A Review of the Second Edition of The Flat Tax by Robert E. Hall and Alvin Rabushka (Hoover Institution Press, pages, $ paperback), and published in. Download Citation on ResearchGate | Flat tax: An overview of the hall-rabushka proposal | The concept of replacing the current U.S. income tax system with a. The Hall-Rabushka flat tax would replace the current income tax system with a consumption tax. Their system is a two-part value-added tax (VAT). All value.

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A key element in raising growth and a major motivation for tax reform is increasing saving. For additional analysis of the growth effects of tax reform, see Engen et al.

A consumption tax that exempts old assets is just a tax on future wages. Perceptions of fairness may rabusbka be difficult to retain when, under the flat tax, some wealthy individuals and large corporations remit no taxes to the government while middle-class workers pay a combined marginal tax rate above 30 percent on the flat tax, state income tax, and payroll taxes.

Third, under a pure consumption tax, all capital existing at the time of the transition is implicitly taxed again when the capital is consumed. Second, consumption taxes reallocate after-tax income toward high-saving households. The flat tax would eliminate corporate income taxes, put all businesses on an equal tax footing, reduce the statutory tax rate applied to business income, and make investment write-offs more generous.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Although this difference appears simple, consumption taxes come in many forms. Under an income tax, pensions are a tax-preferred form of saving. Second, pension coverage could fall. Hlal proposal for fundamental tax reform that would replace the income tax system with a consumption tax, to be collected by levying a flat-rate tax on businesses and individuals.

Review of Hall & Rabushka

Efficiency gains might arise from five sources: If you are unable to access or print the PDF document please contact us or call the Publications Office at The estimates also show that, even for welldesigned consumption taxes, efficiency losses are possible. The Brookings Institution, The Hall-Rabushka system is often called the “flat tax”: Retrieved from ” https: Economic Effects of Fundamental Tax Reform.


The distribution of such capital is more skewed toward wealthy households than is the distribution of overall wealth, which in turn is more skewed than the distribution of income. An income tax taxes savings both when the money is earned and again when the savings earn interest.

From Wikipedia, the free encyclopedia. Hall and Rabushka have consulted extensively in designing flat taxes. But transition rules likely to be added to a consumption tax to avoid this double taxation would reduce or eliminate the long-term effect on saving and growth, as noted above.

Second, within any age group, wealthy households do most of the saving. Thus some simplification is likely with tax reform, but it is twx no means a certain or lasting outcome. Desai Dhammika Dharmapala James R.

Hall–Rabushka flat tax

That is, the flat tax would be a consumption tax, even though it would look like a wage tax to households and a variant of a VAT to most businesses. The business tax rabusjka be set equal to the highest tax rate on wage income.

Brookings Institution Press, Removing the deduction for charitable contributions would reduce overall giving and could affect its composition as well: The answer may not be as obvious as it seems.

November Learn how and when to remove this template message. MIT Press,pp. Pros and cons of the flat tax In principle, replacing the income tax with a consumption tax, such as the flat tax, offers the possibility of improving the efficiency, equity, and simplicity of the tax system. Relatively few elderly households finance much of their living expenses by other assets, and those that do tend to be very well off.

Hall–Rabushka flat tax – Wikiwand

But these results need to be interpreted carefully. A central issue in tax reform is always who wins and who loses. Second, the estimates provided do not allow for child exemptions, as the Hall-Rabushka proposal and all of the recent flat tax proposals do.


Without the personal exemptions, the flat tax would be equivalent to a VAT, but with taxes on wages remitted by households rather than business. Funds placed in pensions, k plans, Keogh plans, and most individual retirement accounts IRAs are not taxed until they are withdrawn. Ebel, and Jane G. October 01, Released online: By using this site, you agree to the Terms of Use and Privacy Policy. These changes would, of course, require higher rates.

Flat Tax: An Overview of the Hall-Rabushka Proposal

As a result, if a flat tax were to raise as much revenue as the current one, the tax burden for the middle class would have to rise. Thus, the only difference in principle between a consumption tax and an income tax is the treatment of the savings.

The economic effects of the flat tax flwt addressed by a number of contributions in Aaron and Gale All but the first and last are attainable under income tax reform.

And fundamental tax reform would not end the demands for special treatment that have so tangled the income tax. The question remains, though, of how large these gains would be. They could even lead to a system that is less efficient and less fair than the one we have.

Can we get there from here? Therefore, other than the exemptions, the economic effects of the flat tax should be essentially the same as those of a VAT or a sales tax. This tax -related article is a stub.