Document Type

Article

Publication Date

10-26-2005

Keywords

tax, tax policy, flat tax, E tax, consumption tax, tax reform, fundamental tax reform, earned income credit, wage tax

Abstract

The article builds on the Hall-Rabushka Flat Tax and proposes a consumption tax called the “E Tax,” which is an electronically collected credit invoice VAT. The Hall-Rabushka Flat Tax is a two-tier consumption tax that is based on a subtraction method VAT. The Hall-Rabushka nuance, however, allows a deduction for wages as if they were purchases of materials by the employer. Wage earners would be taxed on those wages at rates that could be set as graduated or flat, with or without a zero rate or bracket amount and with or without personal exemptions and deductions. Hall and Rabushka proposed a flat rate equal to the VAT rate, with a zero bracket amount, personal exemptions and limited individual deductions. The E Tax modifies the Flat Tax by substituting a credit invoice business level VAT for the subtraction VAT. As such, the business tax would become a point of sale or transaction tax, which could be collected in each transaction rather than annually. Thus, one could combine the credit invoice VAT, modified for wages (as discussed in detail in the article), with a wage tax in order to build in progressivity. This modification to the two tier Flat Tax structure would both improve compliance and facilitate a pay-as-you-go collection system. Transaction taxes lend themselves to electronic tracking and tax collection, and therefore impose an automatic framework to the taxing process. Moreover, the administrative characteristic of annual accounting and collection can be eliminated by basing the tax on a modified credit invoice VAT instead of a subtraction VAT. As suggested above, progressivity and any desired personalizing of the tax would be introduced at the wage earner level, as it could be with the Hall-Rabushka Flat Tax. The mechanics of the wage tax collection, however, would be slightly different under the E Tax. The modification suggested in the paper builds in the prospect of graduated rates and a substitute for the Earned Income Tax Credit in an automatic way. Thus, the E Tax, in contrast to the Flat Tax, is a transaction tax and therefore facilitates point-of-sale collection. Nevertheless, like the Flat Tax, it still permits greater progressivity than a straight business level VAT, because the separate wage tax component of the tax allows for flexibility in tax rates, exemptions and deductions. Although this characteristic may appear to be a simple detail without a great conceptual difference, the characteristic of taxing transactions and dispensing with annual accounting in fact makes an enormous practical difference. It would facilitate electronic collection and auditing to ensure compliance. It thereby should reduce costs of compliance and significantly reduce the tax gap. Moreover, the E Tax takes advantage of computer technology that will only get better as the twenty-first century progresses and the shift continues away from cash transactions to electronic transactions, including debit cards, credit cards and electronic funds transfers.

Publication Citation

108 Tax Notes 1168 (2005).

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