While any tax system with flat rates could be called a flat tax, the name is usually reserved for a system developed by Robert Hall and Alvin Rabushka in Their flat tax is really a two-part VAT: All value added except wages is taxed at the business level and wages are taxed at the individual level at the same flat rate but with an exemption related to family size. The Hall-Rabushka flat tax would replace the current income tax system with a consumption tax. Their system is a two-part value-added tax VAT. All value added would be taxed at the business level except wages, which would be deductible. Wages would be taxed at the individual level, with an exemption based on family size.
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While any tax system with flat rates could be called a flat tax, the name is usually reserved for a system developed by Robert Hall and Alvin Rabushka in Their flat tax is really a two-part VAT: All value added except wages is taxed at the business level and wages are taxed at the individual level at the same flat rate but with an exemption related to family size.
The Hall-Rabushka flat tax would replace the current income tax system with a consumption tax. Their system is a two-part value-added tax VAT. All value added would be taxed at the business level except wages, which would be deductible. Wages would be taxed at the individual level, with an exemption based on family size.
All taxable wages and all business non-wage value added would face the same flat rate. In short, the flat tax is a consumption tax, even though it looks like a wage tax to households and a variant of a VAT to most businesses. Therefore, except for the exemptions, the economic effects of the flat tax are essentially the same as those of a VAT or a sales tax. The flat tax can be split into two parts: the business tax and the individual tax. Firms would be responsible for paying taxes at a flat rate on sales after they have deducted wages, pensions, material costs, and capital investments.
Individuals would be responsible for paying taxes again, at a flat rate on the wages that firms have deducted, but only on wages in excess of an exemption level. Aaron, Henry J. Economic Effect of Fundamental Tax Reform. Gale, William G. Cordes, Robert D. Ebel, and Jane G. Hall, Robert E. The Flat Tax. Skip to main content. How does the federal government spend its money? What is the breakdown of revenues among federal, state, and local governments?
How do US taxes compare internationally? Federal Budget Process How does the federal budget process work? What is the history of the federal budget process? What is the schedule for the federal budget process?
What is reconciliation? How is a budget resolution enforced? What are rescissions? Federal Budget Outlook How accurate are long-run budget projections? What have budget trends been over the short and long term? How much spending is uncontrollable? What are tax extenders? What options would increase federal revenues? What does it mean for a government program to be off-budget? How did the TCJA affect the federal budget outlook? Taxes and the Economy How do taxes affect the economy in the short run?
How do taxes affect the economy in the long run? What are dynamic scoring and dynamic analysis? Do tax cuts pay for themselves? On what do economists agree and disagree about the effects of taxes on economic growth? What are the economic effects of the Tax Cuts and Jobs Act? Economic Stimulus What is the role of monetary policy in alleviating economic downturns? What are automatic stabilizers and how do they work?
What characteristics make fiscal stimulus most effective? Distribution of Tax Burdens How are federal taxes distributed? Are federal taxes progressive? How should progressivity be measured? What is the difference between marginal and average tax rates? What criticisms are levied against standard distributional analysis? How should distributional tables be interpreted? Who bears the burden of the corporate income tax?
Who bears the burden of federal excise taxes? How do financing methods affect the distributional analyses of tax cuts? How do taxes affect income inequality? Tax Expenditures What are tax expenditures and how are they structured?
What is the tax expenditure budget? Why are tax expenditures controversial? What are the largest tax expenditures? How did the TCJA affect tax expenditures? Tax Gap and Tax Shelters What is the tax gap? What does the IRS do and how can it be improved? What is a tax shelter? Recent History of the Tax Code What did the —10 tax stimulus acts do?
What did the American Taxpayer Relief Act of do? How did the Tax Cuts and Jobs Act change personal taxes? How did the Tax Cuts and Jobs Act change business taxes?
Key Elements of the U. What are itemized deductions and who claims them? How did the TCJA change the standard deduction and itemized deductions? What are personal exemptions? How do federal income tax rates work? What are tax credits and how do they differ from tax deductions?
How do phaseouts of tax provisions affect taxpayers? Capital Gains and Dividends How are capital gains taxed? What is the effect of a lower tax rate for capital gains?
What is carried interest, and how is it taxed? How might the taxation of capital gains be improved? Who pays the AMT? How much revenue does the AMT raise? Taxes and the Family What is the child tax credit? What is the adoption tax credit? What is the earned income tax credit? How does the tax system subsidize child care expenses? What are marriage penalties and bonuses? How did the TCJA change taxes of families with children?
Taxes and the Poor How does the federal tax system affect low-income households? What is the difference between refundable and nonrefundable credits? Can poor families benefit from the child tax credit? Why do low-income families use tax preparers? How does the earned income tax credit affect poor families? What are error rates for refundable credits and what causes them? How do IRS audits affect low-income families?
Taxes and Retirement Saving What kinds of tax-favored retirement arrangements are there? How large are the tax expenditures for retirement saving? What are defined benefit retirement plans? What are defined contribution retirement plans? What types of nonemployer-sponsored retirement savings accounts are available? What are Roth individual retirement accounts?
Remember When the New York Times Endorsed the Flat Tax?
The Hall—Rabushka flat tax may include an exemption, which allows the tax to preserve progressivity. In the United States , extensive tax reform has not taken place since the Tax Reform Act of , and like other tax reform, the flat tax has not advanced far in the US political process. However, Eastern Bloc countries have generally embraced the flat tax after the fall of the Iron Curtain. Hall and Rabushka have consulted extensively in designing flat taxes.
The Flat Tax
Latest Research. Browse by Author. The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. A proposal for fundamental tax reform that would replace the income tax system with a consumption tax, to be collected by levying a flat-rate tax on businesses and individuals.