Tax Policy:

Economic, Administrative, and Taxpayer Compliance Aspects of a Gross Income Tax

GGD-89-36: Published: Feb 16, 1989. Publicly Released: Feb 16, 1989.

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In response to a congressional request, GAO reviewed Department of the Treasury and Congressional Research Service (CRS) tax policy literature and studies to: (1) identify the general economic effects of the proposed gross income tax; and (2) compare certain administrative and taxpayer compliance aspects of the tax with the current tax system.

GAO found that a gross income tax system would: (1) reduce competition by providing an incentive for producers and suppliers to merge; (2) tax firms that earned little net income or suffered a loss; (3) be a disincentive to investment because it would raise the effective marginal tax rate on capital; and (4) shift the distribution of the tax burden to lower income people. GAO also found that: (1) the proposed gross tax would be a cascading transactions tax, since it would tax the same business inputs more than once; (2) proponents believed that a gross income tax would reduce administrative and taxpayer compliance costs if it replaced corporate and personal income taxes; (3) the Internal Revenue Service (IRS) believed that a gross income tax would neither simplify the tax system nor reduce its administrative costs, and the transition to such a system would place an overwhelming burden on IRS; and (4) a gross income tax system would not be preferable to the current system even if it were less costly, because of its potential for greater economic distortion.

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