Would you trade the income tax for a value added tax?

A former Treasury official in the George H. W.  Bush administration has put forward a new tax reform proposal.  It would eliminate the income tax for households that earn less than $100,000, cutting the rates for those above that threshold to 16% or 25.5%.  Instead, everyone would pay a Value Added Tax (basically a national sales tax) of 12.9%.  Charles Lane explains the proposal after the jump.

What would you think of this?From Charles Lane, Another tax reform solution: taxing consumption – The Washington Post.

The United States’ real problem, according to [Michael J.] Graetz, is its undue dependence on income taxes — corporate and individual — in the first place. He supplies a nifty world map with all nations shaded except the ones that don’t have a value-added tax (VAT), essentially a sales tax on goods and services imposed at each stage of their production and distribution. It’s striking to see the United States grouped with Burma, Saudi Arabia, Afghanistan and exactly zero developed nations.

Graetz would put a 12.9 percent VAT at the center of a new system — using the revenue to slash the corporate tax rate to 15 percent and eliminate income taxes for all households earning less than $100,000 ($50,000 for singles), that is, 80 percent of current filers.

For those above that threshold, there would be two rates, 16 percent and 25.5 percent. Payroll tax rates would stay the same, with credits for low-income workers to offset the regressive impact of the VAT, as well as an additional child tax credit.

Graetz points to independent analyses showing this would raise about as much revenue, about as progressively, as the current system. It could spur growth by reducing uncertainty and perverse incentives — of which “tax inversions” are but one example. By taxing consumption, it would encourage savings and investment, but not steer them in politically favored directions, as the current code does.

For Graetz’s paper, go here.