Tax Policy:

Choosing Among Consumption Taxes

GGD-86-91: Published: Aug 20, 1986. Publicly Released: Aug 20, 1986.

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Pursuant to congressional interest, GAO studied three consumption taxes to determine the features, relative advantages and disadvantages, and questions associated with each. GAO examined the use of a national retail sales tax, a value-added tax, and a personal expenditure tax to raise additional revenues to reduce the deficit.

A national retail sales tax would impose levies on a broad range of consumption products at the time of retail sale and would have the capability of raising large amounts of revenue. One disadvantage to the tax is that it would require the poor to pay more of their income in taxes than the rich. Before introducing a national retail sales tax, the government would have to draft regulations, design tax forms, recruit personnel, conduct education and training, and plan programs to register vendors, process returns, determine delinquency, and audit returns. The retailers would be burdened by collecting the tax and remitting it to the government. A value-added tax would be collected among the various stages of production and would generate large amounts of revenue. However, it would also require the poor to pay more of their income in taxes than the rich. The government would need to make extensive preparations before introducing a value-added tax and administering it effectively. Businesses and professional organizations expressed their disfavor for a new tax. A personal expenditure tax would be collected entirely from individuals based on their personal expenditures. Congress has been reluctant to discard the proven revenue-productive income tax for an untested personal expenditure tax. Taxpayers would have to supply more information about their personal income and savings for the effective administration of such a tax. One professional organization cautioned that extensive transition rules might be required if a personal expenditure tax replaced the individual income tax.

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