Major Design Differences Among Alternative Tax Systems

Table 1 lists four basic design features of the tax systems we studied: (1) the basis for taxation (income or consumption); (2) whether individuals, businesses, or both would be subject to tax; (3) whether tax preferences could exist for certain individuals, businesses, or goods and services; and (4) the rate structure for individuals (single or multiple rates). Preferential Treatment

Each of the various alternatives could include tax preferences, although the types of preferences provided would differ among alternatives. Implications of the Alternative Tax Systems for Taxpayer Compliance Burden and Tax Administration

Because of differences in the four basic design features, the tax systems we studied would have different impacts on taxpayers’ and tax administrators’ responsibilities, and thus on taxpayers’ compliance burden and the costs of tax administration. Business-level tax systems generally have fewer filers than individual-level tax systems or systems that combine a business and individual tax. In addition, businesses would not be required to file information returns related to individuals. The alternatives that include a business tax and a relatively simple individual tax would likely require return filing by businesses and by some individuals. Determining Correct Tax Amounts and Assessing Compliance

Because of differences in the four design features we discussed earlier, the tax systems we studied would differ in the burden experienced by taxpayers in determining their tax liability and in the costs to tax administrators of assessing compliance. The fact that some tax systems—the current income tax, versions of a reformed income tax, and the personal consumption tax—have or could have multiple rates on individuals imposes little additional burden on taxpayers or tax administrators except to the extent that multiple rates encourage tax planning. Transition to a New Tax System

A wide range of options exist for moving from the current income tax system to an alternative tax system, and the way that any transition is formulated could have significant effects for economic efficiency, equity, taxpayer compliance burden, and tax administration. Special rules designed to exempt existing saving from tax could burden individuals with additional recordkeeping, filing, and tax determination requirements and create additional tax compliance issues for tax administrators. Our second objective was to describe how the alternatives, by incorporating these differences, may affect taxpayers’ burden of complying with the tax laws and the government’s responsibilities for tax administration. Then, it discusses the potential impact of these options on taxpayers’ compliance burden and on tax administration. An income VAT could reduce the number of tax returns still further. Processing of Returns

With a flat tax, a tax agency might process almost the same number of tax returns as the 122 million in the current system (in 1995), since both individuals and businesses would continue to file returns and remit taxes; however, the level of personal allowances and deductions available could affect that number considerably.
Why GAO Did This Study

GAO reviewed alternative tax systems, focusing on: (1) the major differences in design among the tax alternatives; and (2) how the alternatives, by incorporating different design features, may affect the taxpayers' burden of complying with the tax laws and the government's responsibilities for administering those laws.

What GAO Found

GAO noted that: (1) the alternative tax systems that GAO studied differ in their potential impacts on taxpayer compliance burden and tax administration; (2) the different potential impacts of the tax systems can largely be explained by four basic design features: (a) the basis for taxation; (b) the type of taxpayer; (c) preferential tax treatment for certain individuals, businesses, or goods and services; and (d) the rate structure for individuals; (3) the differences in the four basic design features of the tax systems GAO studied explain in large part the differing potential impacts of the tax systems on taxpayer compliance burden and tax administration; (4) simplifying the determination of tax liability for taxpayers could simplify assessing compliance and providing taxpayer assistance for tax administrators; (5) tax systems that would tax only businesses, rather than individuals and businesses, could reduce taxpayer compliance burden and the costs of tax administration by greatly reducing the number of taxpayers required to file returns; (6) tax systems that combine a business tax with a relatively simple individual tax, such as flat tax or some version of a reformed income tax, could add limited burden relative to a business-only tax; (7) tax systems requiring individuals to report more information about their personal finances could add more burden than a business tax combined with a simple individual tax because more individuals could have to file tax returns and the returns would be more complicated; (8) an alternative tax system incorporating tax preferences--exemptions, special deductions, credits, or multiple rates on goods and services aimed at various economic and social goals--would generally add complexity; (9) tax preferences generally increase taxpayer compliance burden by complicating the determination of tax liability, adding recordkeeping requirements, and creating incentives to engage in tax planning; (10) tax preferences generally increase taxpayer compliance burden by complicating the determination of tax liability, adding recordkeeping requirements, and creating incentives to engage in tax planning; (11) tax systems with multiple tax rates for individuals, which could include income taxes and a personal consumption tax, do not need to add burden to taxpayers' calculation of tax liability compared to single-rate systems; and (12) in addition to impacts due to the four basic design features, the transition to an alternative tax system could affect taxpayer compliance burden and tax administration.