How To Read A Book

Transcription

1 I. Introdtion Chaptr 8 DISTRIBUTIOAL EFFECTS OF THE VALUE-ADDED TAX Th ost frqnt ritiis of a val-addd tax, as of any sals tax, is that th distribtion of th tax brdn by ino grop wold b nfair. As notd in Chaptr 5, two aspts to this ritiis an b idntifid: (I) th absolt brdn of a val-addd tax on low ino individals and failis, and (2) th rlativ brdn of th val-addd tax at varios ino lvls. A oprhnsiv or broad-basd val-addd tax iposd at a nifor rat, th typ dsribd in Chaptr 7, wold pla a signifiant tax brdn on low ino grops. Morovr, it wold b rgrssiv; that is, th aont of tax paid as a prntag of ino wold b gratr at th lowr ino lvls than at th highr bas individals at low ino lvls ons a largr prntag of thir ino than thos at highr ino lvls. Morovr, prsons in th highr ino grops spnd a highr prntag of thir inos on srvis, so of whih, sh as xpnditrs on forign travl, dation abroad, and prsonal srvis rndrd in th ho, annot b rahd by a val-addd tax. 11. So Undrlying Assptions Th viw that a val-addd tax wold brdn th poor and b rgrssiv is basd on th standard assption that th tax wold b shiftd forward to onsrs throgh pri inrass. If a valaddd tax ass a dirt and nifor inras in osts affting all opting firs, idiat pri inrass an b xptd ndr sal priing onditions and thods, givn a ontary poliy that prits or "ratifis" ths pri inrass. A gnral inras in th pri lvl an or only if th appropriat aoodativ adjstnts or in th total spply of ony (or its vloity). In th fa of an nhangd noinal or ony val of th gross national prodt, th pri lvl annot ris in rspons to th tax, and ithr wags and othr fator inos or th lvl of otpt st dlin. It is rasonabl to ass that to prvnt any dlin in ral otpt, th ontary adjstnts nssary to allow firs to pass th tax forward will b ad. Aordingly, th tax brdn an b assd to rst "on onsrs" in th sns that it wold b proportional to onsr spnding on goods and srvis inldd in th taxabl bas. Anothr ndrlying assption (soti ipliit) is that th appropriat basis for oparing val-addd tax brdns aong varios individals and failis is rrnt ino. So xprts ritiiz this approah on th gronds that lifti or "prannt" ino,

2 - 9 - rathr than th rrnt yar's ino, shold b sd to asr a faily's living standard ovr its lifspan. On a lifti ino basis, a val-addd tax wold b lss rgrssiv, and prhaps vn proportional, bas onsption tnds to b a nifor proportion of lifti or prannt ino at all ino lvls, xpt for thos who lav stats and ths do not ons all of thir lifti ino. In any partilar yar, howvr, for failis in a givn ino lass, rrnt ino ay diffr fro prannt ino bas of: sddn and nxptd windfalls, sh as th ript of gifts or bqsts; rdd arnings asd by th tporary loss of ploynt or illnss; or yoth or old ag. To th xtnt that onsption is dtrind by prannt, rathr than rrnt ino, onsption will not b a onstant prntag of rrnt ino at all lvls. In any givn yar, for xapl, lowino failis ay hav onsption xpnditrs in xss of thir ino for that yar, and high ino failis ay ons lss than rrnt ino. Ths, th rgrssivity of th tax is probably ovrstatd with rfrn to rrnt ino. Still, it is th rrnt yar's ino that in larg part dtrins th rrnt living standard and th s ot of whih ost taxs ar paid. Morovr, th rrnt yar's ino is sally rgardd as th ost pratial basis for th oparison of val-addd tax brdns at varios ino lvls. Dspit its liitations, it is sd in this haptr Th Altrnativ Soltions Whthr th absolt brdn of a val-addd tax on th poor and th rgrssivity of th tax ar objtionabl is, in th first instan, a val jdgnt. vrthlss, ost wold agr that th poor shold not b sbjtd to any signifiant tax brdn and that th ovrall distribtion of th Fdral tax syst shold not b rgrssiv. Of ths two lnts, th absolt brdn of th valaddd tax on th poor is th or srios probl, sin th tax wold dpriv thos prsons of th ino nssary to aintain a ini standard of living. In oparison, th rgrssivity of a val-addd tax ovr othr ino rangs an b offst by adjstnts in th ino tax rats; a progrssiv tax strtr dos not rqir ah of th taxs in that strtr to b progrssiv or vn proportional. This haptr onsidrs for altrnativs for daling with th probls of th brdn of th tax on low ino failis and its rgrssivity. In valating ths altrnativs, th distribtional ffts ar basd on 198 lvls of ino and pattrns of spnding, and th xpnditr and rvn ffts of th altrnativs ar basd on 1988 lvls of ino and xpnditr. (As xplaind in Chaptr 9, th Intrnal Rvn Srvi onsidrs 1988 to b th first fll yar for whih a val-addd tax old b fftiv.) Th distribtional rslts and figrs prsntd in this haptr ar lassifid by faily onoi ino lass. As xplaind in Appndix 4-A to Vol 1, Ovrviw, onoi ino is a oprhnsiv asr of ino that is intndd to approxiat th standard dfinition of ino, onsption pls hangs in nt worth. It inlds

3 fors of ino that ar not sbjt to tax, sh as tax-xpt intrst fro stat and loal bonds and govrnnt transfr paynts. ~t also asrs or aratly rtain othr fors of ino, sh as ral intrst ino. This broadr asr of ino, thrfor, provids a bttr yardstik than adjstd gross ino for valating th abilitis of failis to pay taxs and for oparing tax brdns by ino lass. (Th sall nbr of failis with ngativ onoi ino ar xldd fro th rslts bas this nsal sitation, typially assoiatd with larg apital or oprating losss, is not rlvant for assssing th distribtional brdn of th val-addd tax. ) A. Adjstnts in Transfr Paynts So govrnnt-providd transfr paynts, sh as soial srity and food staps, ar atoatially indxd to rflt hangs in th ost of living. If iposition of a val-addd tax asd th pri lvl to inras, th indxd transfr paynts wold also ris to adjst for th fft of th tax on pris. Undr th indxing provisions of rrnt law, th brdn of th val-addd tax on low ino failis wold b rdd by th atoati adjstnt of transfr paynts. This altrnativ wold not liinat th brdn of th tax on thos low ino failis who rivd ithr no or only odst aonts of indxd transfrs. In 198, thr wr narly 14 illion failis and individals with onoi inos blow $1,. Of ths, 12 illion rivd so for of govrnntal transfr paynts; 2 illion did not riv any transfr paynts. Alost 1 illion of ths failis and individals rivd on or or typs of bnfit that is alrady indxd for ost of living hangs; th fft of th val-addd tax on pris wold atoatially b rfltd in highr bnfits ndr ths progras. Approxiatly 2 illion failis and individals with onoi inos lss than $1, rivd only non-indxd transfr paynts. Thrfor, a total of 4 illion of ths low ino hosholds wold not bnfit fro th atoati indxing of transfr paynts. Soial srity paynts ar th ost widsprad of ths indxd transfr paynts, going to 7 illion failis and individals, or on-half of thos with onoi inos blow $1,. Othr indxd progras ar food staps, spplntal srity ino, and govrnnt pnsions; ths progras rah a total of 7 illion low ino nits, ovr half of whih also riv soial srity bnfits. ot all govrnnt ino aintnan systs ar indxd, inlding so progras finand at last in part by th Fdral govrnnt, sh as nploynt opnsation and aid to failis with dpndnt hildrn, as wll as dirt wlfar rlif providd by stat and loal govrnnts. Whil ths nonindxd transfrs old onivably b adjstd to rflt th fft of th val-addd tax on pris, this wold involv additional xpnditrs by stat and loal, as wll as th Fdral, govrnnt.

4 Sin only abot 8 prnt of onsption xpnditrs wold b sbjt to th broad-basd tax, it an b xptd that a 1 prnt val-addd tax wold as th onsr pri indx (CPI) to ris by abot 8 prnt. Th distribtional onsqns of indxing transfr paynts ar illstratd in Tabl 8-1 and Figr 8-1 for a 1 prnt val-addd tax. Th prntags show val-addd tax paynts as a prnt of onoi ino for varios onoi ino lasss. For xpositional onvnin, illstrations of distribtional ffts ar allatd for a 1 prnt val-addd tax. For lowr rats of tax, ontary agnitds wold b orrspondingly lowr. For prposs of oparison, th distribtional ffts of a broad-basd or oprhnsiv val-addd tax of th typ dsribd in Chaptr I lvid in th absn of indxing ar also shown. It is iportant to phasiz that this indxing of transfr paynts wold b atoati ndr rrnt law. Ths, barring any hang in rrnt law indxing provisions, th botto lin in Tabl 8-1 and Figr 8-1 ay b a or arat dsription of th atal distribtional brdn of a broad-basd valaddd tax than is th ppr lin. Th indxing of transfr paynts wold rd, bt not liinat, th brdn of th val-addd tax on low ino failis and individals. This is tr bas not all low ino failis riv indxd transfrs, and in any givn yar, so low ino failis hav onsption xpnditrs in xss of thir ino. As shown in th last oln of Tabl 8-1, th indxing of transfrs ndr rrnt law wold absorb abot 11 prnt of th rvn fro th oprhnsiv val-addd tax. 8. Zro Rating of "ssitis" Thogh any stdis of distribtional brdns hav shown that a broad-basd sals tax is rgrssiv if lvid at a singl rat, a 1981 stdy by th Organisation for Eonoi Coopration and Dvlopnt, "Th Ipat of Consption Taxs at Diffrnt Lvls of Ino," shows that th val-addd taxs in svn Eropan ontris, with thir xlsions and ltipl rats, ar gnrally not rgrssiv, xpt at high ino lvls. Evn th oprhnsiv val-addd tax bas dsribd in Chaptr I dos not inld all onsr xpnditrs on goods and srvis; rnts on rsidntial hosing, for xapl, wold b xldd fro th tax bas. A sond altrnativ for rding th brdn of th tax on low ino failis wold xld additional goods and srvis fro th tax bas. If this approah wr sd in obination with th indxing of transfrs, it wold provid so failis and individals with or rlif than othrs. That is, zrorating wold liinat tax on so goods for all taxpayrs. Indxing of transfrs wold inslat transfr ripints fro th brdn of tax on goods that ar not zro-ratd. Ths, zro rating of ooditis ight b don in li of adjsting transfrs. To prvnt transfrs fro bing indxd to rflt th val-addd tax, th tax wold hav to b xldd fro th onsr pri indx sd for indxing transfrs. This altrnativ wold idntify thos taxabl ooditis on whih lowr ino failis and individals spnd a larg proportion of thir ino and rov thos xpnditrs fro th tax bas by zro

5 !, E 1 C 9 - I O. I o. ) % VI VI VI. o ". G 4 E " w W a " Y =I y w "4 P, x f 5 Yr- "a ' 4 ' r -i? Y. 1. 5;Y. n Y w P 5: o w x n w. E x + x w w w 2 rl 8 W 5 tl 5 wj > lll d Y Y o Y &&I - Lor. $% wol z $5 ' > "$ -? % 2:: z; -I- ~ g alto 5" 2 rtn E" X ' D - 4 O5 O W Y I o %!A O E w 5 U :: o Lp r a

6 - 94 -

7 rating th. That is, no tax wold b hargd on thir sal, bt th fir slling th zro-ratd ooditis wold b ntitld to a rdit or rfnd for th tax paid on its prhass that ar rlatd to th prodtion and sal of th zro-ratd ooditis. Ths, th zroratd ooditis wold b frd of any val-addd tax. Consr xpnditrs on th goods and srvis idntifid in th raindr of this stion ar rgrssiv; that is, as a prntag of ino, xpnditrs dlin as ino riss. Zro rating ths its wold rd both th brdn of th tax on lowr ino grops and th rgrssivity of th tax Food. Mor than on-half of th stats xpt food prpard at ho (bt not rstarant als) fro rtail sals taxation. With a rtail sals tax, of ors, xption frs th xpt it of all rtail sals tax. Expnditrs on food prpard at ho xhibit a rgrssiv pattrn, onstitting a highr prntag of ino in th lowr ino grops than in th iddl and ppr ino lvls. On th basis of data drivd fro th Bra of Labor Statistis, Consr Expnditr Srvy (hraftr rfrrd to as th CES), failis with onoi ino of lss than $1, spnt 2 prnt of thir bfor-tax ino on ho-onsd food. Ths, zro rating of ho-prpard food wold rov a sbstantial portion of th brdn of th val-addd tax fro th failis in th lowst onoi ino grop. By oparison, thos with onoi ino btwn $2, and $,, spnt 11 prnt, and thos with onoi ino of ovr $2, spnt lss than 1 prnt of thir ino on ho-prpard food. Th fft of zro rating xpnditrs on food is illstratd in Tabl 8-2 and Figr 8-2. For prposs of oparison, th distribtional brdn of a broad-basd val-addd tax with no indxing is also shown. Thogh, th xlsion of food wold addrss so of th distribtional objtions to a broad-basd val-addd tax, thr ar a nbr of diffiltis with this approah that poliy akrs shold onsidr : (a) Exlding food wold sbstantially rd th rvn yild of th tax. Stat xprin with rtail sals taxs indiats that th stats los fro 15 to 2 prnt of thir' sals tax rvn if food is xpt; zro rating of food wold rd th bas of a Fdral val-addd tax by abot $49 billion at 1988 lvls of xpnditrs, or, aording to th last oln in Tabl 8-2, by abot 14 prnt of th oprhnsiv bas dsribd in Chaptr 7. Exlding food has a rlativly largr ipat on th stats' tax bas bas, nlik th val-addd tax dsribd in Chaptr 7, ost stat rtail sals taxs do not inld srvis. Bas zro rating of food rovs th food xpnditrs of th iddl and ppr ino grops fro th tax bas, as wll as th xpnditrs of th poor, h of this rosion in th bas is nnssary to ahiv th objtiv of lssning th brdn of th tax on lowr ino failis and individals. arly 9 prnt of th rosion in th bas is fro xpnditrs on food by thos with onoi inos abov $1,. By oparison, this grop aonts for 92 prnt of all onsption.

8 , U C o Y I( 52 o S lo O 1 Y) I rl 96 - T 4 F: t-4 F: Y) 1 T w 1 (D. i rl v rl t o 1 1 rl n I 1 M

9 - 97 -

10 (b) Zro rating of food wold favor thos individals and failis with rlativly strong prfrns for food, and it ay rat onoi distortions by inrasing prhass of food rlativ to thos of taxd goods. () Evn if ho-prpard food is xpt, rstarant als ar alost always taxd ndr stat rtail sals taxs. A fw jrisditions, howvr, xpt als blow a rtain pri. Bt drawing th lin btwn a rstarant al and ho-prpard food is vry troblso, partilarly with th poplarity of fast food takot rstarants and dliatssn and prpard food dpartnts in grory stors. Th argnt for taxing rstarant als is that oriallyprpard als involv "lxry" spnding. Atally, aording to th SASS-basd stiats, spnding on rstarant als also xhibits a rgrssiv pattrn by ino lass, thogh it is lss rgrssiv than xpnditrs for food prpard at ho. A poliy of xlding only rstarant als blow a rtain pri wold b arbitrary and wold rat probls with billing stors. For xapl, wold sparat bills b rqird for ah br of a grop ating togthr to tak advantag of th xlsion? Th probls with rstarant als illstrat th inhrnt objtions of trying to solv th rgrssivity probl by xlding rtain atgoris of xpnditr fro th valaddd tax. (d) Zro rating of food wold atrially opliat th adinistration and opration of a val-addd tax. Th distintion btwn zro-ratd food prhass and othr taxabl ooditis is not lar t. Thr invitably wold b probls of dlinating food fro othr ooditis. For xapl, thr is no sharp distintion btwn soft drinks, whih ight b taxabl, and varios frit jis and drinks, whih ight not b. If i ra is taxabl, it ay b diffilt, and inappropriat, to diffrntiat it fro tax-xpt frozn yogrt. Zro rating of food wold rais any bordrlin isss of this sort. In ah as, th tax adinistrator st spify th dividing lin btwn taxabl and non-taxabl ooditis and th food stor lrk st b awar of ths distintions if th propr aont of tax is to b hargd. () In addition to ths dlination probls, th oplian probls of sllrs and th ontrol probls of th Intrnal Rvn Srvi (IRS) wold b sbstantially inrasd by zro rating of food. vry fw stors sll only food its. If food wr zro ratd, larg sprarkts wold hav to nsr th orrt appliation of th tax at th ash rgistr, and thy wold b rqird to kp sparat rords of food and nonfood sals. Thr wold b a tndny for firs to ovrstat th portion of total sals onsisting of food, and th adit task of th IRS wold b ad or diffilt. Stat xprin with th rtail sals tax indiats that hking on th food xption absorbs a sbstantial portion of th ti of sals tax aditors.

11 Zro rating of othr ooditis. As shown by Tabl 8-2 and Figr 8-2, zro rating of food wold not rov th ntir valaddd tax brdn fro th lowst ino grops. Aording to th stiats fro th CES, approxiatly two- thirds of th xpnditrs of th failis with onoi inos ndr $2, onsists of prhass of goods and srvis in th oprhnsiv bas othr than ho-prpard food. Th brdn on low ino grops old b rdd frthr by xlding thr othr atgoris of onsr xpnditrs. (a) Hosing osts. As notd in Chaptr 6, hosing xpnss annot b flly taxd bas of th inability to rah iptd rnt on ownr-opid hosing. Sin rsidntial rnts on ithr tnantopid or ownr-opid hosing wold not b taxd, th brdn of th broad-basd val-addd tax on th poor wold b lss than what it wold b with fll taxation of hosing rnts. Th oprhnsiv val-addd tax bas dsribd in Chaptr 7, howvr, dos inld prhass of nwly-onstrtd, as wll as rnovatd, hosing. Coplt xlsion of all hosing osts, inlding thos of nw onstrtion and rnovation, wold rd th brdn on th poor still or. This old b aoplishd by zro rating sals of nwly-onstrtd hosing and th rpair and rnovations of xisting hosing. As with zro rating of food, howvr, this rdtion in th tax bas wold b at th xpns of a sbstantial loss of rvn fro xpnditrs by prsons in th iddl and ppr ino grops and wold as inqity and onoi distortions. Zro rating th sals of nw hosing wold rd th val-addd tax bas by abot $17 billion, or 7 prnt of th oprhnsiv bas. Abot 94 prnt of th rvn loss isssatd with this bas rosion wold b fro xpnditrs on nw hosing (pls rpair and rnovation) by thos failis with onoi inos abov $1,. (b) Drgs and diins. Thogh ost dial ar wold b ithr zro ratd or xptd vn ndr th oprhnsiv val-addd tax bas, zro rating of prsription drgs and diins wold frthr rd th brdn of th val-addd tax on low ino failis. zro rating of prsription drgs and diin, whih wold rd th tax bas by abot $16 billion, wold rat fwr oplian and adinistrativ probls than in th as of food bas this atgory is larly dlinatd by th nd for a physiian's prsription. Zro rating of nonprsription drgs, howvr, wold rat troblso oprational probls. onprsription diin is sold by a grat varity of stors handling othr goods as wll, and it is not larly dlinatd fro othr ooditis. Stat and loal govrnnts that hav xptd nonprsription drgs fro rtail sals taxation hav nontrd both oplian and adit probls. () Enrgy, watr, and sanitation srvis. Consr spnding on ltriity, gas, fl oil, and watr and sanitation srvis old also b zro ratd; of ors, this wold onflit with rnt proposals for an nrgy tax, ithr to rais rvn or disorag th onsption of nrgy. For thos failis with onoi ino of lss than $1,, this atgory of xpnditrs rprsnts abot

12 - 1 - prnt of total onsption xpnditrs. Zro rating of xpnditrs on ths its for all onsrs wold rd th val-addd tax bas by abot $16 billion or by 7 prnt of th oprhnsiv bas; abot 9 prnt of th rvn loss assoiatd with this bas rosion wold b fro thos failis with onoi ino abov $1,. Th botto lin in Tabl 8-2, as wll as Figr 8-, illstrats th distribtional ffts of zro rating xpnditrs on hoprpard food, nw hosing, prsription drgs and diins, hoshold nrgy, and watr and sanitation srvis. Th fft of zro rating ths xpnditrs is to rd sbstantially th brdn of th tax on thos with onoi ino blow $1, and to rd, bt not liinat, th rgrssivity of th val-addd tax. In gnral, any attpt to lssn th absolt brdn of a valaddd tax on th poor and rd th rgrssivity of th tax by xlding varios atgoris of goods and srvis fro th tax annot flly solv th qity probl, and alost invitably wold as disriination, loss of onoi ffiiny, and nnssary loss of tax rvn. As shown in th last oln in Tabl 8-2, zro rating th xpnditrs disssd in this stion wold rd th rvn fro a oprhnsiv val-addd tax by narly prnt. It wold atrially opliat th tasks of both taxpayrs and th IRS, and prhaps pav th way for vasion of th tax. C. Ribrsnt for Val-Addd Tax Undr anothr altrnativ for lssning th brdn of th tax on th poor, no ffort wold b ad to zro rat th prhass of nssitis ndr th val-addd tax. Th val-addd tax wold apply to th oprhnsiv bas of onsr xpnditrs, as dsribd in Chaptr 7. Th brdn of th val-addd tax on th poor wold b rdd by ribrsing thos at th lowr ino lvls for a spifid aont that wold b roghly qal to th aont of val-addd tax paid. Th objtiv wold b to fr fro th val-addd tax th onsption nssary to sstain a ini standard of living. Mini or ssntial onsption old b dfind by rfrn to th povrty ino lvl. In othr words, th povrty lvl of ino old b onsidrd to b qivalnt to th onsption rqird to attain a ini standard of living. This approah wold b an altrnativ to th indxing of transfrs; that is th fft of th val-addd tax wold b xldd fro th onsr pri indx sd to indx transfrs. If transfr ripints wr allowd a rdit, on top of having transfrs indxd, thy wold b lft or than whol. This ribrsnt old b iplntd in ithr of two ways: (1) A rdit old b providd against on's Fdral ino tax liability for a s rprsnting th val-addd tax born on th onsption nssary to sstain a ini standard of living. This

13 r D D r 6 z a l- : l - Lo Y- O l - o b9

14 aont wold b takn as a rdit on Fdral ino tax rtrns in th sa fashion as ino taxs withhld and th arnd ino tax rdits ar rditd against on's ino tax liability. If th aont of th rdit xdd on's ino tax liability, it wold b rfndabl, as is tr of th arnd ino rdit and of ino tax withholding. Althogh a nonrfndabl rdit wold rd th rgrssivity of th tax in so ino rangs, it wold not hlp thos prsons blow th tax thrshold--basially thos blow th povrty lin. Ths ar th popl who th rdit is intndd to hlp. Th rfndabl rdit approah is sd by Hawaii, Massahstts, w Mxio, Vront, and Wyoing to lssn th brdn of th sals tax. Th rdit syst has bn sd in fiv othr stats to offst rtail sals tax liability, bt was rplad by a food xption, apparntly not bas th syst did not fntion wll, bt priarily bas a food xption had gratr politial appal. (2) Altrnativly, it wold b possibl to allviat th valaddd tax on a nssary lvl of onsption by providing a syst of rfnds indpndnt of th ino tax. Kansas follows this approah, vn thogh it has an individal ino tax. A for sparat fro th ino tax rtrn is sd to apply for th rbat. Soth Dakota, whih dos not hav an ino tax, ss this prodr as wll. Most of th stat ribrsnt systs apply to all prsons, bt so ar rstritd to th ldrly. Soth Dakota, for xapl, rstrits th rfnds to prsons 65 or oldr and to th disabld. Wyoing has siilar rstritions. Th stat systs also diffr in whthr all prsons riv th rdit rgardlss of ino, or only thos blow rtain ino lvls. w Mxio, and, in th past, Colorado, Indiana, and braska providd a flat rdit for all individals. Othr jrisditions ithr phas th rdit ot at ino lvls abov a spifid figr, or liinat it at a givn ino lvl withot a phasot. In Hawaii, for xapl, th fll rdit ($48 pr prson in 198) is givn to prsons with adjstd gross ino ndr $5,, bt it is phasd ot btwn $5, and $2, of ino in 1 intrdiat stps. Althogh it is by no ans a probl-fr soltion, th ribrsnt approah wold avoid any of th probls that aris with th zro rating of ooditis and srvis. If th ribrsnt wr targtd at th povrty lvl of ino, ost of th tax brdn on ssntial onsption old b rovd fro prsons in th lowst ino grops, not rly a portion of it. To th xtnt that low-ino individals qalifying for th rdit hav onsption xpnditrs in xss of th povrty lvl of ino in a givn yar, thy wold still bar so tax brdn. If this is onsidrd to b naptabl, th ribrsnt aont old b inrasd sowhat. Fro a bdgtary prsptiv, th ony nssary to pay for th ribrsnt an b viwd as rding th nt aont of rvn gnratd by th val-addd tax. If th ribrsnt wr phasd

15 - 1 - ot, as ino riss, th loss of tax rvn at th ppr ino lvls wold b avoidd; if it wr not phasd ot, th rvn loss wold b roghly qivalnt to that fro zro rating food, nw hosing, prsription drgs, nrgy, and watr and sanitation srvis. If th ribrsnt wr availabl to vryon, it wold absorb abot 25 prnt of th rvn fro a oprhnsiv val-addd tax, as dfind in Chaptr 7. If it wr phasd ot btwn th povrty lvl of ino and 15 prnt of that lvl, it wold absorb only abot 5 prnt of th rvn. This is h hapr than zro rating of ssntial ooditis, or vn indxing transfrs. Thogh th ribrsnt approah wold avoid th oplian and adit probls ratd by zro rating of nssitis, thr ar svral isss that st b rsolvd. (1) Th aont of rdit or rfnd to b grantd st b dtrind. Th povrty lvl of ino for a faily of for is stiatd at $12,612 in (As xplaind in Chaptr 9, 1988 is probably th first fll yar for whih a val-addd tax old b fftiv.) This lvl of ino, in othr words, wold b nssary to finan th onsption to sstain a ini standard of living. Sin hosing rnts, dial and dntal xpnditrs, and rban transportation, as wll as othr onsr xpnditrs, wold not b inldd ndr vn a oprhnsiv val-addd tax bas, abot 77 prnt of onsr xpnditrs wold atally b sbjt to tax. For a faily of 4, a rdit of abot $971 wold b ndd to rov th brdn of a 1 prnt val-addd tax fro ssntial onsr xpnditrs. Th rdit wold b qal to th povrty lvl of ino ($12,612) tis th proportion of total onsption sbjt to th val-addd tax (77 prnt) tis th tax rat (1 prnt). A rdit of abot $25 for th hoshold had pls $216 for ah dpndnt (or two-thirds of th aont for th hoshold had) wold provid abot th right asr of rlif for th avrag for-prson faily. (2) An adjstnt st b ad for th nbr of dpndnts. With th rdit illstratd hr, th additipnal aont for ah dpndnt wold b lss than th priary aont, ndr th prsption that ah additional br of th hoshold wold add lss than a proportionat aont to th living xpnss of th hoshold and ths to th val-addd tax brdn. Th sipl rdit illstratd hr is basd on th assption that th onsption xpnditrs of ah additional hoshold br ar abot two-thirds thos of th hoshold had. Altrnativly, an ntir shdl of rdits old b onstrtd basd on th povrty lvls of ino for ah faily siz or basd on a strtr siilar to that of th zro brakt aonts and dpndnt xptions proposd in Vol 1, Ovrviw, for th ino tax. () A flat rdit or rfnd withot a phasot wold b siplr, bt, as indiatd abov, wold hav a vry sbstantial bdgtary fft. ~f th rdit or rfnd is phasd ot at highr ino lvls, qstions will aris ovr th appropriat onpt of ino on whih to bas th phas-ot. Logially, th figr shold inld adjstd gross ino for Fdral ino tax prposs pls ino

16 xldd fro th Fdral ino tax, sh as intrst on stat and loal bonds and th ntaxd portion of soial srity bnfits. (A portion of soial srity bnfits is now sbjt to Fdral ino tax if ino xds rtain lvls.) Transfr paynts and food staps shold also b inldd. Using a dfinition of ino diffrnt fro th dfinition for tax prposs, howvr, wold b ontrovrsial and wold as oplxity. (4) Th appropriat filing nit st also b dtrind ndr a ribrsnt syst. Idally, it shold b th onsption nit, sally a faily. If th rdit or rfnd for ah additional hoshold br is sallr than th aont for th hoshold had, as sggstd hr, thr wold b a "arriag pnalty." Bt it ay b ovrly gnros to allow th fll rdit or rfnd for two brs of th sa hoshold. So gropings of popl ar sbstantially diffrnt fro th traditional faily nit. For xapl, a grop of singl adlts ah of who ay fil an ino tax rtrn, ight b living togthr. Individally thy wold lai a largr total rdit or rfnd than if a singl rtrn wr fild for th hoshold grop, partilarly if th rdit or rfnd has a phasot. Svral oprational probls wold aris ndr a ribrsnt syst: (1) Additional ino tax rtrns wold b fild, or nw rfnd rqsts wold hav to b prossd by a nw braray if th syst is not intgratd with th ino tax. If th syst wr adinistrd throgh ino tax, th nbr of ino tax rtrns wold inras, as shown by stat xprin with rdits dsignd to offst th rtail sals tax. Whn th ribrsnt provision was introdd at th stat lvl, th nbr of tax rtrns inrasd by btwn 5 prnt (braska) and 15 prnt (Massahstts). A siilar pattrn dvlopd in Canada, whr th availability of rfndabl rdits for dpndnt hildrn inrasd th nbr of individals filing tax rtrns to 1 prnt of th labor for. Vry sipl rtrns old b providd for s by prsons not othrwis rqird to fil ino tax rtrns. If rfnd rqsts wr handld sparatly fro th ino tax, th nbr of th rqsts wold dpnd pon ligibility. (2) So ligibl individals ay fail to fil to obtain th rfnd of val-addd tax. Fdral xprin with th arnd ino rdit indiats that abot 8 prnt of thos ligibl fail to lai th rdit; in ths ass, th Intrnal Rvn Srvi ropts individal tax liabilitis to allow for th rdit, issing a rfnd whr nssary. Th probl wold b sowhat diffrnt ndr th val-addd tax rdit. Whras th IRS an idntify thos who fil rtrns that hav not laid an arnd ino rdit for whih thy ar ligibl, th probl with th val-addd tax rdit wold b to idntify thos who ar ligibl bt fil no ino tax rtrn. This probl has arisn in th stats, and a nbr of rasons hav bn idntifid for it: lak of knowldg of th syst; nwillingnss to tak th trobl; far that filing ay lad to qstions abot atal ino and why ino tax rtrns had not bn fild. Bt, with

17 adqat pbliity and th availability of rlativly sipl rtrns, this shold not b a srios drawbak, as th Canadian xprin on rfndabl rdits has shown. () Minor probls hav arisn in th stats with so inligibl prsons obtaining rfnds, or prsons riving or than on rfnd. (4) Th availability of rfnds wold, ndr th phasot approah, dpnd pon ino; individals thrfor wold b givn an additional inntiv to ndrstat thir ino for ino tax prposs. Thogh a phasot of th rdit at highr ino lvls is dsirabl for both qity and rvn rasons, th arginal tax rat in th phasot rang wold b inrasd ovr that of th ino tax alon. AS an individal's or faily's ino ros, th ino wold not only bo sbjt to ino tax on th xtra ino, bt a portion of th val-addd tax rdit also wold b lost. Considr th rdit disssd hr, whih wold b phasd ot btwn th povrty lvl of ino and 15 prnt of that lvl. A faily of for with a povrty lvl of ino of $12,612 wold s th rdit of $971 phasd ot by th ti ino ros to $18,918. Ths, if th faily arns an additional $1, of ino, its val-addd tax rdit wold b rdd by approxiatly $154. Th arginal tax rat assoiatd with th dlining rdit on th additional $1, of ino wold b 15 prnt. This wold b in addition to th arginal ino tax rat on that xtra ino. Th obind arginal tax rat ffts wold b a disinntiv to additional work ffort. Th fft wold b vn wors if th rdit wr qal to tax on onsption of 15 prnt of povrty-lvl ino, bt phasd ot ovr th rang btwn 1 and 15 prnt of povrty-lvl ino. Th rdit intndd to opnsat low-ino failis and individals for th val-addd tax on thir prhass wold b ovr and abov th arnd ino tax rdit allowd ndr rrnt law. It wold b flly availabl to all failis and individals blow th povrty lvl and wold phas ot only on ino xds th povrty lvl. By oparison, th arnd ino tax rdit is availabl only to thos who work and hav dpndnts. Th Tax Rfor At of 1984 stablishd that, for tax yars bginning aftr 1984, th arnd ino rdit inrass with ino ntil it rahs a axi of $55 and thn phass ot to zro by th ti ino rahs $1,1. If only arnd ino wr involvd, th arnd ino tax rdit wold norally b flly phasd ot bfor th phas-ot of th val-addd tax rdit bgan. This wold b dsirabl to avoid th high arginal tax rats that wold rslt fro having both rdits phas ot siltanosly. If diffrnt dfinitions of ino wr sd to allat th two phas-ots, it wold b possibl that th two rdits old phas ot siltanosly. Car wold b rqird to oordinat ths two rdits to avoid th advrs inntiv ffts of dal phas-ot, as wll as for adinistrativ rasons.

18 Undr a ribrsnt approah, th val-addd tax wold b born dring th yar on prhass of taxabl goods and srvis, bt th tax rdit wold not b rfndd ntil th nd of th yar. By ontrast, zro rating of goods and srvis, or th adjstnt of transfr paynts disssd blow, wold or dring th yar. This probl is ost pronond whn th syst is first introdd and ligibility first dtrind, sin on a ribrsnt is ad it an b sd to fnd tax liability on sbsqnt prhass. If, howvr, th dlay is rgardd as a srios probl, stiatd paynts old b ad in th ors of th yar. Th advan paynt prodr is alrady sd to provid th bnfits of th arnd ino rdit dring th yar. In gnral, this probl an b solvd and is not a ajor objtion to th plan. Evn thogh th arnd ino rdit in rrnt law is rfndabl to low ino taxpayrs, so ay objt that th s of a ribrsnt plan to offst th val-addd tax ay b rgardd as introding a nw faily allowan or ngativ ino tax syst. A portion of th w Mxio syst, whih provids a tax rbat for low ino individals and failis, is ssntially this. Ths, it an b argd that a ribrsnt of val-addd tax wold bring in by th bak door a ajor hang in th ontry's ino aintnan syst withot adqat onsidration. In othr words, sh a syst shold b dbatd on its own rits, rathr than bing introdd as an indirt onsqn of a val-addd tax. Th syst wold b siilar to th rfnding of th arnd ino tax rdit ndr xisting Fdral law. Svral of th stats hav sd this approah for lssning th brdn of th sals tax withot kindling a dbat ovr wlfar rfor. In Iowa, howvr, th politial argnt was ad that th tax syst was inhrntly ndsirabl for aking dirt ony paynts. Tabl 8- and Figr 8-4 show th distribtional onsqns by ino lass of two rfndabl, phasd-ot rdit plans. On wold provid a rdit basd on th povrty lvl of ino; th othr a rdit basd on 15 prnt of th povrty ino lvl. ithr of th two rdits illstratd hr wold liinat ntirly th valaddd tax brdn on th lowst ino failis, priarily bas any failis with ino at or nar th povrty lvl in a partilar yar hav onsption xpnditrs in xss of that ino. A rdit basd on an aont in xss of th povrty lvl ight b jstifid on th basis of onsption xding ino at th low-ino lvls. Eah of th rdits illstratd hr wold b phasd ot btwn th povrty lvl of ino and 15 prnt of that lvl. Th last oln of Tabl 8- also shows th bdgtary fft of ah of th rdits as a prnt of th rvn fro th broad-basd val-addd tax. As notd abov, th bdgtary osts assoiatd with this altrnativ ar h lowr than thos for ithr zro rating ssntial prhass or for indxing transfrs.

19 a a 17 - I P " " " in in. I. I P " l-7 " in ) p: w Ln in Y :.. z a.:. a w. a x... a o... %

20 - 18 -

21 I). Prsonal Exption Val-Addd Tax As xplaind in Chaptr 4, a prsonal xption val-addd tax wold b sbstantially diffrnt fro a onvntional val-addd tax. It wold rsbl, at first glan, a flat-rat ino tax, bt, in fft, old b rgardd as a onsption tax of th val-addd typ, at last in trs of its bas, with a prsonal allowan and xptions to lssn th brdn on th poor and th rgrssivity of th tax. As with th rdit altrnativs, th prsonal xption approah probably wold b in li of any indxing of transfrs. Undr this prsonal xption val-addd tax, a tax wold b lvid, at a flat rat, on two fors of ino: (1) For individals, wags, salaris, and pnsions wold b th only typs of ino sbjt to tax. Th tax wold b withhld by ployrs and pnsion payrs, and paid to th IRS. Individals wold b givn an allowan and prsonal xptions, rlatd to th nbr of dpndnts, and th aont of tax withhld by ployrs wold b adjstd in trs of th allowan and xptions. Th prsonal allowan and xptions wold apply only to labor ino; thy wold not b availabl with rspt to th ript of apital ino. (2) For all bsinss ntrpriss, propritorship, partnrship, and orporat, bsinss ino wold b taxd at th sa rat as ino of individals. In allating taxabl bsinss ino, ddtions wold b allowd only for wags and salaris taxabl to ploys, for prhasd inpts, and prhass of apital qipnt. Bas apital qipnt prhass wold b ddtibl, th prsonal xption val-addd tax losly rsbls a onsption-typ valaddd tax, thogh with a fatr that rds rgrssivity and th absolt brdn on th poor. Bt this altrnativ wold only rd th brdn on low ino individals and failis riving labor or pnsion ino. Ths, thos dpndnt on ino fro apital, sh as rtird prsons, wold not b aidd by th prsonal xptions, nor wold th nployd b hlpd. IV. Sary As illstratd in Tabl 8-1 and Figr 8-1, a broad-basd valaddd tax, lik any gnral sals tax, wold b rgrssiv rlativ to rrnt annal ino and wold pla a sbstantial absolt brdn on th lowst ino grops. It is oonly agrd that any viabl proposal for a val-addd tax st addrss ths probls. Failis with onoi inos blow $1, riv ovr half of thir ino in th for of indxd transfr paynts, sh as soial srity paynts and food staps. Ths tranfrs wold inras atoatially to rflt th fft of th val-addd tax on pris; ths indxing wold lssn th brdn of th tax on 1,owr ino failis. onindxd transfrs, whih 2 illion failis riv, old b adjstd, if nssary, bt this wold hav bdgtary ffts as wll as raifiations for Fdral-stat finaning of so of thos

22 nonindxd transfrs. Approxiatly 2 illion of th 14 illion failis with onoi inos blow $1, do not riv any transfr paynts, ithr indxd or nonindxd. Ths failis wold not b afftd by any adjstnt of transfr paynts. An altrnativ for aking a val-addd tax or aptabl in trs of its brdn distribtion, attrativ fro both an onoi ffiiny and a rvn and bdgtary standpoint, wold b to provid a rfndabl rdit against ino tax that was phasd-ot as ino inrasd abov th povrty lvl. A proprly dsignd rdit old rov th brdn of th tax on onsption qal to th povrty lvl of ino and wold lssn th rgrssivity of th tax. It wold b h hapr than ithr indxing transfr paynts or zro rating of rtain ooditis; th bnfits of ths two altrnativs wold go to failis in a11 ino lasss, not jst thos at th lowst lvls. An iportant objtion to th rdit altrnativ is that it ay b viwd as involving th introdtion of a nw faily allowan as a by prodt of th val-addd tax and withot dirt pbli dbat on wlfar rfor. An altrnativ to a rfndabl rdit is zro rating of xpnditrs on food, prsription drgs and diins, hoshold nrgy, and watr and sanitation srvis. This has any disadvantags, partilarly th loss of rvn fro thos with ino abov th povrty lvl and oprational and oplian probls. To attpt to xtnd th zro rating byond ths atgoris of xpnditr wold opond th oprational probls and th rvn loss. Th altrnativ of a prsonal xption val-addd tax wold only hlp thos riving labor or pnsion ino. Tabl 8-4 sarizs th distribtional and rvn onsqns of th altrnativs prsntd in this haptr: (1) atoatiallyindxd transfr paynts; (2) zro rating of food; ( ) zro rating of food, nw hosing, prsription diin, hoshold nrgy, and watr and sanitation srvis; and (4) rfndabl, phasd-ot rdits basd on 1 and 15 prnt of th povrty lvl of ino. An iportant onlsion is that ithr th transfr paynt or rdit altrnativ wold sbstantially rd th brdn of th tax on thos failis with onoi inos blow $1,, bt with h sallr rvn onsqns than th zro rating of ssntial ooditis. This rslt is shown in th last oln of th tabl.

23 n p. o I O Q VI - P O VI 1. (1 - VI - 1 p. w - o 1 V I y VI VI w 1 VI. VI 1 22 h "4 O H o)% 5, VI UVI..I o.4w W O W x Y