Sectors that might be adversely affected include the non-profit sector (loss of charitable contributions deductions), the state and local sector (loss of state tax deductions, change in their own tax structures), and the health care sector (taxation of fringe benefits). There is no reason to expect trade benefits from any of the tax changes per se.Ī broader tax base would have diverse effects on economic sectors. Trade balances, however, depend on capital flows and would be affected by these tax changes only if they do bring about an increase in the U.S. It is also argued that these taxes could improve the country’s trade balance. Any effect on savings would depend crucially on the transition provisions. Although theoretical inter-temporal models predict that saving and efficiency would increase, evidence from past tax cuts does not bear out this prediction. Most reform proposals are based on the notion that switching to a consumption tax base or exempting savings from tax would increase the savings rate and improve economic efficiency. The President has indicated that major tax reform will be a priority item in his second term, and his tax reform commission has included a modified flat tax as one of its options. Reform suggestions have proliferated, including a national retail sales tax, several versions of a value-added tax (VAT), the much-discussed “Flat Tax” on consumption (the “Hall-Rabushka” tax), the “USA” proposal for a direct consumption tax, and revisions of the income tax. The current income tax system is criticized for costly complexity and damage to economic efficiency.
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