Washington, D.C. 20540
FLAT-RATE TAX PROPOSALS
I n r e c e n t months t h e r e h a s b e e n a growing c o n g r e s s i o n a l i n t e r e s t
i n t h e a d v a n t a g e s and d i s a d v a n t a g e s o f revamping o u r c u r r e n t t a x s y s t e m
f o r a f l a t - r a t e t a x method.
S u p p o r t e r s o f t h e new p r o p o s a l a r g u e t h a t such a p l a n would promote
p r o d u c t i v i t y , s i m p l i f y p r e s e n t IRS t a x f o r m s , s a v e t h e p u b l i c b i l l i o n s of
d o l l a r s t h a t p r e s e n t l y go t o t a x - p r e p a r a t i o n p r o f e s s i o n a l s , and e n h a n c e
F e d e r a l r e v e n u e by c l o s i n g numerous t a x l o o p h o l e s and s p e c i a l d e d u c t i o n s
t h a t a r e now e n j o y e d by r e l a t i v e l y few.
Opponents b e l i e v e , however, t h a t t h e t a x b u r d e n u n d e r a f l a t - r a t e
p l a n might f a l l more h e a v i l y upon t h e m i d d l e c l a s s a n d , u n l e s s e x c e p t i o n s
were made, would h u r t e d u c a t i o n a l i n s t i t u t i o n s and c h a r i t i e s . Problems
w i t h p o p u l a r t a x d e d u c t i o n s , such a s home mortgage i n t e r e s t , would h a v e
t o be addressed.
T h i s p a c k e t p r o v i d e s background m a t e r i a l s which d i s c u s s t h e p r a c t i c a l
and t h e o r e t i c a l i s s u e s t h a t s u r r o u n d a f l a t - r a t e t a x , i n c l u d i n g t h e p r o b a b l e
r e d i s t r i b u t i o n o f t h e t a x b u r d e n u n d e r v a r i o u s r a t e s and income b a s e s .
A d d i t i o n a l i n f o r m a t i o n on t h i s s u b j e c t , p r i m a r i l y i n p e r i o d i c a l s and
n e w s p a p e r s , may b e found i n a l o c a l l i b r a r y t h r o u g h t h e u s e o f i n d e x e s such
a s t h e R e a d e r s ' Guide t o P e r i o d i c a l L i t e r a t u r e , t h e P u b l i c A f f a i r s Information ~
s Times Index.
n a l
Q u a r t e r l y Weekly Report and t h e ~ o m m e r ~ n ~ r e s s i o Index
a r e commercial p u b l i c a t i o n s which t r a c k t h e s t a t u s o f c u r r e n t l e g i s l a t i o n
and a r e a v a i l a b l e i n l a r g e r l i b r a r i e s .
AN OVERVIEW OF THE ISSUES
CONCERNING A FLAT-RATE
by Gregg A. Esenwein
Gregg A. Esenwein is an economic analyst i n the
Economics Division of the Congressional Research
Seivice (CRS) i n The Library of Congress. This
special report is a reproduction of a May 26, 1982
CRS research report prepared by him.
The idea of a flat-rate or proportional income tax has
generated considerable legislathe and popular interest in
recent months.' Many individuals, including some prominent tax experts, believe that the current income tax
system has become a burden on the economy. They
consider it to be far too complex, to provide too many tax
breaks for upper income individuals and to promote
economic inefficiencies. They see a flat-rate tax, on the
other hand, as the antithesis of the current system.
embodying the principles of simplicity, efficiency and
Much of the criticism of the current income tax system
has some justification. It has become an extremely complex and unwieldy system. It may seem that over the years
the main rationale for the income tax-to collect the
revenue needed to operate the federal government-has
been obscured in the pursuit of secondary goals.
However, most of the complexity of the current income
tax system is a result of the desire to promote specific
social goals which have broad-based constituencies supporting them. To give just two examples consider the
cases of the deductibility of mortgage interest payments
and charitable contributions. In each case the current
income tax promotes what is widely viewed as socially
acceptable and desirable goals, making home ownership
more affordable to a majority of the populace and promoting charitable contributions.
Additionally, the current income tax structure reflects
attempts to achieve what is perceived as an equitable
distribution of the tax burden. Although these attempts
have produced some inefficiencies in the economy, the
benefits must also betaken into account. It should be kept
'The concept of a flat-rate income tax has been periodically
discussed as an alternative to the current tax system. For an
example of an earlier review of the debate see U.S. Library of
Congress. Congressional Research Service. Progressivity in Income Taxation: A Pro-Con Discussion. By Robert Tannenwald,
TAX NOTES, June 21,1982
in mind that adoption of a flat-rate income tax would in all
probability entail a major redistribution of the tax burden.
To simplify the current income tax system, any proposal
for a flat-rate tax would have t o address these and many
other similar issues. Given the difficult choices involved in
adopting a flat-rate tax, the purpose of this report is
threefold. First, the practical considerations of defining
the appropriate taxable income base for a flat-rate tax are
analyzed. A discussion of the probable redistribution of
the tax burden under each alternative income base is
included. Second, the practical and theoretical issues
surrounding a flat-rate tax are analyzed. Questions of
behavioral responses, economic efficiency and equity are
addressed. Third, an overview of recent legislative initiatives in the area of flat-rate income taxes is presented in an
I. ALTERNATIVE INCOME BASES FOR A
FLAT- RATE INCOME TAX
The definition of the appropriate income base represents one of the more difficult issuesfaced by proponents
of a flat-rate income tax. The flat tax rate needed t o
generate the required revenue will vary with the tax base
used. The broader the tax base, the lower the necessary
flat tax rate. There are three basic ways that a flat-rate
income tax could be applied. It could be applied to the
current law base of taxable income, adjusted gross income, or some expanded income concept. Each of the
three income bases for a flat-rate income tax possess
certain benefits and drawbacks.
Regardless of the income base used, the transition to a
flat-rate income tax would affect the distribution of the tax
burden. The precise change i n the distribution of the tax
burden would depend on the income base which is used.
However, unless some form of low to middle income relief
were included (say an exemption of a portion of income or
a tax credit) a flat-rate income tax would produce a tax
burden which would fall more heavily on lower t o middle
income taxpayers than the present tax system.
It should be kept In mlnd that adoption of a
flat-rate Income tax would In all probablllty
entall a major redlstributlon of the tax burden.
A. Taxable Income
The drawbacks to using taxable income as defined in
current law as the income base for a flat-rate tax are
substantial. First, with taxable income as a base, the
complexity of the current income tax system would be
maintained. Itemized deductions and the treatment of investment income account for a substantial portion of the
complexity of the current income tax system. If taxable
income were used as the base, there would be little
reduction in the complexity of the income tax system,
since both of these items would be retained.
Over the years the main rationale for the Income tax-to collect the revenue needed to
operate the federal government-has been
obscured In the pursult of secondary goals.
Second, taxable income is the narrowest of the potential
tax bases. Asa result, the flat-rate tax which would have to
be applied to taxable income to raise the required revenues
would be quite high. This high flat tax rate would produce
One, i t would causeasubstantial shift in the tax burden.
Low to middle income households would experience
major increases in both their effective and marginal income tax rates. Only the upperincome households would
experience reductions in their effective and marginal tax
rates. Two, since the flat tax rate would be quite high, the
benefits in terms of increased economic efficiency would
be small. Only a small percentage of households would
experience reductions i n their marginal tax rates and
these reductions would have a negligible effect on resource allocation.
The only benefit to using taxable income as defined in
current law as the tax base is that it would avoid the
dislocations that would occur if the current deductions
and preferential tax treatment of certain income were
8. Adjusted Gross Income
Adjusted gross income (AGI) would be a somewhat
broader income base than taxable income. AGI is usually
less than money income, because certain types of income
are excluded i n calculating AGI. For example, social
security, railroad retirement, unemployment compensation and 60 Dercent of c a ~ i t aaains
income are excludable
from gross income. ~ d d / t i o n & certain
other items such
as contributions to individual retirement accounts can be
excluded from AGI. AGI, whilenot as broad a tax baseas a
comprehensive incomeconcept. would be a much broader
tax base than taxable income (which allows exemptions
and deductions from income).
AGI would allow use of a lower flat tax rate to raise the
required level of revenues. However, there are still considerable drawbacks to using AGI as the income base.
First, the required flat-tax rate would probably still be
higher than the tax rate faced by most low-middle income
households under the current tax system. As a result, the
distribution of the tax burden would shift toward the low to
middle income groups. Second, the removal of itemized
deductions would produce serious financial ramifications
for middle income households. The economic behavior of
these households has been heavily influenced by the
deductibility of certain expenses such as interest on home
mortgages and interest on consumer credit. Eliminating
the deductibility of these items would severely penalize
these households for past behavior. Finally, although the
tax code would be somewhat simplified with the removal
of itemized deductions, many sources of complexity in the
tax code, such as the preferential treatment of long-term
capital gains and the depreciation allowances, wolrld
C. Comprehensive Income
Another, still broader tax base would be provided by
comprehensive income. Although there are alternative
definitions as to the specific Items which can be included
in a comprehensive income base, under most definitions
comprehensive income would represent a quite broad tax
base.: For example, a comprehensive income base could
include wage income, social security and pension benefits, all realized net capital gains, dividends, property
income, and imputed corporate retained earnings.
In the case of a comprehensive income base, the flat-tax
rate required to raise the appropriate level of revenue
would be substantially lower than the comparable rates
under a taxable income or adjusted gross income base.
However, many of the same problems would remain, such
as the probable shift in the distribution of the tax burden
toward the lower and m ~ d d l eincome taxpayers and the
dislocations and distortions resulting from the exclusion
of previously deductible items.
11. OVERVIEW OF PRACTICAL AND
In addition to the technical issues of instituting a flatrate tax, there are several practical and theoretical considerations which are important. For example, in terms of
practical considerations it is of interest to know whether a
flat-rate income tax is sensitive to inflation and how it
affects the marriage penalty. In terms of theoretical
considerations, it is Important to understand how a flatrate income tax would affect horizontal and vertical
equity, economic efficiency and individual behavior. This,
section presents an overview of these issues.
Probably the most commonly heard critique of the
current income tax system is that its complexity promotes
both administrative and econornlc inefficiencies. There
are two basic issues involved; one, the administrative and
compliance costs associated w ~ t hthe current income tax
system and two, the economic costs.
Administration and compliance with thecurrent income
tax code are costly and time consuming. Due to its
complexity, a myriad of specialists have evolved whose
primary function is to sort through and interpret provisions
of the tax code. In lieu of contnbuting to the economy in a
productive manner, these specialists spend their time
developing methodsio minimize the impact of the current
tax code. These efforis represent a resource drain on the
=Fora detailed analysis of the components of a comprehensive
income base see Dept. of the Treasury. Blueprints for Basic Tax
Reform, Jan. 1977.
TAX NOTES, June 21,1982
As a corollary, the massive amount of regulations which
accompany the current income tax code promotes inefficiencies in the compliance and collection of taxes. The
average taxpayer is confronted with a multitude of forms
and procedures when filing his income tax. As a result,
due toeither outright avoidance or lack of full information,
compliance with the tax regulations for a full reporting of
income has declined over the years. This has produced a
significant loss of revenue for the federal g ~ v e r n m e n t . ~
In addition to the compliance and administrative costs,
there are also economic costs associated with the current
progressive tax system. Under the current tax system
there are incentives to artificially shelter income from
taxation at high marginal tax rates. These shelters take
oneof two basic forms. First, investors time the realization
of their gainstocoincide with periods when they are in low
marginal tax brackets. Second, investments are made in
instruments which receive preferential tax treatment. Both
of these factors distort the efficient allocation of resources.
Proponents contend that these excess administrative'
and economic costs could be eliminated by broadening
the income base under a flat-rate income tax. Since a
flat-rate income tax would be extremely simple compared
to the current system, there would be a dramatic decrease
in the amount of resources needed to administer and
interpret the tax code. Additionally, the simplicity of a flat
rate income tax would promote better compliance and
hence help prevent the loss of tax revenues. It should be
noted, however, that by broadening the income base.
much of the decrease in complexity could be achieved
under the current income tax system.
Proponents also argue that a flat-rate tax would remove
most of the incentives to shelter income artificially. Since
most taxpayers would face the same low marginal tax
rates, there would be no tax advantage from timing the
realization of economic gains. Finally, under most proposals for a flat-rate income tax, similar activities would be
taxed at similar rates. As a result, investment would flow
into those vehicles which offer the highest pretax return
promoting the efficient allocat~onof resources.
B. Inflation Sensltlvlty
Under the current progressive income tax system,
inflation-induced increases in income push individuals
into higher marginal income tax brackets. For most
individuals, the increase in income tax liability is proportionately greater than the inflation-induced increase in
income. As a result of the combination of a progressive
income tax and inflation-induced increases in income,
most taxpayers experience a reduction in their real aftertax purchasing power.
Under provisions contained in the Economic Recovery
Tax Act of 1981 the problem of bracket creep would be
resolved by indexing the rate structures, zero bracket
amount and personal exemptions beginning in 1985.
However, a flat-rate income tax would also eliminate
inflation-induced bracket creep. With only one marginal
tax rate, inflation-induced increases in income would not
push taxpayers into higher tax brackets and would have
relatively little effect on their average or effective income
tax rates. Under a flat-rate tax, taxpayers would experience
little change in their real after-tax purchasing power as a
result of inflation.
=For a background discussion of this issue see: Molefsky,
America's Underground Economy, CRS Report 81-181 E.
TAX NOTES. June 21,1982
C. Marriage Penalty
Under the current income tax system two income
earning individuals who file a joint return in all probability
pay more in income taxes than they would if they were to
file separate returns as singles. This is commonly referred
to as the marriage penalty tax. It is the result of the
different marginal tax rate schedules for joint and single
returns. Provisions contained in the Economic Recovery
Tax Act of 1981 attempt to correct this inequity by
allowing the lower income earning spouse to deduct a
percentage of his or her income from taxation. However,
in many instances the penalty is only partially offset,
while in others the provisions create a marriage bonus.
The problem of a marriage penalty or marriage bonus
would beeliminated underaflat-rate income tax. Applying
the same flat tax rate to both joint and single returns would
eliminate the source of the penalty: marginal tax rate
schedules based on filing status.
D. Horizontal Equity
If a tax system taxes individuals in similar positions
equally, then the tax system possesses horizontal equity.
Under the current income tax system, the principle of
horizontal equity is violated, since individuals in similar
circumstances are taxed at different rates. For example,
consider the case of an individual with $10,000 of wage
income and another individual with $10,000 of capital
gains income. Under the current income tax system, the
individual with only wage income would pay a substantially higher tax than the individual with capital gains income (capital gains income receives preferential treatment under current tax law).
Horizontal equity is a function of how comprehensively income Is defined for tax purposes; It
is not a function of the type of tax rates that are
applied to taxable income.
Most proposals for a flat-rate tax system include provisions which would broaden the income base and end the
preferential treatment of certain types of income. Under
this type of flat-rate tax horizontal equity would improve.
However, the same degree of horizontal equity could be
achieved under the current income tax system if the income base were broadened and the preferential tax
treatment of certain types of income were curtailed.
Horizontal equity is a function of how comprehensively
income is defined for tax purposes; it is not a function of
the type of tax rates that are applied to taxable income.
E. Vertlcal Equity
Vertical equity concerns the incidence of a tax among
people with unequal incomes. The standard interpretation
of vertical equity has been that tax burdens should be
distributed according to taxpayer's ability to pay. In other
words, an individual with a larger income should pay
proportiondtely more of his income in taxes than an
individual with a smaller income. With respect to income
taxation, this concept of vertical equity is the rationale for
progressive tax rates.
Most empirical studies of vertical equity conclude that,
taken in isolation, the current income tax system ranges
from slightly to highly progressive. However, when other
taxes are included, it appears the overall tax burden
(federal, state, and local) is roughly prdportional:
Adopting a flat-rate tax does not necessarily entail the loss
of all progressivity. If aflat-rate taxexempted afixed dollar
amount of income from taxation then it would be a
moderately progressive system. For example, consider a
flat-rate tax of 10 percent which exempts the first $5,000 of
income from taxation. An individual with $10,000 income
would pay $500 or 5 percent of his income i n taxes. An
individual with a $20,000 income would pay $1,500 or 7.5
percent of his income in taxes. Hence, a flat-rate tax
coupled with an income exemption is not incompatible
with the concept of progressivity. However, regardless of
the particular provisions for exemptions, adoption of a
flat-rate tax would in all probability reduce progressivity
when compared to the current income tax system and
hence could result i n an overall tax burden that is
Adopting a flat-rate tax doer not necessarily
entall the loss of all progresslvlty..
It should be noted, however, that the principle of vertical
equity is a highly subjective concept because it is based
on the assumption of declining marginal utility of income.
That is, a dollar of income is considered to be more
valuable t o a lower income individual (who is more likely
to spend it on necessities) than it is to an upper income
individual (who is more likely to spend it on non-necessities). A number of tax experts and laymen contend that
the concept of declining marginal utility of income is
much too subjective and arbitrary to serve as the basis for
determining the structure of the tax system.
their marginal tax rates while others would experience
decreases in their marginal tax rates.
Unless some form of low to mlddle lncome
rellef were included a flat-rate lncome tax
would produce a fax burden which would fall
more heavily on lower to mlddle income taxpayers than the present tax system.
Taxpayers whose marginal tax rates decrease would
experience a reduction in the distortion between the price
of income versus leisure. This would tend to reduce the
inefficiency of the tax system. On the other hand, taxpayers whose marginal tax rates increase would experience an increase in the distortion between the price of
income versus leisure, which, in turn, would increase the
inefficiency of the tax system. Because of these offsetting
effects it is not clear whether a flat-rate tax would increase
the overall economic efficiency of the tax system.
Proponents of a flat-rate tax also contend that in
response to reductions in marginal tax rates, individuals
will tend to increase their work efforts. That is, since the
price of leisure will rise relative to the price of income,
individuals will substitute income for leisure. However, as
pointed out earlier, under a flat-rate tax, some individuals
would experience reductions while others would experience increases in their marginal tax rates. Therefore, while
some individuals might substitute income for leisure
(since the price of leisure will rise relative to the price of
income) others might substitute leisure for income (since
the price of leisure will fall relative to the price of income).
For this reason, the effects of a flat-rate tax on the
aggregate work level are uncertain.
The effects of a flat-rate tax on the aggregate
work level are uncertain.
F. Economlc Efflclency
The economic efficiency or inefficiency of a tax system
can be judged by its effects o n relative prices. If the tax
system distorts relative prices it is inefficient, since this
distortion prevents the efficient allocation of resources.
An income tax, regardless of whether it is progressive or
proportional, distorts relative pricesand affects economic
choices such as the choice between income and leisure
and the choice between present and future consumption.
For example, i n the presenceof an income tax, the price of
leisure is reduced relative t o an individual's wage income.
That is, to acquire an extra hour of leisure an individual
would need only give up something less (depending on his
marginal tax rate) than an hour's worth of wages.
Since all income taxes are inherently inefficient, the
goal is to design a tax which minimizes distortions in
relative prices. It is often argued that a flat rate income tax
is more efficient than a progressive income tax, since it
would minimize relative price distortions. However, in the
transition from the current progressive tax system to a flat
rate tax some individuals would experience increases in
An additional factor to consider when discussing behavioral responses is the income effects of a change in
relative prices. As opposed to the substitution eftect,
which depends on the change in the marginal rate of tax,
the incomeeffect is a function of the change in the average
rate of tax. If a reduction in an individual's marginal tax
rate coincides with a reduction In his average tax rate, then
the substitution effect might be offset by the income
effect. In this case, the individual's income will increase
(due to the reduction in his average tax rate) and he will be
able to consume more of everything, including leisure.
Most empirical studies indicate that the substitution and
income effects of a reduction in marginal and average tax
rates tend to cancel each other producing little or noeffect
on work effort5
S e e Pechman and Okner. Who Bears the Tax Burden?
Brookings Institution. 1974.
5See Dept. of Treasury, Can Tax Revenues Go Up When Tax
Rates Go Down?, by Don Fullerton, OTA Paper 41. Sept. 19.30.
TAX NOTES, June 21,1982
Nine bills have been introduced (six in the House and three in
the Senate) all of which address the issue of a flat rate lncome tax
or an expanded income base. A brief synopsis of the pertinent
aspects of each of these bills follow^.^
H.R. 3181. (Introduced: April 9, 1981; Sponsors: Rep. Leon E.
Panetta. D-Calif.,et al.) Synops~s.Repeals all itemized deductions
for individuals except deductions relating to the production of
income or alimony or support payments. Substitutes an income
tax credit for the personal exemption. Abolishes the tax schedule
for heads of households.
H.R. 4821. (Introduced: October 22.1981; Sponsor: Rep. George
Amends the lnternal Revenue Code to repeal the income tax
tables. Provides for an income tax rate of 14 percent for all
indtviduals, estates, and trusts.
Redefines "adjusted gross income" to eliminate the deductions from gross income for the following: (1) long-term
capital gains; (2) moving expenses; (3) retirement savings;,
and (4) repayments of supplemental unemployment compensation benefits.
Deflnes "allowable itemized deductions" as any deduction
attributable to: (1) expensesfor the production of income; (2)
contributions to a church or convention or association of
churches: (3) medical and dental expenses; and (4) alimony
or separate maintenance payments.
Repeals the deduct~onsfor: (1) interest, taxes, and depreclat~onof cooperative housing; (2) moving expenses; (3)
retirement savings; (4) abortion expenses; and (5) long-term
H.R. 5513. (Introduced:February 10,1982;Sponsor: Rep. Philip
M Crane. R-Ill.) Synopsis:
Amends the lnternal Revenue Code to repeal the income tax
T h e abstracts of these bills were prepared by the Bill Digest
unit of the American Law Division of the Congressional Research
tables. Provides for an income tax rate of 10 percent for all
individuals, estates, and trusts.
Repeals all special tax deductions, credits, and exclusions
from incomes for individuals. Amends the Economtc
Recovery Tax Act of 1981 toincrease to$2.000 the deduction
for personal exemptions.
S. 2147. (Introduced: March 1, 1982; Sponsor: Sen. Denn~s
DeConcini, R-Ariz.) Synopsis:
Requires that the lnternal Revenue Code be amended to
provide that after 1985, all income should be taxed at a rate of
20 percent or less.
Sets forth guidelines for a new income tax scheme. Requlres
the Secretary of the Treasury to propose legislation to
implement this Act.
S. 2200. (Introduced: March 15, 1982; Sponsor: Sen Jesse
Helms. R-N.C.) Synopsis: Companion bill to H.R. 5513.
H.R. 5868. (Introduced: March 17, 1982; Sponsor: Rep. Kent
Hance, D-Tex.) Synopsis: Directs the Secretary of the Treasury or
his delegate to conduct a study of the advisability of replacing the
current federal income tax system for individuals and corporations with a system under which income tax is imposed on gross
H.R. 8070. (Introduced: April 5, 1982; Sponsor: Rep. Leon E.
Panetta, D-Calif. et el.) Synopsis: Eliminates most deductions,
credits and exclusions. Establ~shesa 19 percent tax on gross
income, less basic business expenses. Establishes tax credits of
S1,OOOfor an individual. $l,WOfora spouse, $200 per dependent,
and $200 for individuals who are blind or over 65.
S. 2376. (Introduced: April 15. 1982; Sponsor: Sen. Charles E
Grassley. R-Iowa.) Synopsis: Directs theTreasury Department to
study the feasibility of replacing the current income tax for
individuals and corporations with a flat-rate tax on various income bases.
H.R. 6352. (Introduced: May 11, 1982; Sponsor: Rep. Ron Paul,
Amends the lnternal Revenue Code to provide that a 10
percent income tax rate shall apply to all individuals.
Repeals all deductions, credits, and exclusions for individuals other than an exemption of $10,000.
ESTIMATES OF FLAT INCOME
TAX RATES USING VARIOUS
by Louis Alan Talleyl
Louis Alan Talley is a Research Analyst i n Taxation i n the Economics Division of the Congressional
Research Service (CRS) i n The Library of Congress.
This special report is a reproduction of a June 2,
1982 CRS research report prepared by him.
The concept of a flat-rate, or proportional, income tax
has long held wideattraction becauseof its simplicity and
its underpinnings with regard to tax equity. Proposals for
the institution of a flat-rate federal income tax are
advanced perennially, and the potential revenue implications of the proposals are among the foremost issues
debated. A resolution, directing the Treasury Department
to complete a study on the feasibility of replacing the
current tax system with a flat percentage rate of tax on all
forms of personal and corporate income, was introduced
by a bipartisan gtoup of House Ways and Means Committee members. The resolution callsfor the study to assume
that economically disadvantaged families would be
exempt, paperwork reduced, and economic disincentives
removed by the new tax system. Additionally, strengths
and weaknesses are to be identified with possible solutions. Thestudy would be in two parts; the first would look
at only replacing the current personal income tax while
the second would focus on replacing both business and
personal income taxes.2
The chief purpose of any tax system, proportional or
progressive, is to raise the revenue needed for the operations of government. This report examines the flat tax
rates necessary to generate the 1980 level of federal
individual income tax revenues, under various income tax
bases.) It is intended as a companion piece to the CRS
reports, Progressivity i n :ncome Taxation: A Pro-Con
Discussion (December 28, 1976) by Robert Tannenwald,
and An Overview of the Issues Concerning a Flat-Rate
Income Tax (May 26, 1982) by Gregg A. Esenwein.
The rate of tax necessary to generate a level of revenue
equal to that generated by current law will vary according
to the income tax base with which it is used; the broader
the tax base, the lower the necessary income tax rate.
Therefore, proposals for the institution of a flat-rate
federal individual income tax often have as corollaries the
broadening of the tax base.' The broadening of the tax
base would entail the reduction of or the outright elimination of various tax exemptions, deductions, exclusions,
and preferences which the tax code now includes. (Some
proposals also call for the imputation of net undistributed
corporated income to shareholders and the elimination of
the-corporate income tax.) This report examines the flat
tax rates necessary to raise 1980 levels of individual income tax revenues given various income tax bases, which
range from the narrow (taxable income) to the quite broad
Besides the simple revenue effects the institution of a
flat-rate tax would bring about, a switch to a proportional
income tax could entail distributional effects. These
effects would be changes in how the aggregate tax burden
is distributed over income classes. For example. one
would expect to find that a greater percentage of the
overall tax burden would fall on lower income classes
under a proportional tax than under a progressive tax rate
system. The precise change in the distribution of the tax
burden over income classes would depend partly upon the
income tax base which is used. A truly comprehensive tax
base with no exemptions whatsoever coupled with a flatrate income tax would result in a tax burden which falls
'Interested readers should see: U.S. Treasury Department.
Blueprints for Basic Tax Reform. Washington. U S . Govt. Print.
Off.. January 17.1977; and: Pechman, Joseph, ed. Comprehensive Income Taxation. Brookings Institution. Washington, D.C.,
1977. Also of interest is: Brazer, Harvey E. "The Income Tax in the
Federal Revenue System." in Musgrave. Richard A,. ed. Broadbased Taxes, New Options and Sources.
'This paper is based on an earlier report: U.S. Library of
Congress. Congressional Research Service. Estimates of Rat
lncome Tax Rates Necessary to Raise 1976 Level of Federal
lncome Tax Revenues, Using Various Tax Bases, by John Karr.
June 21. 1978.
?Tax Legislation: Tax Writers Introduce Resolution on Gross
Income Tax Study. Daily Tax Report, The Bureau of National
Affairs, Inc. March 17, 1982, No. 52, p. G5 and G6.
lstatistics for 1980 are the most recent available which provide
information by size of adjusted gross income.
The tlat-rate taxes necessary. . .to generate the
1980 level of. . .revenues are: system one, 11.8
percent; system two, 18.5percent; system three,
15.7 percent; and system tour, 18.7 percent.
TAX NOTES, June 21,1982
mined. The revenue a flat-rate tax must generate to
provide an amount equal to total federal individual income
tax collections (at 1980 levels) is about $248.4 billion.
The first income base measure examined is taxable income (TI). T I is the most narrowly defined income tax
base, consisting of gross income after exclusions, adjustments, exemptions, and d e d ~ c t i o n s . ~ T huse
e of T I as a tax
more heavily on lower income classes than the same tax
rate on a less comprehensive tax base. However, the intent
behind the institution of a flat-rate tax may be i n fact t o
avoid the "progressive" distribution of the tax burden over
income classes (i.e., a tax burden which falls more heavily
on upper-income taxpayers than on lower-income taxpayers).
Table 1 below presents actual 1980 levels of adjusted
gross income (AGI), taxable income (TI), and federal
individual income tax liability by category of AGI. From
the table, the tax rate necessary to generate equivalent
revenues according to the tax base used can be deter-
SDefinitions of these terms can be found in: U.S. Library of
Congress. Congressional Research Service. An Explanation of
Federal Individual lncome Tax Terms, by Morgan Frankel and
Louis Talley. May 17, 1980. (Repolt No. 80-98 E).
FEDERAL INDIVIDUAL INCOME TAX LIABILITIES, 1980
50,000 and over
'Not equal to 100.0 percent due to rounding.
Source: U.S. Internal Revenue Service. Statistics of lncome Bulletm, winter 1981-82. Washington, D.C., 1982.
ESTIMATED TAX REVENUE GENERATED BY A FLAT-RATE 19.5 PERCENT
TAX ON TAXABLE INCOME AT 1980 LEVELS
Adjusted Gross Income
50,000 and over
Total Taxable Income
Estimated Tax Revenues Percent of Total Cumulative Percent
'Not equal to 100.0 percent due to rounding.
Source: Author's calculations based on IRS data
ESTIMATED TAX REVENUE GENERATED BY A FLAT-RATE 15.5 PERCENT
TAX ON ADJUSTED GROSS INCOME A T 1980 LEVELS
Adjusted Gross lncome
50,000 and over
'Not equal to 100.0 percent due to rounding.
Source: Author's calculations based on IRS data.
TAX NOTES, June 21,1982
Estimated Tax Revenues
base would not provide much simplicity due to the many
rules regarding allowable deductions, limits on adjustments. etc. TI for 1980 totaled about $1,273.6 billion. In
order to generate income tax collections of approximately
$248.4 billion, a tax rate of roughly 19.5 peccent would
have to be applied. Table 2 presents estimates of the tax
revenues that would be collected in each category of AGI
under a 19.5 percent tax on TI (at 1980 levels).
Adjusted gross income (AGI) would be a somewhat
broader income base. AGI is usually less than money
income because certain types of income are excluded in
calculating AGI. For example, social security, railroad
retirement, and unemployment compensation are excludable from gross income. Additionally, certain other items,
such as contributions to individual retirement accounts,
can be excluded from AGI. AGI, while not as broad a tax
DISTRIBUTION OF TAX LIABILITIES UNDER FOUR ALTERNATIVE FLAT-RATE
TAX SYSTEMS COMPARED TO 1984 TAX LAW1AT 1981 INCOME LEVELS
N u m k r of
SOURCE: Joint Committee on Taxation.
income credit, the two-earner couple deduction, or the IRA or
Keogh provision. The flat rate tax systemssimilarly do not include
- - - 20utcomes
under the flat-rate tax for tax returns of under
55,000 of Income
be highly uncertain' Some laxpayers at
that income level currently make use of tax preferences that
would be terminated under the flat-rate tax, and those taxpayers
would thus face substantial tax increases. A particular problem
would arise under System 1, in which all income would besubject
to tax without exemption or deduction; many households with
very low incomes who are excused from filing tax returns under
the 1984 law are therefore not represented in the table, but would
have to file returns and pay taxes under System 1 The impact of
this factor on the table would likely be small, though it would
significantly change administrative burdens under the tax
System 1: 11.8 percent tax on adjusted gross Income with longterm cap~talgains ~ n c l u d e din full.
System 2: 18.5 percent tax on ,984 law taxable Income less zero
system 3: 15.7 percent tax on ,984 lawtaxable income
bracket amount, wlth long-term capital galns ~ n c l u d e d
in full, and no itemized deductions.
System 4: 18.7 percent tax on taxable incomeas in system 3 with
increased exemption and zero bracket amount.
TAX NOTES, June 21,1982
base as personal income or comprehensive income,
would be a much broader tax base than taxable income
( w h i c h i n c l u d e s e x e m p t i o n s and d e d u c t i o n s f r o m
income). Table 3 presents the estimated revenue which
would be generated by a 15.5 percent tax on AGI, with no
other exclusions or exemptions.
Another possible income base would be personal, or
money income. Because money income includes items
such as retirement benefits received, the sum of all
dividends received, as well as wage and salary income, it
would be a broader tax base than AGI. Total 1980 money
income received by families and unrelated individuals
totaled roughly $1.739.0billion, as reported by the Census
Bureau.=In order t o generate $248.4billion in tax revenues,
a tax rate of 14.3percent would have t o be applied t o the
$1,739.0figure, with no exemptions or exclusions.
Another, still broader tax base would be that provided
by comprehensive income. Although there are alternative
definitions as t o the specific items which can be included
in a comprehensive income base, under most definitions
combrehensive income would represent a quite broad tax
base. For example, in the Treasury study, Blueprints for
Basic Tax Reform (Blueprints s t u d y ) , a comprehensive
income definition was developed which includes not only
net money wage income, but also social security and
pension benefits received, all realized non-corporate
capital gains, dividends, and property income, and
imputed corporate retained earnings.'
This report examines the fiat tax rates necessary
to raise 1980 levels of individual income tax
revenues given various income tax bases, which
range from the narrow. . .to the quite broad. . .
T h e foregoing analysis has presumed the institution of a
flat-rate tax on income, under various income definitions.
It would be possible t o design a simple, yet more progressive, income tax based on a broad tax base by adjusting
tax rates or including personal exemptions. However, by
including exemptions or exclusions from income the income tax base is narrowed, thus requiring higher tax rates
in order t o generate a prescribed amount of revenue. T h e
Blueprints study as well as the Brookings study edited by
Pechman, Comprehensive Income Taxation, presented
examples of simple and progressive federal income tax
structures based on comprehensive income which yielded
equivalent revenues as the then current tax system. Issues
w h i c h are raised in a consideration of progressive versus
proportional income taxation are more explicitly discussed in the CRS report previously mentioned, Progressivity i n lncome Taxation: A Pro-Con Discussion.
6U.S.Bureau of the Census. Current Population Reports, Series
P-60. No. 127. Money Income and Poverty Status of Families and
Persons in the United States: 1980 (Advance Data from the March
1981 Current Population Survey). U.S.Govt. Print. Off.. 1981.
'Another definition of the items to be included in a comprehensive income tax base can be found in: Pechman, Joseph, ed.
Op. cit. p. 277-298.
TAX NOTES, June 21,1982
T h e T r e a s w y ' s Blueprints study included a proposal for
a simple three-tiered income tax rate structure, based on
comprehensive income, w h i c h would provide the same
degree of progressivity as that contained in the current tax
system. T h e Treasury tax rates ranged from eight percent
t o 38 percent on comprehensive incomes of over $40,000,
and the structure included very few exemptions and
deductions. T h e proposal was designed t o generate
revenue equivalent t o the then current system, and distribute the tax burden in approximately t h e same manner
as the then current system. However, because the tax base
would have been broadened d u e t o the lack of the myriad
deductions of the then current tax code, tax rates could
have been lower, and the entire income tax system would
have been simplified without sacrificing any of the progressivity of the then current tax system.
In a letter t o t h e Senate Appropriations Committee
dated February 25, 1982,J . Gregory Ballentine, Deputy
Assistant Secretary of the Treasury, wrote of the tax rates
and revenue potential of a proportional tax and such a tax
combined with a surtax o n individual income. He states in
This is in response t o your letter dated November
30, 1981, regarding a proportional tax rate and
surtax for individuals.
In order t o maintain the individual income tax
liability levels of the 1983 budget, a proportional tax
o n all individual income would require a tax rate of
10.6 percent i n 1983 increasing t o 11.3 percent in
1987. If Old Age, Survivors, and Disability (OASDI)
benefits were excluded from the tax base, and a 20
percent charitable contributions bredit were allowed, the required tax rates would b e 11.6percent
i n 1983 and 12.4 percent i n 1987.
In your letter you suggest a 10 percent proportional tax o n all individual income combined with a
surtax of 15 percent o n income exceeding $50,000
and 20 percent o n income exceeding $100,000.
Assuming a January 1, 1983, effective date and
corresponding changes i n tax withholding schedules, the direct effect of this proposal would b e a $25
billion reduction i n 1983 tax receipts and a $30
billion increase in 1984 and 1985 receipts compared
t o the 1983 budget. The exclusion of OASDI benefits
and the allowance of a 20percent charitable contributions credit would increase the 1983 revenue loss
t o $36 billion and reduce the revenue gain t o
approximately $2 billion i n 1984 and less than $1
billion i n 1985.
In arriving at these estimates the new tax base
includes capital gains, pensions, personal contributions t o socialinsurance, and allsources of personal
money income except income currently associated
with fraudulent underreporting.8
Paul Craig Roberts, a former Assistant Secretary of t h e
Treasury for Economic Policy, looked at flat income tax
rates needed t o balance t h e 1983 budget using t h e
comprehensive base of the Blueprints study. He states:
An update o f former Treasury Secretary William E.
Simon's "Blueprints for Tax Reform" (1976) reveals
OEleven Percent Proportional Tax Needed to Meet 1983
Revenue Targets. Tax Notes, v. 14, no.11, March 15,1982. p. 705.
Letter sent to Senate Appropriations Committee.
that a 16 percent flat-rate tax o n persdnal and
corporate income would balance the 1983 budget.
There are variations of the flat-rate tax that retain
elements of progressivity without defeating the purpose of the tax. A 19 percent flat-rate fax, for
example, would balance the 1983 budget and allow
the first $6,000 of income to be excluded from tax.
That drops the tax rate On a $10,000 income to 7.6
percent and o n a $20,000 income to 13.3 percent.
Alternatively, an 18 percent flat tax would balance
the 1983 budget and allow all transfer payments
including social security to be excluded from the tax
The fourth system uses the tax base of the previous
system but increases relief to low-income taxpayers
by increasing the personal exemption to $1,500 and
thezero bracket amount to $3,00Ofor singletaxpayers
and to $6,000 for joint returns.
The flat-tax rates necessary under these systems are as
follows: System 1: 11.8 percent; System 2: 18.5 percent)
System 3: 15.7 percent; and System 4: 18.7 percent. The
distribution of tax liabilities under these alternative flatrate systems is shown in Table 4.
Astudy by Joseph J. Minarik, Deputy Assistant Director,
Tax Analysis Division, Congressional Budget Office,Io
entitled The Future of the lndividuallncome Tax, contains
a section o n a flat rate income tax. I n his work, Minarik
examines four flat-rate tax systems:
System one represents7a gross income tax o n AGI
(including capital gains in full) yielding the equivalent
of current scheduled 1984 law tax revenues, applied
to the various tax bases for 1981 income.
System two represents the change to a flat tax rate
with currently scheduled 1984 tax law unaltered.
Under system three, the tax base is made broader by
including long-term capital gains in full and prohibiting itemized deductions.
In general, lower income taxpayers would find
their tax iiablilties greatly increased, while
upper-income taxpayers would find their tax
liability greatly reduced, unless large exemptions are adopted. .
9Roberts. Paul Craig. How to Break the Stalemate over the
Budget. Wall Street Journal, May 3. 1982. p. 30.
'OAs stated on the cover of the Minarik study, the author of that
paper takes the responsibility for opinions and any errors, and
none should be attributed to the Congressional Budget Office or
any of the individuals who helped through comments, advice, or
execution of portions of the paper.
The "proper" amount of progressivity an income tax
should entail is a judgment which depends upon personal
notions regarding equity and social utility. Despite one's
judgment regarding the appropriate degree of progressivity the federal income tax should embody, it is clear that
the institution of a flat-rate l.ax on any income base would
greatly shift the burden of the individual income tax. In
general, lower-income taxpayers would find their tax
liabilities greatly increased, while upper-income taxpayers
would find their tax liability greatly reduced, unless large
exemptions are adopted which are designed to provide
income tax relief to lower-income individuals.
THE LIERARY C" CONGRESS
Congressional Research Service
PROGRESSIVITY IN INCOME TAXATION: A PRO-CON DISCUSSION
R o b e r t Tannenwald
A n a l y s t In T a x a t i o n and F i s c a l P o l i c y
E c o n o m i c s Division
D e c e m b e r 28. 1976
PROGRESSIVTTY IN INCOibIE TAXATION: -4 PRO-CON DISCUSSION
Although i t h a s b e e n a f e a t u r e of the F e d e r a l i n c o m e t a x f o r f o r t y
y e a r s , p r o g r e s s i o n d o e s not enjoy u n i v e r s a l s u p p o r t .
a few tax e s p e r t s p r o p o s e a s a s u b s t i t u t e t o the c u r r e n t i n c o m e t a s
simplified, f l a t - r a t e s y s t e m .
F o r e x a m p l e . in 1969
C h a r l e s 0. Galvin, Dean of the Southern Methodist U n i v e r s i t y School
of Law, p r o p o s e d a c o m p r e h e n s i v e l y - b a s e d i n c o m e t a x with a f l a t tax
r a t e of 1 3 p e r c e n t .
Recently, R u s s e l l T r a i n , D i r e c t o r of t h e
E n v i r o n m e n t a l P r o t e c t i o n Agency and f o r m e r judge of the United
S t a t e s T a x C o u r t , a d v o c a t e d a s i m i l a r tax of 10 p e r c e n t s u p p l e m e n t e d
by a n e x p e n d i t u r e tax.
O t h e r s , although not having a d v o c a t e d a
f l a t - r a t e tax, h a v e advocated expansion of the t a x b a s e with a n a c r o s s t h e - b o a r d r e d u c t i o n in r a t e s that l e a v e s t h e t a s nominally l e s s
p r o g r e s s i v e than i n i t s c u r r e n t f o r m .
In D e c e m b e r , 1975, f o r
e x a m p l e , S e c r e t a r y of the T r e a s u r y William E. Simon p r o p o s e d a n
e x p a n s i o n of the i n c o m e t a x b a s e and the u s e of r a t e s ranging roughly
f r o m 10 to 30 o r 40 p e r c e n t .
Senator M a r k Hatfield i n t r o d u c e d a hill
i n the 94th C o n g r e s s (S. 802) p r o p o s i n g a s i m i l a r s y s t e m .
T h i s r e p o r t i s a n evaluation of t h e s e and o t h e r b a s e - b r o a d e n i n g ,
p r o g r e s s i o n - r e d u c i n g i n c o m e tax p r o p o s a l s .
It e m p h a s i z e s the i s s u e
of p r o g r e s s i v i t y r a t h e r than that of income tax base definition.
limitations of time, the d i s c u s s i o n in the following p a g e s is brief,
failing to do complete justice to the complexity of the i s s u e s with
which i t deals.
Tax e x p e r t s have delineated a t l e a s t s i x c h a r a c t e r i s t i c s of a
d e s i r a b l e tax s y s t e m .
T h e s e include equity, efficiency ( n e u t r a l i t y ) ,
simplicity, l u c r a t i v e n e s s , effectiveness i n promoting stabilization,
and effectiveness in promoting growth.
At l e a s t t h r e e p r i n c i p l e s of tax equity o r " f a i r n e s s " have
been expounded, none of which is u n i v e r s a l l y e m b r a c e d .
a r g u e that tax b u r d e n s should be distributed a c c o r d i n g to t a x p a y e r s '
"ability to pay.
The incidence of a tax, in o t h e r w o r d s , should
r e f l e c t the m e a n s of those who pay it.
With r e s p e c t to i n c o m e taxation, this p r i n c i p l e is usually thought
to imply t h e d e s i r a b i l i t y of p r o g r e s s i o n .
This implication follows
f r o m the assumption of declining m a r g i n a l utility, i. e., that a d o l l a r
of income foregone i s m o r e valuable to a p o o r p e r s o n (who is m o r e
likely to have spent it on a n e c e s s i t y ) than t o a r i c h p e r s o n (who i s
m o r e likely to have spent i t on a luxury).
A nominally p r o p o r t i o n a l
tax, given this hypothesis, would place a disproportionate tax burden
on the poor.
P r o p o n e n t s of a f l a t - r a t e tax r e j e c t the assumption of declining
m a r g i n a l utility.
Even if one a c c e p t s it, they maintain, the concept
of utility is m u c h too vague to s e r v e a s a b a s i s f o r the distribution
of tax burdens.
They doubt whether one can c o m p a r e the "utility"
of one t a x p a y e r with the "utility" of another without making e x t r e m e l y
a r b i t r a r y and subjective judgements.
Those who a r g u e in f a v o r of p r o g r e s s i o n do not deny that the
principle of ability to pay and the assumption of declining m a r g i n a l
utility of income a r e subjective.
They a s s e r t , however, that those
a r g u i n g in f a v o r of proportionality a r e on no f i r m e r ground.
objective law can t h e proponents of proportionality r e p a i r in support
of t h e i r conception of a f a i r tax b u r d e n ?
None, a r g u e the s u p p o r t e r s
of p r o g r e s s i o n , because p r i n c i p l e s of equity a r e n e c e s s a r i l y f i r s t
p r i n c i p l e s , based on v a l u e s r a t h e r than fact.
Some who a r g u e i n f a v o r of proportionality a d m i t that a
p r e s u m p t i o n in f a v o r of a given p a t t e r n of burden distribution i s
n e c e s s a r i l y s u b j e c t i v e . Many of them imply that i f one i s going to
choose a r b i t r a r i l y a guideline f o r future tax r a t e s t r u c t u r e s , the
burden distribution of the c u r r e n t tax s y s t e m i s the a p p r o p r i a t e one.
Finding l i t t l e o r no p r o g r e s s i o n in c u r r e n t effective tax r a t e s , t h e s e
tax e x p e r t s conclude that a f l a t r a t e tax b e t t e r r e p r e s e n t s c u r r e n t
r e a l i t i e s than the c u r r e n t s y s t e m of p r o g r e s s i v e r a t e s .
C h a r l e s Galvin, f o r example, a f t e r citing evidence that the effective
r a t e of the F e d e r a l income tax does not v a r y substantially a c r o s s
income c l a s e s , concludes
. we a r e not taxing. even now n e a r l y a s p r o g r e s s i v e l y a s we s a y
we a r e . T h e r e f o r e , a n outright recognition of proportionality
would recognize r e a l i t i e s a s they a r e and not a s the tax t a b l e s
r e p r e s e n t them to be. R u s s e l l T r a i n a r g u e s along s i m i l a r l i n e s :
I believe c u r r e n t economic a n a l y s i s h a s in fact concluded that
the p r e s e n t o v e r a l l s y s t e m , taking into account the s o c i a l
s e c u r i t y t a s , is quite definitely r e g r e s s i v e in i t s effect in any
event. . . . t h e r e being s o little honest p r o g r e s s i v i t y i n the p r e s e n t
s y s t e m , i t s p r e s e r v a t i o n h a r d l y justifies continuance of the p r e s e n t m o r a s s of complexity and s p e c i a l t r e a t m e n t . 4/
P r o p o n e n t s of p r o g r e s s i v i t y cite s t u d i e s which d e m o n s t r a t e that,
c o n t r a r y to the c l a i m s of Galvin and T r a i n , the effective r a t e s of both
the F e d e r a l income tax and the o v e r a l l F e d e r a l tax s t r u c t u r e a r e p r o gressive.
A study p e r f o r m e d by Richard A. and Peggy B. Musgrave
indicates that in 1958 effective individual income tax r a t e s r a n g e d
f r o m 2. 0 p e r c e n t f o r individuals with i n c o m e s u n d e r $4, 000 to 18. 5
p e r c e n t f o r individuals with i n c o m e s o v e r $92, 000 [Table 1, line 11.
Another study, conducted by Joseph P e c h m a n and Benjamin Okner,
a l s o concluded that the income tax is p r o g r e s s i v e in i t s incidence,
even a f t e r loopholes and the shifting of t a x e s a r e taken into account.
A s Table 2 indicates, t h e s e two economists found that t h e i r r e s u l t s
v a r i e d with t h e i r assumptions concerning such shifting.
s e t of assumptions, they found that a t the l o w e r end of the income
s c a l e , (individuals with adjusted family i n c o m e s between 0 and 3
thousand d o l l a r s ) the a v e r a g e effective r a t e of the F e d e r a l income tax
in 1966 w a s 1 . 4 p e r c e n t .
The a v e r a g e effective r a t e climbed s t e a d i l y
with i n c r e a s i n g i n c o m e until it reached a peak of 15. 3 p e r c e n t f o r
individuals with adjusted f a m i l y i n c o m e s between 100 and 500 thousand
The a v e r a g e effective r a t e declined a t higher income l e v e l s ,
falling to 1 2 . 4 p e r c e n t f o r individuals with adjusted family incomes
of one million d o l l a r s o r m o r e .
T h i s p a t t e r n of effective r a t e s did
not change substantially when different incidence a s s u m p t i o n s w e r e
The r e s u l t s of t h e s e two s t u d i e s roughly substantiate
R u s s e l l T r a i n ' s a s s e r t i o n that the burden distribution of a l l F e d e r a l
t a x e s combined i s p r o p o r t i o n a l o r r e g r e s s i v e .
however, depended on the underlying incidence a s s u m p t i o n s .
Musgrave and Musgrave [See Table 1, line 57 and P e c h m a n and Okner
[See T a b l e 31, when using incidence a s s u m p t i o n s the l a t t e r though w e r e
regressive:::, found a l l F e d e r a l taxes combined w e r e roughly p r o p o r tional a c r o s s m o s t of the income s c a l e although mildly p r o g r e s s i v e
-7 / However, P e c h m a n and Okner,
a t the l o w e r and u p p e r s e g m e n t s .
using a s s u m p t i o n s they considered to be progressive::":',
burden distribution of a l l F e d e r a l t a x e s combined to be distinctly
p r o g r e s s i v e throughout the income s c a l e [See Table 31.
:: See Table 6 , Variant 3b f o r a description of t h e s e a s s u m p t i o n s .
'r* See T a b l e 6, V a r i a n t l c , f o r a description of t h e s e a s s u m p t i o n s .
Some of those who a d h e r e to the p r i n c i p l e of p r o p o r t i o n a l i t y a r g u e
p r o g r e s s i o n in the F e d e r a l i n c o m e tax i s n e e d e d to offset the
r e g r e s s i v i t y or s t a t e and l o c a l t a s e s .
They m a i n t a i n t h a t the o v e r a l l
i n c i d e 6 c e of F e d e r a l , s t a t e , and l o c a l t a x e s is p r o p o r t i o n a l .
to a p r o p o r t i o n a l F e d e r a l i n c o m e tau, t h e r e f o r e , would r e n d e r the
overall incidence r e g r e s s i v e .
E s t i m a l e s of the b u r d e n d i s t r i b u t i o n of s t a l e and l o c a l t a s e s a p p e a r s
to be highly s e n s i t i v e to a s s u m p t i o n s c o n c e r n i n g how t h e s e t a x e s a r e
P e c h m a n and Olcner found, u n d e r t h e i r " p r o g r e s s i v e " s e t of
a s s u m p t i o n s [See T a b l e 6, V a r i a n t l c ] that this d i s t r i b u t i o n w a s
Effective s t a t e a n d l o c a l tax r a t e s s t a r t e d a t 9. 8 p e r c e n t
f o r individuals in the $0-3 thousand b r a c k e t , d r o p p e d to 6. 5 p e r c e n t
f o r those in the $10 to $20 thousand b r a c k e t , and r o s e a f t e r that to
13. 8 p e r c e n t o n i n c o m e s o v e r $1 m i l l i o n [See T a b l e 31.
Under t h e i r
r e g r e s s i v e s e t of a s s u m p t i o n s [SeeTable 6, V a r i a n t 3b] the b u r d e n
d i s t r i b u t i o n was c l e a r l y r e g r e s s i v e , r a n g i n g f r o i n 14. 0 p e r c e n t to
4 . 2 p e r c e n t f o r the l o w e s t a n d h i g h e s t b r a c k e t s r e s p e c t i v e l y [See
Under the p r o g r e s s i v e s e t of a s s u m p t i o n s , t o t a l F e d e r a l , s t a t e ,
a n d l o c a l effective r a t e s w e r e c l e a r l y p r o g r e s s i v e i n t h e i r i n c i d e n c e ,
r a n g i n g f r o m 18. 7 p e r c e n t to 49. 3 p e r c e n t .
Undcr the " r e g r e s s i v e "
s e t of a s s u m p t i o n s , o v e r a l l b u r d e n d i s t r i b u t i o n was roughly p r o p o r t i o n a l ranging between 24. 3 and 30. 3 p e r c e n t .
[See T a b l e 31
Some maintain that, in evaluating the distributive i m p a c t of the
introduction of a flat r a t e tax, one m u s t take into account the incidence of the total budget, expenditures a s well a s taxes.
t h e benefits of public expenditures a c c r u e s o disproportionately to
l o w e r inconle individuals, s o the a r g u m e n t goes, the c u r r e n t total
f i s c a l incidence is p r o g r e s s i v e .
Reducing o r eliminating t h e p r o -
g r e s s i v i t y of the F e d e r a l income tax, t h e r e f o r e , would move this
incidence c l o s e r to proportionality.
Studies of the distribution of governmental benefits by income
c l a s s e s a r e based on even s t r o n g e r incidence a s s u m p t i o n s than those
underpinning s t u d i e s of the burden distribution of taxes.
t h e r e s u l t s of those s t u d i e s which have been p e r f o r m e d a r e not o v e r l y
s e n s i t i v e to t h e s e assumptions.
Benefit distribution a p p e a r s to be
c l e a r l y r e g r e s s i v e (i. e . , benefits in g e n e r a l a c c r u e disproportionately
to t h e poqr. ) Musgrave and Musprave, f o r example, e s t i m a t e d that
benefits f r o m a l l l e v e l s of government in 1959 a c c r u i n g to individuals
with i n c o m e s u n d e r $4, 000 constituted between 123.7 and 1 8 0 . 4 p e r cent of income.
T h e s e e s t i m a t e d p e r c e n t a g e s declined steadily with
income until they r e a c h e d between 12. 3 and 24. 4 p e r c e n t f o r
individuals with i n c o m e s between $35, 000 and $92, 000,
(figures w e r e
not given f o r individuals with i n c o m e s above $92, 000) [See Table 4.
l i n e s 19-21].
ILlusgrave and ~ u s g r a v kfound the distribution of net
benefits and burdens (benefits m i n u s t a x e s ) of a l l l e v e l s of government to be skewed in f a v o r of the poor.
[See Table 5, line 91
Some f e e l that s t u d i e s such a s that p e r f o r m e d by Musgrave and
lMusgrave fail to e n t e r t a i n the possibility that the benefits of public
goods and s e r v i c e s a c c r u e disproportionately to the r i c h r a t h e r than
B o r i s B i t t k e r , f o r example, m a i n t a i n s that the benefits
of governmental expenditures on defense, police, f i r e protection, and
adjudication should be distributed in proportion to p r o p e r t y o w n e r s h i p
because they s e r v e p r i m a r i l y to p r o t e c t p r o p e r t y rights.
he believes that e.upenditures on education, health, and w e l f a r e
g e n e r a t e l a r g e amounts of benefits to individuals in high income
b r a c k e t s by improving society in general.
If t h e s e benefits w e r e
accounted f o r , Bittker concludes, one might even find that o v e r a l l
f i s c a l incidence in the United S t a t e s is r e g r e s s i v e and that i n t r o -5 /
ducing a proportional income tax would m a k e it even m o r e so.
CRS - 9
Estimated Distributipn of Tax Burdens by Income Breckets, 1968
flaxes a s Percent of Total Farndv Incornel
$5,700- $7.900- $10.400- $12.500- $17.500- $22,600- $35,500- $92.000All
$4,000 $5,700 $7.900 $10,400 $12,5DO $17.500 $22.600 $35.500 $92.000 ahd over Brackets
Under $4 000-
1. Individual income tax
2. Estate and gift tax
3. COrporation income tax
4. Excises and customs
5. Payroll tax
7. Total excluding line 5
State and Local Taxes
8. Individual income tax
9. Inheritance tax
10. Corporation income tax
1 1. General sales tax
13. Property tax
14. Payroll tax
16. Total excluding line 14
18. Total excluding lines
5 and 14
Source: For brief explanation of estimates, see text.
Uneven bracket limits are used for computational reasons.
Line 12: Includes motor vehicle licenses, excises. and miscellaneous revenue.
Totals may not add due to rounding.
Richard A. Musgrave and Peggy B. Musgrave. Public finance in
theory and practice. New York, McGraw Hi11 [l973], p. 368.
Effective Rates of Federal, State, and Local Taxes, by Type
of Tax, Variants l c and 3b, by Adjusted Family Income Class, 1966
Income classes i n thousands o f dollars; t a x rates
a n d motor
1,000 a n d over
A l l classesb
1,000 a n d over
A l l classesb
Source Computed from the 1966 MERGE dato flh.For on erplonotion of the incidence voriontr, seeloble 3-1.
Note; Voriant I c i s the most progr.srive and 3b the Ieost progressive $01of incidence osrumptims .xomined
in this study.
Less thon 0.05 percent.
b lnclv>r-rnegative incomes not shown seporotdy.
Source: Joseph A. Pechman and Benjamin A. Okner.
Who bears t h e t a x burden? Washington, Brookings
I n s t i t u t i o n , p. 59.
Effective Rates of Federal and State-Local Taxes, Variants
lc and 3b, by Adjusted Family Income Class, 1966
I n c o m e classes i n
o f dollars; t a x rates i n percent
50-1 0 0
1,000 and over
Source: Computed from the 1966 MERGE data file. For on explanation of the incidence voriontr, see Tablo 3-1.
Details may not odd to totals becouse of rounding.
Note, Variant I c i s tho mort progressive and 3b'tho least progrenivo set of incidence assumptions examined
in this study.
Includes negative incomes not shown separately.
Source: Joseph A. Pechman and Benjamin A. Okner. Who bears
the tax burden ? Washington, Brookings Institution [I 9741,
Distribution of Expenditure Benefits
(Benefits as Percent of Total Family Income)
SELECTED INCOME BRACKETS
Under $4.000- $5.700- $7,900- $12,500- $35.500$4.000 $5,700 $7.900 $10,400 $17,500 $92.000
I. SPECIFIC BENEFIT ALLOCATIONS
State and Local
II. TOTAL BENEFIT ALLOCATION
19. Variant A
20. Variant B
2 1. Variant C
*Less than 0.05 percent.
Notes: Lines 2 and 10: Interest is included here under purchases, although according to national income accounts it should appear as a separate category.
Lines 19, 20. 21: For explanation, see text.
Richard A. Musgrave and Peggy B. Musgrave. Public
finance in theory and practice. New York, McGraw Hill
, p . 373.
Distribution of Net Benefits and Burdens
(Net as Percent of Total Family Income)
Under $4,000$4.000 $5,700
$5.700- $7.900- $10,400$7.900 $10,400 $1 2,500
$12,500- $17.500$17,500 $22,600
$22,600- $35,500- $92,000
$35,500 $92.000 and over
1. Specific allocation
2. General, variant A
State and Local
4. Specific allocation
5. General, variant A
7. Specific allocation
8. General, variant A
Notes: Lines 2. 5. and 8: General expenditures are allocated in propornon to family income levels and tax distributions as in
'Less than 0.05
Richard A. Musgrave and Peggy B. Musgrave. Pub1 i c finance in
theory and practice. New York, McGraw Hill , p. 375.
CRS - 14
Tax Incidence Assumptions Used in Pechman-Okner Study
Tax and basis o f ollocotion
lndividuol income fox
Soles and excise foxes
To consumption o f t a x e d commodities
Corporofion income fox
To property income in generol
Half t o dividends; holf to property
income in general
Half t o dividends; one-fourth to consumption;one-fourth to employee
Half t o property income in general;
half t o consumption
Property fox on Iond
To property income in generol
Property tax on improvemenfs
To shelter ond consumption
To property income in general
Holf t o shelter and conrumption; half
t o property income in generol
Poyroll fox on employees
TO employee compensation
Poyroll fox on employers
To employee compensation
Holf t o employee compensation; holf
t o consumption
. . . . . . . . . . . .
X . . .
Source: Joseph A. Pechman and Benjamin A. Okner. Who bears the tax
burden? Washington, Brookings Institution 119741, p. 38.
Some proponents of a f l a t - r a t e income tax have advocated the
maintenance of a d e g r e e of p r o g r e s s i o n in the tax s t r u c t r u r e through
a n expenditure tax with a l a r g e exemption.
m o s t r e c e n t l y by R u s s e l l E. T r a i n .
T h i s suggestion was m a d e
Because consumption a s a
proportion of income d e c r e a s e s with income, the exemption would
have to be huge in o r d e r to m a k e the tax p r o g r e s s i v e .
Some tax a n a l y s t s r e j e c t the ability to pay principle a s a guideline to tax equity in f a v o r of the "benefit" principle.
t h i s p r i n c i p l e , tax b u r d e n s should be allocated according to the
value of the benefits g e n e r a t e d by public goods and s e r v i c e s .
Obviously, the implications of this principle f o r the d e s i r a b l e amount
of p r o g r e s s i o n i n the income tax depends o n o n e ' s beliefs concerning
the distribution of benefits by income c l a s s .
Because Boris Bittker
believes that t h i s distribution is skewed in f a v o r of high income
individuals, he u s e s t h e benefit principle t o defend the c u r r e n t p r o gressive rate structure.
F o r others,
benefit p r i n c i p l e s
horizontal equity" r a t h e r than the ability-to-pay o r
i s t h e m o s t important c r i t e r i o n f o r evaluating
In s h o r t this principle s t a t e s that individuals with equal
i n c o m e s should b e a r equal tax burdens r e g a r d l e s s of the s o u r c e s of
Many existing tax p r e f e r e n c e s violate this principle.
e s a m p l e , o t h e r things being equal, a t a x p a y e r who e a r n s h i s income
through the realization of capital gains p a y s l e s s in t a x e s than one
whose s o u r c e of income i s s a l a r y .
Thus, much base-broadening is
advocated under the banner of horizontal equity, too.
Some believe that the principle p e r t a i n s to the i s s u e of
p r o g r e s s i v i t y a s well.
It h a s been argued that p r o p e r t y i n c o m e should
be taxed m o r e heavily than e a r n e d income because i t is m o r e c e r t a i n .
A p r o g r e s s i v e income tax r a t e s t r u c t u r e effects this differential,
s i n c e p r o p e r t y income a s a percentage of total i n c o m e i n c r e a s e s a s
one p r o c e e d s up the income s c a l e .
B e f o r e leaving i s s u e s of equity, one should note that not even the
m o s t adamant i n h e r e n t s to a proportional income tax s t r u c t u r e bel i e v e that income below s u b s i s t e n c e l e v e l (however that may be
defined) should be subject to i n c o m e taxation.
How s u b s i s t e n c e
income is f r e e d f r o m taxation a f f e c t s t h e p r o g r e s s i v i t y of o v e r a l l budget incidence.
The advocates of Senator Hatfield's s i m p l i f o r m proposal
p r a i s e i t f o r i t s u s e of c r e d i t s r a t h e r than exemptions o r deductions
in achieving this goal.
The credit, i s a m o r e p r o g r e s s i v e i n s t r u m e n t
of tax relief than a deduction o r exemption.
While the tax s a v i n g s
resulting f r o m a d o l l a r of exemption depends on the t a x p a y e r ' s r n a r g i n 4 tax r a t e , the tax savings resulting f r o m a d o l l a r ' s worth of
c r e d i t is the s a m e f o r everyone, r e g a r d l e s s of that r a t e .
Some a r g u e that e v e r y d o l l a r or income should be subicct to
These individuals believe that the s u b s i s t e n c e problem
should be rcrnetiicd thr-ough the expcnditurc s i d c of thc budget.
One of the 1no.st fundamental canons of m a i n s t r e a m economic
theory and the ideology of c a p i t a l i s m is that p u r e l y competitive
m a r k e t s a r e m o s t efficient.
Left alone, such m a r k e t s will s a t i s f y
c o n s u n l e r p r e f e r e n c e in t h e cheapest possible way.
A c o r o l l a r y of
t h i s b a s i c tenet i s that a tax s y s t e m should d i s t o r t private economic
decisions.rnade under purely competitive conditions a s little a s
Many opponents of p r o g r e s s i o n believe that it d i s t o r t s the
p a t t e r n of s e v e r a l types o f economic decisions.
F i r s t , it allegedly
d i s t o r t s the w o r k e r l s choice between l a b o r and l i e s u r e , causing him
to choose l e g s of the f o r m e r and m o r e of the l a t t e r .
T h i s distortion
r e s u l t s f r o m the penalty that p r o g r e s s i v i t y i m p o s e s on the w o r k e r
f o r attempting to rnove up the income s c a l e .
In combination with
the c u r r e n t e r o s i o n of the income tax base, it a l s o induces taxp a y e r s to w a s t e t i m e and e n e r g y in seeking ways to avoid the
o n e r o u s effects of pr*gxessivity.
With r e s p e c t to the purported i m p a c t of p r o g r e s s i v i t y on work
effort, one could a r g u e that reducing p r o g r e s s i v i t y might d e c r e a s e
a s well a s i n c r e a s e s u c h effort.
i n c r e m e n t i n efSo~-tg a r n e r i n g
with e a c h hour worked o r each
a l a r g e r net wage, the w o r k e r who
l a b o r s until h e h a s achieved a fixed iricome l e v e l might r e d u c e
h i s eMort, reasoning that h e n e e d w o r k l e s s to achieve that level.
Anyway it i s not c l e a r that people have e i t h e r the capacity o r t h e
d e s i r e to a l t e r t h e i r work e f f o r t i n r e s p o n s e t o changes in net s a l a r y .
As f o r the a r g u m e n t that p r o g r e s s i v i t y l e a d s people to w a s t e t i m e
and e n e r g y in seeking ways to avoid i t s impact, f i r s t removing a v e n u e s
of avoidance through the enactment of a c o m p r e h e n s i v e income b a s e
would d r a s t i c a l l y r e d u c e this type of behavior, even if proportionality
w e r e not enacted.
Secondly, one could a r g u e that people would spend
a l m o s t a s much t i m e in the p u r s u i t of. tax s h e l t e r s even with a p r o portional r a t e s t r u c t u r e , s i m p l y because i t is n a t u r a l to a t t e m p t to
m i n i m i z e tax liabilities u n d e r any c i r c u m s t a n c e s .
It should a l s o be noted that the broadening of the i n c o m e tax
would eliminate important investment incentives c u r r e n t l y embedded
in the income tax s t r u c t u r e , such a s favorable t r e a t m e n t of longt e r m capital gains, the investment tax c r e d i t , and a c c e l e r a t e d
Thus, even if one m a i n t a i n s that the c r e a t i o n of a
proportional income tax r a t e s t r u c t u r e would s t i m u l a t e investment,
it does not follow that a complete base-broadening p r o g r e s s i o n reducing proposal would.
Besides, t h e r e a r e ways of stimulating
saving and investment through the expenditure s i d e and through
the m o n e t a r y s y s t e m which might be just a s effective a s changes
in tax policy.
A s f o r R u s s e l l T r a i n ' s suggestion that a consumption tax be
enacted, one could a r g u e that such a tax would r e v e r s e t h e
direction of the distortion in the consumption/ s a v i n g s decision
a s well dampen c o n s u m e r demand.
Yet the s t r e n g t h of c o n s u m e r
demand i s an important f a c t o r in the investment decision.
proposal, t h e r e f o r e might have only a l i m i t e d effect on capital f o r mation.
In r e s p o n s e , one could a r g u e that the government could
maintain o v e r a l l demand s t r e n g t h through m o n e t a r y policy and the
e s p e n d i t u r e s i d e of the budget.
T h e r e i s a g e n e r a l a g r e e m e n t that taxes should be s i m p l e to
collect and s i m p l e to comply with.
s y s t e m i s e x c e s s i v e l y co.mplex.
Many believe that the c u r r e n t
The multitude of schedules, the
n u m b e r of o p e r a t i o n s the t a x p a y e r m u s t p e r f o r m in o r d e r to d e t e r mine his o r h e r tax liability, the i n c r e a s i n g l y f r e q u e n t n e c e s s i t y of
obtaining p r o f e s s i o n a l a s s i s t a n c e to f i l l out r e t u r n s have imposed a
s u b s t a n t i a l burden on the public, diverting i t s e n e r g i e s f r o m m o r e
productive a c t i v i t i e s ,
T h i s burden purportedly h a s contributed to
t h e disillusionment of the A m e r i c a n people with government in
A broad-based p r a p o r t i m a l tax, s o i t s s u p p o r t e r s a r g u e , would
e l i m i n a t e much of t h i s complexity,
Eliminating tax p r e f e r e n c e s
obviously would simplify the s y s t e m .
Eliminating o r reducing p r o -
g r e s s i o n in the r a t e s t r u c t u r e would s t i f l e the motivation to r e i n s t a t e
Some maintain. however, that broadening the t a s b a s e would
g e n e r a t e as m u c h complexity as i t would eliminate. B o r i s Bittker
h a s argued that base expansion would c r e a t e new valuation p r o b l e m s
not r a i s e d under c u r r e n t law, p a r t i c u l a r l y i f u n r e a l i z e d a p p r e c i a t i o n
and depreciation, the m a r k e t value of annuities, and imputed income
f r o m the ownership of p r o p e r t y become tasable.
a r g u e s , base augmentation might r e q u i r e distinctions noL r e q u i r e d
under the p r e s e n t s y s t e m .
F o r example, if deductions of p e r s o n a l
expenditures a r e disallowed, it would be n e c e s s a r y to e s t a b l i s h
viable c r i t e r i a f o r t h e i r identification and distinction f r o m
-. b u s i n e s s
How will such a distinction be m a d e ? B i t t k e r g i v e s
s e v e r a l e x a m p l e s of situations in which the distinction would be
Would the p e r s o n injured in t h e c o u r s e of h i s work be
p e r m i t t e d to deduct the physician's bill a s a b u s i n e s s e x p e n s e ?
Would a n individual be a b l e i o deduct the i n t e r e s t on h i s home m o r t gage i f h e i n c u r r e d o r continued the debt in o r d e r to finance a
business o r p u r c h a s e investment s e c u r i t i e s ?
T h e s e e x a m p l e s give
a taste, according to Bittker, of the complexity that base-broadening
The f l a t - r a t e consunlption t a s with a l a r g e exemption, which
R u s s e l T r a i n h a s suggested a s a p r o g r e s s i v e supplemcnt to income
taxation, would entail e n o r m o u s a d m i n s t r a t i v e complexities.
R'lusg~.aveand h'lusgr.ave have suggested that the m o s t f e a s i b l e
p r o c e d u r e f o r determining the t a x p a y e r ' s annual consumption would
be the following:
R e c o r d the bank balances a t the beginning of the y e a r
Add r e c e i p t s
Add n e t borrowing (borrowing m i n u s debt r e p a y m e n t o r
Subtract net investment ( c o s t s of a s s e t s purchased minus
proceeds from a s s e t s sold)
Subtract bank b a l a n c e s a t end of the y e a r
The r e s u l t i n g f i g u r e would equal consumption f o r t h e y e a r .
T h i s p r o c e d u r e would r a i s e m a n y problems.
F i r s t of a l l imputed
consumption--e. g., housing and gome grown food--would have to be
included if the tax b a s e is to r e f l e c t a l l consumption.
borrowing m u s t be accounted for.
Such accounting would be difficult
when the c r e d i t o r s a r e institutions, not subject to the expenditure tax.
The expenditure tax would a l s o have to deal with the p r o b l e m of
long-lived consumption goods, s u c h a s housing.
T h e s e might be
taxed e i t h e r a s imputed consumption o v e r t h e i r useful life, o r a t the
t i m e of initial outlay, with a p p r o p r i a t e averaging permitted.
c u l t i e s m i g h t a l s o a r i s e in distinguishing between consumption and
S e v e r a l expenditures have both consumption and
investment c h a r a c t e r i s t i c s , e. g.
s h a r e s in
o r the pur-chase of
Finally, it might be possible Tor a high-
consumption t a x p a y e r to e s c a p e the tax by convincing a low
consumption taxpayer to m a k e p u r c h a s e s f o r him, dropping both
below the t a x - f r e e l e v e l in the p r o c e s s .
STAB ILIZA T I 0 N
It is d e s i r a b l e f o r a tax to p r o m o t e s t a b l e p r i c e s and dampen
swings i n the b u s i n e s s cycle.
P r o g r e s s i o n h a s often been p r a i s e d a s
an automatic s t a b i l i z e r that a s s i s t s the tax s y s t e m i n achieving
When the economy is booming and i n c o m e s a r e
i n c r e a s i n g , the bite of p r o g r e s s i o n m o d e r a t e s the expansion,
thereby allegedly controlling inflationary f o r c e s .
economy is declining and incomes a r e d e c r e a s i n g , the a v e r a g e m a r ginal tax r a t e declines under a p r o g r e s s i v e r a t e s t r u c t u r e .
consequence the reduction i n disposable income r e s u l t i n g f r o m the
r e c e s s i o n and concomitant reductions in demand and employment
a r e moderated.
Opponents of the d e g r e e of p r o g r e s s i o n c u r r e n t l y f e a t u r e d in the
income tax c l a i m that the r a t e s t r u c t u r e not only d a m p e n s expansion
but r e t a r d s r e c o v e r y .
In o t h e r w o r d s they c l a i m that p r o g r e s s i o n h a s
such an o p p r e s s i v e effect on the economy that i t p r e v e n t s i t f r o m
achieving i t s potential.
It h a s been alleged that p r o g r e s s i v i t y d a m p e n s growth b e c a u s e
i t f a l l s m o r e heavily on s a v i n g s than does a p r r o p o r t i o n a l o r r e g r e s sive income tax.
T h i s a r g u m e n t follows f r o m the a s s u m p t i o n that
the m a r g i n a l propensity to s a v e i n c r e a s e s with income, i. e . , that
f a m i l i e s k i t h r e l a t i v e l y high i n c o m e s tend to change t h e i r savings
by a l a r g e r f r a c t i o n of a change in t h e i r disposal income than do
f a m i l i e s with r e l a t i v e l y lpw incomes.
Studies designed to t e s t the
i m p a c t of p r o g r e s s i v i t y on savings have found that a p r o g r e s s i v e t a x
d o e s in f a c t f a l l m o r e heavily on savings than would a proportional
income t a s .
The s t u d i e s d i s a g r e e on the extent of the differences
in impact on s a v i n g s of these a l t e r n a i v e tax r a t e s t r u c t u r e s .
Some e c o n o m i s t s r e f u t e the c l a i m that an income tax which
falls heavily on s a v i n g s will r e d u c e household savings.
e m b r a c i n g this a r g u m e n t a s s u m e that the s a v e r h a s a fixed
s a v i n g s t a r g e t ; f o r example, adequate r e t i r e m e n t o r enough to p r o vide f o r h i s c h i l d r e n ' s education.
If the s a v e r ' s income i s reduced,
he will have to s a v e a t a g r e a t e r r a t e in o r d e r to m e e t h i s t a r g e t .
Reddcing tax r a t e s and p r o g r e s s i v i t y , i t follows, would d e c r e a s e the
r a t e of s a v i n g by higher income tax p a y e r s .
This effect might off-
s e t t h e g r e a t e r tendency of higher income people to substitute s a v i n g s
f o r consumption when t h e i r disposable incomes a r e i n c r e a s e d .
Advocates of base-broadening and p r o g r e s s i o n - r e d u c t i o n point
out that augmentation of the tax b a s e would p e r m i t r a t e reduction
without revenue l o s s .
Galvin,for example, s u g g e s t s that under h i s
proposed f l a t - r a t e tax, the income tax r a t e could be s e t a t 13 p e r cent without any l o s s in revenue.
T r a i n s u g g e s t s that r a t e could
be a s low a s 10 p e r c e n t under his scheme.
Some even contend that
r e v e n u e s would i n c r e a s e u n d e r plans such a s those of Galvin and
T r a i n because the s t i m u l u s provided by t h e i r proposed r a t e r e d u c tions would i n c r e a s e taxable income.
Introducing a 10 o r 13 p e r c e n t flat r a t e income tax without
reducing revenue below i t s c u r r e n t level would be p o s s i b l e only if
the income t a s base w e r e broadened to include unrealized c a p i t a l
gains, whose identity a s "income" i s a point of contention among
e c o n o m i s t s and accountants.
Otherwise, even if a l l national i n c o m e
w e r e included i n the tax base, with no exemptions, deductions, o r
exclusions, a I 6 p e r c e n t r a t e would be n e c e s s a r y t o avoid revenue
In evaluating Galvin's and T r a i n ' s p r o p o s a l s , one should
keep in mind the e x t r e m e n a t u r e of the b a s e broadening involved.
A s f o r the a r g u m e n t that revenues would actually i n c r e a s e u n d e r
these p r o p o s a l s because of t h e i r sizeable s t i m u l u s to the economy,
one can point out that no c o n c r e t e evidence h a s been unearthed that
the p r o p o s a l s would have such a l a r g e i m p a c t on taxable income.
s e v e r a l of those who have advocated simplified income t a x e s with
reductions in p r o g r e s s i o n have d i s c u s s e d integration of the individual
income tax with o t h e r F e d e r a l taxes, such a s the c o r p o r a t i o n income
tax and the payroll tax.
a-k.e beyond the scope
Although these questions a r e important, tXey
of this r e p o r t .
O n e ' s beliefs concerning the a p p r o p r i a t e d e g r e e of p r o g r e s s i v i t y
fii F e d e r a l irrcofie taxation a r e i m p o r t a n t components of h i s im-3ge of
C j ~ s society.
The i s s u e of p r o g r e s s i v i t y ultimately m u s t be r e s o l v e d
tlie b a s i s of value judgements, not on deductions based on objective
Galvin, C h a r l e s 0. and B o r i s I. B i t t k e r . T h e i n c o m e tax: how
p r o g r e s s i v e should i t b e ? Washington, A m e r i c a n E n t e r p r i s e
histitute [ I 9691.
T r a i n , R u s s e l l E. A plan f o r r e a l tax r e f o r m .
Oct, 24, 1976: B1, B4.
Washington P o s t ,
Ne w s p
Galvin, C h a r l e s 0. a n d B o r i s I. Uittker, op. c i t . , p. 19.
T r a i n , R u s s e l E . , op. c i t . , B4.
Galvin a n d B i t t k e r , op. c i t . , pp. 52-54.
T r a i n , op. cit. , 134.
IIatfield, M a r k 0. S i m p l i f o r m on i n c o m e tax. R e m a r k s in the
Senate. C o n g r e s s i o n a l R e c o r d [daily ed. ] v. 121, F e b . 24. 1976:
R i c h a r d A. h l u s g r a v e and P e g g y B. ILlusgrave. P u b l i c f i n a n c e
in t h e o r y and, p r a c t i c e . New York. McGraw Hill [ I 9731, p. 316.
See R i c h a r d Goode. The individual i n c o m e tax. Washington, The
RI-ookings Institution [I9641 p. 67; a l s o , M u s g r a v e , R i c h a r d A.
E f f e c t s of tax policy on p r i v a t e c a p i t a l f o r m a t i o n , i n f i s c a l a n d
debt m a n a g e m e n t policies, R e s e a r c h Studies i o r the Commiss'ion
on nloney and C r e d i t [Englewood Cliffs, N. J. : P r e n t i c e - H a l l , 19631,
pp. 65, 58.