Ask a Scholar: Tax Structure

Richard S. Leaman

Dear Ask a Scholar,

Wouldn't a low flat income tax structure, coupled with fair use taxes at point of purchase, increase tax revenues while cutting costs (through downsizing of the IRS)?

- Jeff Phelps, California State University, San Marcos

Answered by Richard S. Leaman, professor of accounting at the University of Denver’s Graduate Tax Program. He is an active member of the American Taxation Association and has chaired its Corporate Tax Policy Subcommittee for three years. He is a frequent speaker at seminars and professional meetings. His recent publications include articles in Tax Advisor, Taxes—The Tax Magazine, Tax Notes, and Oil and Gas Tax Quarterly.

One would think so but it may be a little more complicated than it first appears. Higher tax rates encourage people to use more tax planning and “loopholes”.  A Flat Tax would discourage this but the devil would be in the details.  Eliminating deductions such as mortgage interest, state and local income tax, property taxes and charitable contributions would make the tax easier to administer but politically difficult to pass.  One limitation on simplicity is determination of the tax base.  An economically neutral tax would be imposed on employee fringe benefits such as employer paid medical insurance but such a move would be unpopular.  Another difficulty is the definition of income.  When a corporation makes a payment to its shareholders is this a dividend includable in income or a nontaxable return of capita? Such questions would still vex a flat tax.

A sales or value added tax would be simple, easy and cheap to collect.  Definition of the tax base would add complication.  Would food, medical care and other necessities be excluded from the tax base?  If so complexity would rise and so would costs.  In short a flat tax combined with a sales tax would decrease costs but the amount would depend on the comprehensiveness of the base. 

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