Tax Policy:

Implications of Replacing the Corporate Income Tax With a Consumption Tax

GGD-93-55: Published: May 11, 1993. Publicly Released: May 11, 1993.

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Pursuant to a congressional request, GAO evaluated the effects of replacing the corporate income tax with a broad-based consumption tax, focusing on the effects of the proposed uniform business tax (UBT) on: (1) economic efficiency and equity; (2) tax administration costs; and (3) tax compliance costs.

GAO found that: (1) replacing the corporate income and payroll tax with UBT would raise labor income taxation, but it would not reduce individual income taxes; (2) UBT would have an insignificant effect on the labor supply of full-time employees but it would reduce the supply of part-time workers; (3) since UBT would reduce the effective tax on undistributed dividends and disallow interest deductions, corporations could use retained earnings to finance investments rather than debt, which would preclude shareholders from making more productive investments; (4) UBT would not serve as a company-level tax in a comprehensive income-tax system or consumption-tax system, since it operates similarly to a value-added tax; (5) replacing the corporate income tax with UBT could raise investment demand, since it reduces the effective tax rate on capital assets investments to zero; (6) UBT is likely to reduce household savings and increase business savings; (7) UBT will produce larger tax bills for labor-intensive companies and smaller tax bills for capital-intensive companies; (8) replacing the corporate income tax with UBT is more likely to change the composition of trade to favor capital-intensive goods; (9) UBT would probably reduce tax progressivity, particularly if the tax burden is shifted from capital income to labor income; (10) replacing the current corporate income tax with UBT would not necessarily lower the Internal Revenue Service's administrative or compliance costs; and (11) UBT compliance costs cannot be determined, since compliance costs have never been reliably measured, but evidence suggests that these costs would be lower for corporations and higher for noncorporate businesses.

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