Yale Law School Professor Proposes Reform, Repeal of Income Tax

One hundred million Americans should not have to pay income tax, according to Michael J. Graetz, the Justus S. Hotchkiss Professor of Law at Yale University and a former deputy assistant secretary of the Treasury for tax policy.

In his essay, “100 Million Unnecessary Returns: A Fresh Start for the U.S. Tax System,” published in the current issue of the Yale Law Journal, Graetz cites several reasons to reform the current U.S. income tax. Among them are growing public perception that the income tax is unfair and overly complex; the trend toward aggressive tax planning and tax avoidance; and the increasingly unmanageable administrative burden placed on the Internal Revenue Service. Graetz proposes that most of the income tax be replaced with a “value-added tax” or “VAT.” Currently, 120 countries on five continents use some form of VAT, which operates much like a national sales tax, except that it is collected at all stages of production rather than just from retailers.

Graetz suggests that a 10-to-15 percent VAT would generate enough revenue so that families with $100,000 of annual income or less-almost 90 percent of all current filers-would not have to pay income taxes or file tax returns. His reform plan would provide a new payroll tax offset to replace the Earned Income Tax Credit and protect low- and moderate-income workers from any tax increase under the new system. Households with an annual income of more than $100,000 would be taxed at a flat 25 percent rate. The corporate income tax rate would also be reduced to 25 percent, which, Graetz notes, would make the United States extremely attractive to corporate investors.

According to an article in the November 19 issue of The Wall Street Journal, the Graetz proposal is already being given consideration by officials in the Treasury Department. The article, by veteran WSJ columnist Alan Murray, quotes Treasury Assistant Secretary for Tax Policy Pam Olson as saying, “We think we have a tax system in need of repair. It’s too complicated, difficult and expensive to administer.”

A version of Graetz’s essay is available online at: http://www.yale.edu/yalelj/112/GraetzWEB.pdf.

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Gila Reinstein: gila.reinstein@yale.edu, 203-432-1325