RE: taxes

[dhenwood@xxxxxxxxx (Doug Henwood)]

At 6:04 AM 4/1/95, Alan G. Isaac wrote:

>You also haven't indicated why you believe that a consumption
>tax that didn't apply to basic foodstuffs and (capped) rent
>would necessarily be regressive. Without any figures in hand,
>I'd guess it would be more progressive than the current
>system.

Your guess is very wrong.

In a 1992 report, the Congressional Budget Office estimated the burden of
three possible versions of a VAT and compared it with an income-tax
surcharge. (The income tax in 1992 was significantly less progressive than
it is now.) The three versions were a broad-based tax; one that exempted
merit goods like health and education; and one that exempted food,
utilities, motor fuels, and housing. The merit good exemption reduced the
tax base to 61% of total consumption; the basic goods plus merit goods
version left only 38% of total consumption available for taxing. To raise
equal amounts of money, the VAT rates were 3.5%, 4.4%, and 6.9% for the
three versions, and the income tax surcharge was 16%.

DISTRIBUTION OF IT SURCHARGE AND VAT BURDEN BY INCOME QUINTILE

                                            VAT
                          inc tax  ---------------------
                         surcharge broad   merit   basic
percent of income
-----------------
poorest                    0.2%     4.8%    4.7%    3.9%

second                     0.7      3.2     3.1     2.9
third                      1.2      2.8     2.7     2.8
fourth                     1.6      2.3     2.3     2.4
richest                    3.0      1.5     1.5     1.6

all                        2.2      2.2     2.2     2.2

percent of families with
smaller tax burden under
IT surcharge
--------------------------
poorest                             92%     90%     76%
second                              93      89      80
third                               87      84      79
fourth                              69      68      68
richest                             29      30      36

all                                 72      70      66


source: Congressional Budget Office, "Effects of Adopting a Value-Added
Tax," February 1992, table 9.



Doug

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Doug Henwood
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