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1 Arthur P. Hall, Compliance Costs of Alternative Tax Systems 1 (1995)

handle is hein.taxfoundation/taxfaarc0001 and id is 1 raw text is: TAX    TO
FOUNDATION

June 1995

Compliance Costs of Alternative Tax Systems
House Ways & Means Committee Testimony

The following testimony was presented
on June 6, 1995, by Dr. Hall before the House
Ways & Means Committee. Portions of the
testimony have been revised.
The Tax Foundation estimates that com-
plying with the entire federal tax system costs
Americans $200 billion annually. The rules
and regulations for the federal income tax
alone account for approximatcly $140 billion
of this cost.
The cost of compliance, which adds noth-
ing to national output, is tantamount to a tax

If Congress were to replace the
current federal income tax with
any one of the three
predominant alternatives
currently being discussed ... it
could dramatically reduce
America's tax-related burden
without necessarily sacrificing a
dime of federal tax revenue.

surcharge on all taxpayers. One way to com-
prehend the magnitude - and economic
waste - of the $140 billion federal income
tax surcharge is to imagine putting every ve-
hicle sold by General Motors in 1994 onto

ships and dumping them into the ocean.
If Congress were to replace the current
federal income tax with any one of the three
predominant alternatives currently being dis-
cussed - Representative Armey's (R-TX) Flat
Tax, the USA Tax System sponsored by Sena-
tors Domenici (R-NM) and Nunn (D-GA), or a
national retail sales tax - it could dramatically
reduce America's tax-related burden without
necessarily sacrificing a dime of federal tax rev-
enue. The Tax Foundation has estimated how
much each plan could reduce the current
system's $140 billion tax surcharge, assuming a
reasonable transition period had ensued.
Rep. Armey's Flat Tax could reduce the
surcharge by 94 percent to $8.4 billion, as-
suming that the current convention of annual
tax filing is retained. However, if Rep. Armey
achieves his stated goal of eliminating indi-
vidual income tax withholding and moving to
monthly tax payments, the Flat Tax would re-
duce the surcharge by 72 percent to $39 bil-
lion. The USA Tax System could reduce the
surcharge by 76 percent to $33.6 billion. A
national retail sales tax could reduce the sur-
charge by 92 percent to $11.2, assuming the
sales tax plan included a per-person rebate
scheme to create a progressive tax system. If
no rebate scheme were part of the retail sales
tax, it could reduce the surcharge by an esti-
mated 96.5 percent to $4.9 billion, but the en-
tire burden of this sum would fall on retail
businesses.
These estimates are based on pure ver-
sions of the alternative tax systems. It is rea-
sonable to assume that the effect of molding
any of the alternative plans into a functioning
tax code could increase the complexity, and
therefore their associated compliance costs.

By Arthur P. Hall, Ph.D.
Senior Economist
Tax Foundation

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