4 Key Tax Reform Proposals At A Glance

Flat Rate Income Tax How It Works: All individuals, regardless of income, would be taxed at the same rate - 19 percent under one plan. Virtually all deductions would be eliminated.

Pros: Simplicity, reduced impact on taxpayer's economic behavior.

Cons: Politically difficult since a flat tax would cause a major shift in the tax burden from upper-income individuals to lower and middle income taxpayers. Modified Flat Rate Tax

How It Works: The income subject to tax would be boosted by closing various loopholes. Especially popular deductions - like those for mortgage interest and charitable contributions - would be kept but their value capped. Maximum tax rates would be lowered for all taxpayers, but rich individuals still pay tax at a higher rate than poor taxpayers. Under one plan the lowest tax rate would be 14 percent, the highest 30 percent.

Pros: Simplification of the tax laws, no major shift in tax burden, more politically appealing than the flat tax.

Cons: Eliminating preferential treatment of some investments could hurt individuals who invested under the old rules. If the concept is applied to corporations, the tax burden on income from capital could rise, reducing firms' incentive to invest. Tax on Consumed Income

How It Works: Rather than taxing all income as is now the case, a consumption-based scheme would tax what citizens spend but not what they save.

Pros: Improves both tax system equity and the incentives for savings and investment. The funds subject to tax would grow since borrowed money would be taxable.

Cons: Young people might object since loans taken to finance homes, cars, and college educations would be taxable. Elderly individuals who were using up savings to maintain their life style would also be hit. A consumed tax is more complex than the current law, and shifting to one may require a lengthy transition period. National Sales Tax

How It Works: A sales tax could take two forms. It might be applied at every stage of production, like the value-added tax (VAT) used in many European countries. Or it could be applied only at the retail level, like state sales taxes.

Pros: Raises large amounts of revenue, relatively easy to administer, does not penalize savings and investment.

Cons: Falls more heavily on lower-income citizens, and contributes to inflation in the short run. States and cities might object to the federal government intruding on their traditional tax base.

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