Order Code IB95060
CRS Issue Brief for Congress
Received through the CRS Web
Flat Tax Proposals and
Fundamental Tax Reform:
An Overview
Updated August 4, 2003
James M. Bickley
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
The Relationship Between Income and Consumption
What Should Be Taxed?
Types of Broad-Based Consumption Taxes
Value-Added Tax
Retail Sales Tax
Consumed-Income Tax
Flat Tax (Hall/Rabushka Concept)
International Comparisons
Other Types of Fundamental Tax Reform
Income Tax Reform: Base Broadening
Option of the Current or an Alternative Income Tax System
Description of Selected Proposals
The Shelby Proposal
The English Proposal
The Specter Proposal
The Tauzin Proposal
The Linder Proposal
The Gephardt Proposal
The Souder Proposal
The Crane Proposal
The Dorgan Proposal
The Burgess Proposal
LEGISLATION
FOR ADDITIONAL READING

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Flat Tax Proposals and Fundamental Tax Reform: An Overview
SUMMARY
The idea of replacing our current income
One or more of four major types of
tax system with a “flat-rate tax” is receiving
broad-based consumption taxes are included
renewed congressional interest. Although
in these congressional tax proposals: the
referred to as “flat-rate taxes,” many of the
value-added tax (VAT), the retail sales tax,
current proposals go much further than merely
the consumed-income tax, and the flat tax
adopting a flat rate tax structure. Some in-
based on a proposal formulated by Robert E.
volve significant income tax base broadening
Hall and Alvin Rabushka, two senior scholars
while others entail changing the tax base from
at the Hoover Institution.
income to consumption.
Other tax reform proposals focus on
Proponents of these tax revisions are
income as the base. The Gephardt proposal
often concerned with simplifying the tax
would keep income as the tax base but
system, making the government less intrusive,
broaden the base and lower the tax rates.
and creating an environment more conducive
Representative Crane’s proposal would levy
to saving. Critics are concerned with the
a tax on the earned income of each individual
distributional consequences and transitional
as a replacement for the current individual
costs of a dramatic change in the tax system.
income tax, corporate income tax, and estate
and gift tax. Representative Burgess’ pro-
Most observers believe that the problems
posal would permit each taxpayer to choose
and complexities of our current tax system are
between the current individual income tax or
not primarily related to the number of tax
an alternative flat tax based on the Hall-
rates, but rather stem from difficulties associ-
Rabushka concept. Senator Dorgan’s pro-
ated with measuring the tax base.
posal would allow most taxpayers to choose
between the current individual tax system and
Most of the recent tax reform proposals
his “shortcut” tax plan under which taxes
(the Shelby, the English, the Specter, the
withheld would equal the employee’s tax
Tauzin, the Linder, and the Souder plans)
liability.
would change the tax base from income to
consumption.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On July 31, 2003, Senator George Voinovich, the chairman of a Senate GOP working
group on fundamental tax reform, said that the group initially is focusing on tax code
simplification issues. He stated that later he hoped the group would explore the larger
question of whether the federal government should shift from an income tax system to a
consumption tax system.
BACKGROUND AND ANALYSIS
Currently, fundamental tax reform is a major congressional issue. Most proposals
would change the tax base from income to consumption.
The Relationship Between Income and Consumption
Although our current tax structure is referred to as an income tax, it actually contains
elements of both an income- and a consumption-based tax. For example, the current tax
system includes in its tax base wages, interest, dividends, and capital gains, all of which are
consistent with an income tax. At the same time, however, the current tax system excludes
some savings, such as pension and Individual Retirement Account contributions, which is
consistent with a tax using a consumption base.
The easiest way to understand the differences between the income and consumption tax
bases is to define and understand the economic concept of income. In its broadest sense,
income is a measure of the command over resources that an individual acquires during a
given time period. Conceptually, there are two options an individual can exercise with
regard to his income: he can consume it or he can save it. This theoretical relationship
between income, consumption, and saving allows a very useful accounting identity to be
established; income, by definition, must equal consumption plus saving. It follows that a tax
that has a measure of comprehensive income applies to both consumption and savings. A
consumption tax, however, applies to income minus saving.
A consumption tax can be levied at the individual level in a form very similar to the
current system. An individual would add up all of his income in the same way as he does
now under the income tax but then would subtract out his net savings (saving minus
borrowing). The result of these calculations would be the consumption base on which tax
is assessed. Equivalently, a consumption tax can also be collected at the retail level in the
form of a sales tax or at each stage of the production process in the form of a value-added tax
(VAT).
Regardless of the form or point where a consumption tax is collected, it is ultimately
paid by the individual doing the consuming. It should be noted that consumption, in the
economy as a whole, is smaller than income. Thus, to raise equal amounts of revenue in a
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given year, tax rates on a comprehensive consumption base would have to be higher than the
tax rates on a comprehensive income base.
What Should Be Taxed?
Should the tax base be income or consumption? Is one inherently superior to the other?
How do they stack up in terms of simplicity, fairness, and efficiency — the three standards
by which tax systems are generally assessed? There appears to be insufficient theoretical or
empirical evidence to conclude that a consumption-based tax is inherently superior to an
income-based tax or vice versa.
One issue associated with the choice of a tax base is equity — how the tax burden will
be distributed across income classes and different types of taxpayers. For example, a tax is
“progressive” if its burden rises as incomes rise. While some types of consumption taxes can
be designed to achieve any desired level of progressivity with respect to consumption alone,
their progressivity with respect to income could only be approximated. Also, a consumption
tax would involve a redistribution of the tax burden by age group, with the young and old
generally bearing more of the total burden than those in their prime earning years. And the
transition from an income-based tax to a consumption-based tax would have the potential for
creating windfall gains for some taxpayers and losses for others.
A definitive assessment cannot be made of the effects of taxing consumption on either
economic efficiency or the aggregate level of savings. Although the current tax system’s
distortions of the relative attractiveness of present and future consumption (saving) would
be eliminated, to raise the same amount of tax revenue, a consumption-based tax would
require an increase in marginal tax rates (since consumption is smaller than income). This
action, in turn, would increase the current system’s distortion between the attractiveness of
market (e.g. purchased products) and nonmarket activities (e.g. leisure). The net effect on
overall economic efficiency cannot be ascertained theoretically. In addition, economic theory
indicates a consumption tax would not necessarily produce an increase in saving. The
increase in after tax income might reduce saving, while the increase in the return to saving
may increase it; the net result is uncertain.
A positive aspect of a consumption-based tax is the ease with which the individual and
corporate tax systems could be integrated. In addition, the problems introduced by separate
provisions for capital gains, attempts to distinguish between real and nominal income, and
depreciation procedures would essentially be eliminated. It is doubtful, however, that a
consumption-based tax would have much effect on the complexities introduced into the
system to promote specific social and economic goals. Many of the same factors that
influenced the design of the current income tax system would exert the same influences on
the final design of a consumption tax.
Whether one prefers income or consumption, one tax rate or multiple tax rates, a critical
point to remember is that the benefits to be derived from tax revision would result from
defining the tax base more comprehensively than it is under current law. A tax with a base
that is comprehensively defined would prove more equitable and efficient than a tax with a
less comprehensively defined base.
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Types of Broad-Based Consumption Taxes
Four major types of broad-based consumption taxes are included in congressional tax
proposals: the value-added tax (VAT), the retail sales tax, the consumed-income tax, and
the flat tax based on a proposal formulated by Robert I. Hall and Alvin Rabushka, two senior
scholars at the Hoover Institution.
Value-Added Tax
A value-added tax is a tax, levied at each stage of production, on firms’ value added.
The value added of a firm is the difference between a firm’s sales and a firm’s purchases of
inputs from other firms. The VAT is collected by each firm at every stage of production.
There are three alternative methods of calculating VAT: the credit method, the
subtraction method, and the addition method. Under the credit method, the firm calculates
the VAT to be remitted to the government by a two-step process. First, the firm multiplies
its sales by the tax rate to calculate VAT collected on sales. Second, the firm credits VAT
paid on inputs against VAT collected on sales and remits this difference to the government.
The firm calculates its VAT liability before setting its prices to fully shift the VAT to the
buyer. Under the credit-invoice method, a type of credit method, the firm is required to show
VAT separately on all sales invoices and to calculate the VAT credit on inputs by adding all
VAT shown on purchase invoices.
Under the subtraction method, the firm calculates its value added by subtracting its cost
of taxed inputs from its sales. Next, the firm determines its VAT liability by multiplying its
value added by the VAT rate. Under the addition method, the firm calculates its value added
by adding all payments for untaxed inputs (e.g., wages and profits). Next, the firm multiplies
its value added by the VAT rate to calculate VAT to be remitted to the government.
Retail Sales Tax
In contrast to a VAT, a retail sales tax is a consumption tax levied only at a single stage
of production, the retail stage. The retailer collects a specific percentage markup in the retail
price of a good or service which is then remitted to the tax authorities.
Consumed-Income Tax
Under this consumption tax, taxpayers would keep their assets in an account equivalent
to a current IRA (individual retirement account). Net contributions to this account
(contributions less withdrawals) would be deducted from income to determine the level of
consumed-income. In contrast to a VAT or sales tax, policymakers would have the option
of applying a progressive rate structure to the level of consumed-income. Each individual
would be responsible for calculating his consumed-income and paying his tax obligation.
Flat Tax (Hall/Rabushka Concept)
A flat tax could be levied based on the proposal formulated by Robert E. Hall and Alvin
Rabushka, two senior scholars at the Hoover Institution. Their proposal would have two
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components: a wage tax and a cash-flow tax on businesses. (A wage tax is a tax only on
wages; a cash-flow tax is generally a tax on gross receipts minus all outlays.) It is essentially
a modified VAT, with wages and pensions subtracted from the VAT base and taxed at the
individual level. Under a standard VAT, a firm would not subtract its wage and pension
contributions when calculating its tax base. Under this proposal, some wage income would
not be included in the tax base because of exemptions. Under a standard VAT, all wage
income would be included in the tax base.
International Comparisons
There are two major distinctions between recent flat tax proposals for the United States
that would change the tax base from income to consumption and the current tax systems of
other developed nations. First, although the United States is the only developed nation
without a broad-based consumption tax at the national level, other developed nations adopted
broad-based consumption taxes as adjuncts rather than as replacements for their income-
based taxes. Most of the congressional proposals would replace our current income taxes
with consumption taxes, rather than use consumption taxes as adjuncts to our current
income-based system.
Second, all developed nations with VATs, except Japan, calculate their VATs using the
credit-invoice method. Most of the current U.S. flat tax proposals, which include VAT
components, however, would use the subtraction method of calculation.
Other Types of Fundamental Tax Reform
Two other types of fundamental tax reform are income tax reform and a tax plan that
gives taxpayers a choice of systems.
Income Tax Reform: Base Broadening
Income tax base broadening would involve eliminating most tax preferences, increasing
the standard deduction and personal exemption allowances, and reducing tax rates. House
Minority Leader Gephardt’s proposal is in this category.
Option of the Current or an Alternative Income Tax System
Two proposals would give taxpayers the option of either paying taxes under the current
income tax or paying a flat rate income tax. Representative Burgess’ proposal and Senator
Dorgan’s proposal are in this category.
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Description of Selected Proposals
Ten flat tax (or modified flat tax) proposals are receiving the most congressional
attention. Six of the proposals (the Shelby, the English, the Specter, the Tauzin, the Linder,
and the Souder plans) would change the tax base from income to consumption.
Representative Gephardt’s proposal would keep income as the tax base. Representative
Crane’s proposal would levy a tax on the earned income of each individual as a replacement
for the current individual income tax, corporate income tax, and estate and gift tax.
Representative Burgess’ proposal would allow each taxpayer to choose between the current
individual income tax return and an alternative individual tax return with a flat rate. Senator
Dorgan’s proposal would allow most taxpayers to choose between the current individual tax
system and his “shortcut” tax plan under which taxes withheld would equal the employee’s
tax liability. While some of these plans are more detailed than others, none of the proposals
has the level of detail that would be required to make a plan operational. Many difficult
details and transitional considerations have yet to be addressed. Some proposals have been
formulated into bills introduced in the 105th, 106th, 107th, or 108th Congresses. After the
heading of each proposal, the most recent bill introduced is specified by its number.
The Shelby Proposal
S. 1040 in the 108th Congress. The Tax Simplification Act of 2003 proposed by
Senator Shelby is modeled after the proposal formulated in 1981 by Hall and Rabushka. This
flat tax would levy a consumption tax as a replacement for the individual and corporate
income taxes, and the estate and gift taxes.
As noted above, this proposal would have two components: a wage tax and a cash-flow
tax on businesses. It is essentially a modified VAT, with wages and pensions subtracted
from the VAT base and taxed at the individual level. Under this proposal, some wage
income would not be included in the tax base because of deductions, while under a VAT all
wage income would be included in the tax base.
Initially the individual wage tax would be levied at a 19% rate, but after December 31,
2004, when the tax is fully phased in, this rate would decline to 17%. The individual wage
tax would be levied on all wages, salaries, pensions, and unemployment compensation. In
addition, government employees and employees of nonprofit organizations would have to
add to their wage tax base the imputed value of their fringe benefits.
The individual wage tax would not be levied on Social Security payments. Thus, the
current partial taxation of Social Security payments to high income households would be
repealed. Social Security contributions would continue to be taxed; that is, they would not
be deductible and would be made from after-tax income. Firms would pay the business tax
on their Social Security contributions. Individuals would pay the wage tax on their Social
Security contributions. The individual wage tax would have “standard deductions” that
would equal the sum of the “basic standard deduction” and the “additional standard
deduction.”
The “basic standard deduction” would depend on filing status. For tax year 2003, the
basic standard deduction would be the following:
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! $25,580 for a married couple filing jointly or a surviving spouse;
! $16,330 for a single head of household;
! $12,790 for a single person;
! $12,790 for a married person filing a separate return; and
The “additional standard deduction” would be an amount equal to $5,510 times the
number of dependents of the taxpayer.
All deductions would be indexed for inflation using the consumer price index (CPI).
Initially businesses would pay a tax of 19% (declining to 17% in after December 31,
2004) on the difference (if positive) between gross revenue and the sum of purchases from
other firms, wage payments, and pension contributions. This business tax would cover
corporations, partnerships, and sole proprietorships. Pension contributions would be
deductible but there would be no deductions for fringe benefits. In addition, state and local
taxes (including income taxes) and payroll taxes would not be deductible.
The English Proposal
H.R. 269 in the 108th Congress. This proposal of Representative English (Simplified
USA Tax) is based on the Domenici-Nunn proposal. The corporate income tax would be
replaced by a cash-flow business tax (a subtraction-method VAT). The gross tax base
(value-added) would equal gross receipts less purchases from other firms. The tentative tax
would be determined by multiplying the value-added by the appropriate tax rate. A tax rate
of 8% would apply to the first $150,000 of a business’ value-added, and a tax rate of 12%
would apply to all of the business’s value-added over $150,000. A business tax rate of 12%
would apply to all imports. A credit for the 7.65% employer-paid OASDHI payroll tax
(commonly called FICA or the Social Security tax) would be subtracted from the tentative
tax to calculate the business’s tax liability for the year.
The individual income tax would be replaced by a tax on consumed-income. An
individual’s tax liability would be calculated by (1) calculating gross income, (2) subtracting
exemptions and deductions, (3) applying a progressive rate structure to the difference, and
(4) subtracting a credit for the 7.65% employer-paid OASDHI payroll tax payments. Gross
income would equal wages and salaries plus interest, dividends, pension receipts, and
amounts received from the sale of stock and other assets. Deduction would be allowed for
charitable contributions, home mortgage interest, and higher education tuition. Deductions
would also be allowed for retirement-oriented 401(k) contributions and IRAs for lower
income families.
The Simplified USA Tax eliminates the double taxation of savings by allowing
everyone to contribute after-tax income to a USA Roth IRA, which is a universal savings
vehicle. After five years, accumulated principal and earnings on principal can be withdrawn
on a tax-free basis at any time and for any purpose. The federal estate and gift tax would be
repealed.
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The Specter Proposal
S. 907 in the 108th Congress. The Flat Tax Act proposed by Senator Specter also is
modeled after the Hall-Rabushka proposal and thus is similar to that of Senator Shelby. The
Specter flat rate consumption tax would replace the federal individual and corporate income
taxes and the federal estate and gift taxes.
This proposal would have two components: a wage tax and a cash-flow tax on
businesses. It is essentially a modified VAT, with wages and pensions subtracted from the
VAT base and taxed at the individual level.
The individual wage tax would be levied at a 20% rate on all wages, salaries, and
pensions. In addition, government employees and employees of nonprofits would have to
add to their wage base the imputed value of their fringe benefits. The individual wage tax
would have “standard deductions” that would equal the sum of the “basic standard
deduction” and the “additional standard deduction.”
The “basic standard deduction” would depend on filing status. For tax year 2003, the
basic standard deduction would be the following:
! $17,500 for a joint return;
! $17,500 for a surviving spouse;
! $15,000 for a head of household;
! $10,000 for a married taxpayer filing separately; and
! $10,000 for a single taxpayer.
The “additional standard deduction” would be an amount equal to $5,000 times the
number of dependents of the taxpayer. All deductions would be indexed for inflation.
Individuals would be allowed to deduct up to $2,500 ($1,250 in the case of a married
individual filing a separate return) annually for charitable contributions. Individuals also
would be allowed to deduct “qualified residence interest” on acquisition indebtedness not
exceeding $100,000 ($50,000 in the case of a married individual filing a separate return).
The business tax would be levied at a 20% tax rate on gross revenue less the sum of
purchases from other firms, wage payments, and pension contributions. Purchases from
other firms would include capital goods. If the business’s aggregate deductions exceed gross
revenue, then the excess of aggregate deductions can be carried forward to the next year and
increased by a percentage equal to the 3-month Treasury rate for the last month of the taxable
year.
This tax reform act would become operational on January 1, 2004.
The Tauzin Proposal
H.R. 2717 in the 107th Congress. This proposal would replace the personal and
corporate income taxes, estate and gift taxes and all non-trust dedicated excise taxes with a
15% national retail sales tax. Each qualified family unit would receive a sales tax rebate
equal to the product of the sales tax rate and the lesser of the poverty level (adjusted for the
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number of dependents claimed) or the wage income of the family unit. The rebate amount
would be included in each paycheck for that pay period. Any business required to collect and
remit the sales tax would keep 0.5% of tax receipts to offset compliance costs. Any state
choosing to do so could administer, collect and enforce the sales tax. To qualify as an
“administering state,” a state would have to conform its sales tax base to the federal base.
Administering states could retain an administration fee equal to 1% of the amounts otherwise
required to be remitted to the United States. A super majority vote of two-thirds of both
Houses of Congress would be necessary to raise the sales tax rate or to create any exemptions
to the sales tax.
The Linder Proposal
H.R. 25 in the 108th Congress. This proposal introduced by Representative Linder
would repeal the individual income tax, the corporate income tax, all payroll taxes, the self-
employment tax, and the estate and gift taxes and levy a 23% national retail sales tax as a
replacement beginning in calendar year 2005. Every family would receive a rebate of the
sales tax on spending up to the federal poverty level (plus an extra amount to prevent any
marriage penalty). The Social Security Administration would provide a monthly sales tax
rebate to registered qualified families. The 23% national retail sales would not be levied on
exports. The sales tax would be separately stated and charged. Social Security and Medicare
benefits would remain the same with payroll tax revenue replaced by some of the revenue
from the retail sales tax. States could elect to collect the national retail sales tax on behalf
of the federal government in exchange for a fee. Taxpayers rights provisions are
incorporated into the act.
The Gephardt Proposal
H.R. 3620 in the 105th Congress. House Minority Leader Gephardt’s calls his proposal
the “10% tax.” Unlike most proposals, this proposal would reform the current income tax
base rather than changing to a consumption base. The taxable income base for individuals
under this proposal includes all items of income currently taxed (salaries and wages,
investment income, capital gains, business profit or loss, etc.) plus employee fringe benefits
(other than health insurance), employer pension plan contribution, and tax-exempt state and
local interest. Social Security benefits would be included to the same limited extent as they
are under current law. Deductions from gross income (called “above-the-line” deductions,
as distinct from the itemized deductions taken from adjusted gross income) would be allowed
for alimony paid, one-half of the self-employment tax, investment interest, and job-related
expenses. The only itemized deduction allowed would be home mortgage interest. Since
pension contributions would be make taxable, an exclusion would be allowed from pension
income for the previously taxed contributions, the way annuities are taxed under current law.
Accumulated earnings under pension plans, IRAs, and life insurance policies would remain
tax-deferred, as under current law. The only credits allowed would be the earned income tax
credit (EITC) and the foreign tax credit.
The standard deduction and personal exemption allowances would be increased and tax
rates would be decreased from current law. In addition, the “marriage tax penalty” arising
from these factors would be eliminated by making the joint filer allowances and tax brackets
exactly twice those of a single filer. “Head-of-household” filers, which are single individuals
with dependent children, would receive allowances and the first two tax brackets halfway in
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between the amounts for single and joint taxpayers; the higher tax brackets are equal the
single-filer brackets. There would be no separate tax rates for capital gains.
The tax-free allowances would be:
! $9,000 for a joint return;
! $6,600 for a head of household;
! $4,500 for an individual; in addition
! $2,900 for each personal exemption.
The tax rate schedule would be:
! 10% marginal rate: married (joint) $0-$46,000; head of household $0-
$32,000; single $0-$23,000.
! 20% marginal rate: married (joint) $46,000-$80,000; head of household
$32,000-$40,000; single $23,000-$40,000.
! 26% marginal rate: married (joint) $80,000-$150,000; head of household
$40,000-$75,000; single $40,000-$75,000.
! 32% marginal rate: married (joint) $150,000-$275,000; head of household
$75,000-$137,500; single $75,000-$137,000.
! 34% marginal rate: married (joint) over $275,000; head of household over
$137,500; single over $137,500.
This proposal would reduce “corporate welfare” by more than $50 billion. The plan
apparently retains payroll and other taxes as under the current system. The plan is said to be
revenue-neutral, to allow a post-card sized tax return for some taxpayers, and to require no
return at all for over one-half of individual taxpayers. It also stipulates that future changes
in tax rates could be made only by national referendum.
The Souder Proposal
H.R. 2971 in the 105th Congress. This proposal would repeal the corporate income tax
and the individual income tax and replace these taxes with a flat rate tax of 20% only on the
earned income of individuals and on business taxable income. For the individual income tax,
there would be a standard deduction equal to:
! $16,500 for a joint return;
! $14,000 for a head of household;
! $9,500 for an individual; in addition
! $4,500 for each dependent.
Interest of the first $100,000 of a home mortgage would be deductible, and there would
be an unlimited deduction for charitable contributions.
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Business taxable income is defined as gross income less the cost of business inputs,
employees’ wages and contributions to qualified retirement plans, and the cost of tangible
personal and real property. For any taxable year, if aggregate business deductions exceed
deductions then the business may carryover the excess deductions (plus interest) to the
succeeding taxable year.
The Crane Proposal
H.R. 1789 in the 108th Congress. This proposal would repeal the corporate income
tax, the individual income tax, the estate and gift tax, and replace these taxes with a flat rate
tax of 10% on individuals’ earned income. The first $10,000 in earned income would be
exempt from taxation. This exemption level would be indexed for changes in the consumer
price index. Earned income would be defined as the sum of wages, salaries, and other
employee compensation; the amount of the taxpayer’s net earnings from self-employment;
and the amount of dividends that are from a personal service corporation or that are
otherwise directly or indirectly compensation for services. Fringe benefits included in earned
income would be valued at the cost to the employer. This proposal would establish an
amnesty for all prior tax liability attributable to legal activities.
The Dorgan Proposal
S. 551 in the 107th Congress. Under this “Fair and Simple Shortcut Tax Plan,” most
employees would be allowed to provide employers with additional information on their W-4
(deduction) Form. For example, whether the employee is a homeowner. Single taxpayers
earning up to $50,000 in annual wage income (and with nonwage income of up to $2,500)
and married couples filing jointly with up to $100,000 in annual wage income (and with
nonwage income of up to $5,000) could choose the “shortcut” tax plan. The employer would
file the W-4 Forms with the federal government. The employer would compute family
deductions, factor in a deductions for home mortgage interest and property taxes, and
determine the amount of federal income tax to withhold by taking 15% of wages after
deductions less the child care credit. Under this “shortcut” plan, the amount of tax withheld
would equal the employee’s tax liability, and consequently, the employee would not have to
file a tax return. If the employee calculates that his tax liability would be less under the
current income tax, he would still have the option of filling out and filing a tax return rather
than paying tax under the “shortcut” plan. Senator Dorgan believes that up to 70 million
taxpayers would be relieved from having to file a yearly federal individual income tax return.
Senator Dorgan’s proposal would also make five other changes in the current tax code.
First, the first $1 million in self-employment income would be exempt from the alternative
minimum tax (AMT). Second, a taxpayer, who cannot use the shortcut method, would be
allowed a tax credit for 50% of the costs (maximum of $200) of paying a preparer if the tax
return is filed electronically. Third, during the first year to cover start- up costs, a business
would be allowed a tax credit equal to the lesser of $1,000 or 50% of the costs of complying
with the exact withholding option. Fourth, the marriage penalty would be reduced by making
the standard deduction for married couples filing jointly double the amount available for
single filers. Fifth, taxpayers would be offered a substantial incentive for savings and
investment by exempting up to $500 of dividend and interest income for an individual and
up to $1,000 for a couple.
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The Burgess Proposal
H.R. 1783 in the 108th Congress. This proposal would allow taxpayers to select a flat
tax as alternative to the current income tax system. The flat tax is based on the concepts of
Hall-Rabushka, two scholars at the Hoover Institution, and is similar to the Armey flat tax
proposal. The individual’s selection of the flat tax would be irrevocable. In the first two
years, the flat tax rate would be 19%, and in subsequent years it would fall to 17%. An
individual engaged in a business activity may elect irrevocably, as an alternative to our
current income tax system, to be taxed on business taxable income that equals gross sales
less the cost of business inputs for business activity, wages, and retirement contributions.
For the first two years, a 19% rated would apply to business taxable income, but after the
first two years, this rate would decline to 17%. This act would become effective for tax years
beginning January 1, 2004.
LEGISLATION
H.R. 25 (Linder)
To promote freedom, fairness, and economic opportunity by repealing the income tax
and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax
to be administered primarily by the states. Introduced January 7, 2003; referred to the House
Committee on Ways and Means.
H.R. 269 (English)
Simplified USA Tax Act of 2003. Replaces the individual income tax, the corporate
income tax, and the estate and gift taxes with a border-adjustable business tax (subtraction-
method VAT) and a progressive consumed-income tax. Individuals may utilize the
equivalent of universal Roth IRAs to encourage savings. Introduced January 8, 2003;
referred to the House Committee on Ways and Means.
H.R. 278 (Graves)
Date Certain Tax Code Replacement Act. Establishes within the legislative branch a
National Commission on Tax Reform and Simplification that shall review and submit to
Congress a report on (1) the present structure and provisions of the Internal Revenue Code;
(2) whether tax systems imposed under the laws of other countries could provide more
efficient, simple, and fair methods of funding the revenue requirements of the government;
(3) whether the income tax should be replaced with a tax imposed in a different manner or
on a different base; and (4) whether the Internal Revenue Code can be simplified, absent
wholesale restructuring or replacement. Authorizes appropriations for the Commission. Any
new federal tax system would require approval by Congress no later than July 4, 2007. If a
new federal tax system is not approved by July 4, 2007, then Congress would be required to
vote to reauthorize the Internal Revenue Code of 1986. Introduced January 8, 2003; referred
to the House Committee on Ways and Means.
H.R. 1783 (Burgess)
Freedom Flat Tax Act. Allows individuals to elect irrevocably to pay a flat tax as an
alternative to our current income tax. Individuals engaged in a business activity could elect
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irrevocably, as an alternative to our current income tax system, to be taxed on business
taxable income that equals gross sales less the cost of business inputs for business activity,
wages, and retirement contributions. Introduced April 11, 2003; referred to the House
Committee on Ways and Means.
H.R. 1789 (Crane)
Crane Tithe Tax Act of 2003. Repeals the individual income tax, the corporate income
tax, and the estate and gift taxes, and replaces these taxes with a flat rate tax of 10% on
individuals’ earned income. Provides for amnesty for all tax liability attributable to legal
activities for prior years. Introduced April 11, 2003; referred to the House Committee on
Ways and Means.
S. 907 (Specter)
Flat Tax Act of 2003. Imposes a 20% flat rate consumption tax (modified VAT) as a
replacement of the individual income tax, the corporate income tax, and the estate and gift
taxes. Introduced April 11, 2003; referred to the Committee on Finance.
S. 1040 (Shelby)
The Tax Simplification Act of 2003. Repeals the corporate income tax, the individual
income tax, and the estate and gift tax, and replaces these taxes with a flat rate consumption
tax of 19% for the first two years (declining to 17% in the third year). Introduced May 12,
2003; referred to the Senate Committee on Finance.
FOR ADDITIONAL READING
CRS Products
CRS Report RL30351. Consumption Taxes and the Level and Composition of Saving, by
Steven Maguire.
CRS Report 98-248. A Federal Tax on Consumed Income: Background and Analysis, by
Gregg A. Esenwein.
CRS Report 98-529. Flat Tax: An Overview of Selected Policy Issues Relevant to the Hall-
Rabushka Proposal, by James M. Bickley.
CRS Report 95-1141. The Flat Tax and Other Proposals: Who Will Bear the Tax Burden?
by Jane G. Gravelle.
CRS Report 96-315. The Flat Tax and Other Reform Proposals: Overview of the Issues,
by Gregg A. Esenwein and Jane G. Gravelle.
CRS Report 98-901. Short-run Macroeconomic Effects of Fundamental Tax Reform, by
Thomas G. Woodward and Jane G. Gravelle.
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CRS Issue Brief IB91078. Value-Added Tax as a New Revenue Source, by James M.
Bickley.
CRS Issue Brief IB92069. A Value-Added Tax Contrasted with a National Sales Tax, by
James M. Bickley.
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