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Laurence J. Kotlikoff, an economics professor Boston University, has proposed a compromise tax plan that seeks to placate both Republicans and Democrats. Under his proposed ‘Purple Tax Plan,’ the federal income tax for individuals and corporations would be scrapped and replaced with a 17.5% federal sales tax.
According to the Purple Tax Plan website, the tax would be levied on the consumption of all final goods. However, there would be provisions to allow those in economic distress to defer paying tax on housing-related transactions. Furthermore, each household would receive a monthly payment called the ‘demogrant’ that would be based on the size of the household.
In a piece written for Investment News, Kotlikoff claimed that the size of the demogrant would “ensure the poor pay no net sales tax, while the rich pay a lot.” In addition to scrapping personal and corporate income taxes, the Purple Tax Plan would also replace the federal estate and gift taxes with a flat 15% tax on inheritances above $1 million.
The plan would also make changes to the FICA employment tax by exempting the first $40,000 of earnings from the employee portion. Currently, there is a ceiling on FICA payments, but the Purple Tax Plan would abolish it. In his Investment News piece, Kotlikoff said that his plan would represent a truly progressive approach to taxation.
He claimed that it would represent a dramatic tax increase for the rich because it would be levied on their consumption. He also stated that the plan would encourage people to save rather than spend, and in the absence of corporate taxes, foreign investment in US companies would increase.
“A zero corporate tax will make the U.S. an investment haven, giving it a shot at experiencing what Ireland enjoyed after it dramatically cut its company rate: a major influx of investment and faster growth in jobs and wages,” he wrote. The Purple Tax Plan would also remove the need to file tax returns, potentially making life easier for ordinary people.
Kotlikoff also sees the imposition of a flat tax rate as a break on spending, since it would make it much harder to conceal future tax increases. Kotlikoff’s plan is certainly ambitious, but it remains to be seen whether or not it will gain much traction on either the Left or the Right.
One also has to wonder whether a Congress that can’t even pass routine pieces of legislation without resorting to partisan stonewalling would be able to agree on such a sweeping overhaul of the tax system.