Document Type

Article

Publication Date

1996

Abstract

What if the current federal income tax laws were repealed and replaced with a simple flat tax? What if the entire Internal Revenue Code (with its graduated rates and countless deductions, exclusions, and credits) were scuttled in favor of a broad-based consumption tax? Only a few years ago, such proposals would have seemed radical and extremely unlikely to be adopted. But times are changing. Calls for a drastic overhaul of the Internal Revenue Code have become commonplace, even at the highest levels in the tax-policy community. In addition, proposals that would replace the income tax with a flat-rate broad-based consumption tax have received substantial bipartisan support in Congress. And many commentators believe that Congress is likely to enact some version of these proposals in the not-too-distant future. One of the most important issues raised by the prospect of radical tax reform is that of transition effects. Each of the tax-reform proposals currently under consideration would eliminate many of the deductions, exclusions, and credits that individuals and businesses have come to rely upon. Therefore, unless Congress accompanies the repeal of those provisions with some form of transition relief (such as grandfathered, phased-in, or delayed effective dates) any taxpayer who made an investment in reliance on the prior rule will suffer substantial transition losses, losses in the value of pretransition investments.


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