Fixing the Income Tax with the Fair Tax

Abstract

In 1985, we have six options for federal tax policy: First, we can do nothing. Second, we can impose some simple income tax surtax or rate increases. Third, we might try to "muddle through" with another piecemeal package of tax loophole closers and revenue raisers, along the lines of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the abortive House and Senate deficit reduction packages of 1983, and the Deficit Reduction Act of 1984. Fourth, we could move to replace the individual income tax with a personal expenditure tax. Fifth, we could add a value-added tax (VAT) or a national sales tax (NST) to the federal tax system. Sixth, we could fundamentally restructure our income tax, to make it fairer, simpler, less economically distorting, and more conducive to employment and productive investment. This commentary recommends the last option as the soundest approach to federal tax reform and discusses the Fair Tax Act, which best restructures our income tax system.