Using a VAT to Reform the Income Tax
- Fiscal Federalism Initiative
- January 9, 2012
Quick SummaryA sweeping reform of the federal tax system has been proposed by Michael J. Graetz, Professor Emeritus of Law at Yale University and currently Professor of Law at Columbia University.
The proposal is intended to simplify the tax system, improve economic incentives, and maintain fairness. To achieve these goals, Graetz’s plan would remove most current taxpayers from the income tax rolls, reform the corporate income tax, significantly reduce the top individual and corporate rates, and adopt a value-added tax (VAT) as the principal tax paid by most Americans. Payroll, estate and gift taxes would not change. This paper describes the Graetz proposal in detail and analyzes its effects on federal revenues, spending and the deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax system’s administrative and compliance costs.