Reprinted with permission of the Virginia Tax Review.
The text below is an excerpt from the complete document. Read the full report in PDF format.
This paper outlines a plan for a VAT dedicated to paying for a new universal health insurance voucher combined with a vastly simplified and much flatter income tax. Top income tax rates could be cut to 25% or less and most taxpayers would not have to file returns. The health care voucher would offset the inherent regressivity of a VAT, since the voucher would be worth more than the VAT tax paid by most households. Moreover, with the VAT rate tied to health spending, the public would have a vested interest in reining in the growth of health care costs.
The nation urgently needs tax reform for at least four reasons. First, under current law most of the tax cuts enacted since 2000 are set to expire at the end of 2010 and the Code will revert to that of 2000. In theory, this would trigger what tax cut advocates have called the largest tax increase in history. Neither political party seems inclined to let that happen, so a significant tax revision before 2011 seems almost certain. Second, the baby boomers are beginning to retire and the costs of providing their Social Security and medical care will strain available federal revenues. Third, under current law, the reach of the individual alternative minimum tax (AMT), a pointlessly complicated and unfair element of the current code, is scheduled to mushroom, hitting thirty-two million taxpayers by 2010, up from four million in 2007. Were that to happen, the middle class would scream in protest, but making up for the hundreds of billions of dollars in revenue that the AMT is projected to produce will be a huge challenge. Finally, there is growing public dissatisfaction with our federal tax system, which is complex, riddled with loopholes, and widely perceived to be unfair. It is hard to see how these challenges can be tackled without a major tax reform.
Nonetheless, there are good reasons to be skeptical of a major tax reform happening any time soon. George Yin catalogued a litany of reasons why tax reform is much less likely now than it was in 1986, when the last landmark tax reform was enacted. Committee chairs in Congress have less power than they once did, meaning that tax bills are controlled by leadership that does not have the specialized knowledge or resources to shepherd a complex tax bill through Congress. Representatives and Senators spend so much time fundraising and running for reelection that they have little incentive or ability to invest in a time-consuming, complicated, and politically risky tax overhaul. Consequently, the political environment is poisoned, making the bipartisan effort necessary to accomplish tax reform next to impossible.
(End of excerpt. The entire report is available in PDF format.)
Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact email@example.com.
If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.
Disclaimer: 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. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.