>But the same applies to VAT as to "flat" income tax. The "large
>exemption" would take the form of a "flat" rebate of the entire
>VAT on the subsistence level of consumption expenditures. Just
>as with income tax the level of progressivity varies with the size
>of the exemption, so with VAT the level of progressivity varies
>with the level of consumption defined as "subsistence"--with
>the advantage that a large majority of people would directly
>benefit from continual increases in the living standard socially
>defined as "subsistence."
In 1995, the CBO did an analysis of the crackpot flat tax + VAT that Jerry Brown proposed in 1992. Here's the table with my intro <http://www.leftbusinessobserver.com/Jerry-Brown.html#CBO>:
After all the above articles were published, the Congressional Budget Office (CBO) analyzed the Brown tax proposals - without mentioning Brown by name - in a staff memorandum dated April 1992 ("Distributional Effects of Substituting A Flat-Rate Income Tax and A Value-Added Tax for Current Federal Income, Payroll, and Excise Taxes"). These numbers have to be regarded as about as definitive as can be expected; though Citizens for Tax Justice does excellent work, the CBO is far better staffed, and their models are as good as they get.
The plan is indisputably regressive. CBO makes this important point: "Families in the bottom one-fifth pay relatively little in combined income and payroll taxes compared with other families. Many low-income families actually receive subsidies from the income tax rather than pay taxes because of the earned income credit. [This has since been expanded significantly. - Ed.] Thus, low-income families would receive little tax relief from eliminating income and payroll taxes. In contrast, in any given year, many of these families spend much more than their annual income, financing such spending by borrowing or selling assets. These families would pay a significant portion of their income in value-added taxes."
Here is a summary of the estimated distributional effects by income quintile. The tax rates were set to assure no change in federal revenue (assuming no behavioral changes as a result of the radical reform of the tax code - a heroic assumption, but the only plausible one analysts can make).
Effect of Brown-style tax plan, by income group
income after tax effective tax rates*
__________________ _________________________________ quintile avg % change 1992 actual after change change poorest $ 6,700 -21.7% 7.7% 27.7% +20.0 second 14,800 -11.0 15.2 24.5 + 9.3 third 23,100 - 5.3 19.1 23.4 + 4.3 fourth 32,400 - 1.3 21.7 22.7 + 1.0 richest 70,300 + 6.8 26.7 21.7 - 5.0 all 29,200 0.0 23.1 23.1 0.0
*Effective tax rates are the taxes people actually pay as a percentage of pretax income, in contrast with statutory rates, which are the numbers on the books that no one pays.