20. For simplicity and because its revenue yield is dwarfed by that of the personal income tax, we have not explored increasing the proceeds from the corporate income tax by broadening its base—without raising the statutory rate. Although we have mentioned the corporate tax’s statutory and marginal tax rates, its average rate—influenced by exclusions from taxable income—is important too, especially in comparison with other countries. Just as the simplified tax’s broadening of the personal income-tax base can increase proceeds while lowering statutory and average rates, so can broadening the base of the corporate income tax.


21. In 2006 the typical VAT rate for the 15 countries was 19.8 percent. For details of VAT rates, see European Commission (2009); for VAT revenues, see Organisation for Economic Co-operation and Development (2008c).


22. However, Social Security benefits are indexed to price inflation, so these benefits would be protected from this aspect of the transition to a VAT. Similarly, the actual services paid for by Medicare and Medicaid would not diminish after a VAT, although out-of-pocket medical spending would rise. (A dollar spending cap for Medicare, Medicaid, or both [see Chapter 5] would need to take the price effect from a VAT into account.)


23. The AMT is indexed to price inflation but, in time, real growth in incomes makes more taxpayers subject to it. The price-indexed thresholds of the tax brackets are retained in our approach, as are the current tax expenditures.


24. In fact, it is not worthwhile to set up a VAT structure to collect at the low rate of 0.9 percent. For simplicity, these data reflect the financial pressures on the tax system structure, not short-term administrative responses. At least in the later years of the scenarios, it appears that no practical VAT with the base we have specified could replace the personal income tax: it would be in addition to it. A national sales tax might be possible, but we have not estimated this possibility in our scenarios.


25. The simplified tax would retain the current tax’s “worldwide” treatment of cross-border income flows by continuing to tax American companies on foreign profits.


26. The Tax Policy Center modeled both the illustrative current tax and simplified tax policies for the committee. For more information on the center’s microsimulation model and how it is applied to model the federal tax system, see, especially, Rohaly et al. (2005) and Burman et al. (2008c).

Because of the need to revise and extend the model to project two very different tax approaches almost 75 years into the future, this aspect of the committee’s study used certain aspects of slightly earlier data, assumptions, and scenarios than presented in Chapter 9. (The only exceptions are that Figure 8-1 and part of Table 8-1 use the baseline data in Chapter 9.) Three differences are noteworthy.

First, although both chapters rely heavily on Congressional Budget Office (CBO) projections, the revenue projections here use certain long-term assumptions, such as inflation rates, that CBO made before it made those that we use in Chapter 9. (For example, for the years after 2018, this chapter’s long-term inflation rate assumptions were those made August 2008, while those in Chapter 9 use CBO’s subsequent June 2009 assumptions.) However, the somewhat different projections used have little or no effect on the comparison here of the study’s illustrative revenue policies because these are modeled as changes from the study baseline, not as absolute levels.

Second, (except for Figure 8-1) this chapter’s revenue baseline differs somewhat from the comprehensive baseline applied to Chapter 9 and described in Appendix B. However, both baselines do assume that most of the 2001 and 2003 tax cuts are permanent and extend the 2009 treatment of the AMT and the estate tax, and both baselines project future revenue collections at 18 to 22 percent of GDP during the 75-year projection period.

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