Human Services News

From Center on Budget and Policy Priorities:

A tax reform plan designed by Yale Law School professor Michael Graetz would replace much of the income tax with a Value Added Tax. The plan would essentially repeal the regular income tax, retain the Alternative Minimum Tax, and establish a $100,000 exemption from the AMT for married filers so that no couples with incomes under $100,000 would owe any income tax. (The exemption would be set at $50,000 for single filers.) The plan also would lower the AMT tax rate and cut the corporate tax rate to 25 percent. In place of the lost personal and corporate income tax revenue, a broad-based Value Added Tax would be established, with a rate set somewhere between 10 percent and 14 percent.

Whatever its other pluses and minuses, the plan could pose significant problems for low- and moderate-income households. There are three key issues here. First, the proposed changes in the income tax would result in the elimination of the Earned Income Tax Credit and the refundable portion of the Child Tax Credit, both of which provide substantial support to low-income working families with children. Second, the imposition of the VAT would increase the prices of goods and services that low-income families (along with other families) consume. Third, the proposed plan may result in the loss of significant amounts of state government revenue; if that occurred, it would likely lead to state reductions in various benefits and services on which low-income families rely (and possibly also to increases in state taxes, which tend to be regressive).Read more from this post.