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A Consumption Tax Versus a Federal Income Tax in the United States Shelly-Ann R Digital Commons @ Georgia Law LLM Theses and Essays Student Works and Organizations 1-1-2007 A Consumption Tax versus a Federal Income Tax in the United States Shelly-Ann R. Tomlinson University of Georgia School of Law Repository Citation Tomlinson, Shelly-Ann R., "A Consumption Tax versus a Federal Income Tax in the United States" (2007). LLM Theses and Essays. 94. https://digitalcommons.law.uga.edu/stu_llm/94 This Article is brought to you for free and open access by the Student Works and Organizations at Digital Commons @ Georgia Law. It has been accepted for inclusion in LLM Theses and Essays by an authorized administrator of Digital Commons @ Georgia Law. Please share how you have benefited from this access For more information, please contact [email protected]. A CONSUMPTION TAX VERSUS A FEDERAL INCOME TAX IN THE UNITED STATES by SHELLY-ANN TOMLINSON (Under the Direction of David Brennen) ABSTRACT This thesis makes a comparison between a consumption tax and the current Federal Income Tax in order to establish which would be fairer, simpler, more efficient and feasible for the United States. Issues such as which of the two tax systems would be easier to apply, and which would yield enough revenue for the fiscal budget are addressed. The Thesis argues that a consumption tax would be more suitable for the United States and in particular makes reference to the Fair Tax plan which is a proposal to replace the current federal income tax with a national retail sales tax. This paper concludes that the Fair Tax plan would be more suitable for the United States than the current Federal Income Tax. INDEX WORDS: Consumption tax, Federal Income tax, Fair Tax Act, Fair Tax Plan, national retail sales tax, global system, schedular system, American family tax system, tax evasion, taxing corporations, alternative minimum tax, economic efficiency, horizontal equity, vertical equity, marginal rate, capital gains, corporate tax, double taxation, estate and gift taxes, fiscal efficiency, neutrality, multi-stage taxes, Value Added Tax (VAT), Flat Tax, gross income, International Tax Law, tax burden, foreign tax credit, inbound transaction, outbound transaction. A CONSUMPTION TAX VERSUS A FEDERAL INCOME TAX IN THE UNITED STATES by SHELLY-ANN TOMLINSON Bachelor of Arts, the University of the West Indies, Jamaica, 2000 Bachelor of Laws, the University of the West Indies, Barbados, 2004 A Thesis Submitted to the Graduate Faculty of The University of Georgia in Partial Fulfillment of the Requirements for the Degree MASTER OF LAWS ATHENS, GEORGIA 2007 © 2007 SHELLY-ANN TOMLINSON All Rights Reserved A CONSUMPTION TAX VERSUS A FEDERAL INCOME TAX IN THE UNITED STATES by SHELLY-ANN TOMLINSON Major Professor: David Brennen Committee: Gabriel Wilner Electronic Version Approved: Maureen Grasso Dean of the Graduate School The University of Georgia August 2007 iv DEDICATION I dedicate this thesis paper to my parents, Maureen and Ainsley Tomlinson, and to my nieces Toniel and Mary Franks. v ACKNOWLEDGEMENTS I give foremost thanks to the omnipotent, omnipresent, and omniscient God Jesus because without Him I can do nothing. I wish to acknowledge the invaluable help and support received from Professor Gabriel Wilner who I believe is a true example of what a teacher ought to be. I would like to thank Professor Brennen, my major Professor for his guidance and insight. I thank my friend Shelley-Ann Irons who encouraged me to never give up. vi TABLE OF CONTENTS Page ACKNOWLEDGEMENTS.............................................................................................................v LIST OF TABLES....................................................................................................................... viii CHAPTER 1 Statement of Thesis........................................................................................................1 2 A History of the Two Tax Systems................................................................................4 A History of the Federal Income Tax........................................................................4 History of the Consumption Tax in the U.S.A..........................................................6 3 The Federal Income Tax ................................................................................................8 A Look at how the Federal Income Tax is applied to Income ..................................8 Problems with the Present Federal Income Tax......................................................11 4 Principles of Taxation..................................................................................................19 Consumption Tax ....................................................................................................21 The Value Added Tax .............................................................................................24 The Flat Tax ............................................................................................................26 5 The Fair Tax Act..........................................................................................................32 What is the Fair Tax Act?........................................................................................32 Disadvantages of the Fair Tax Act..........................................................................35 vii 6 A look at how the Fair Tax Act Affects Corporations, Tax Evasion, The AMT, Estate and Gift Taxes, and International Tax Law.............................................................37 Corporations ............................................................................................................37 Tax Evasion.............................................................................................................43 Alternative Minimum Tax.......................................................................................46 Estate and Gift Taxes ..............................................................................................50 International Tax Law .............................................................................................53 7 Countries in the American Family Tax System .........................................................57 The Tax System of Liberia......................................................................................58 The Tax System of the Republic of Philippines......................................................63 VAT in the Philippines............................................................................................65 Tax on Corporations in the Philippines...................................................................66 8 A Look at how Other Countries have Applied Tax by Consumption: Countries with a Comprehensive Consumption Ta..................................................68 The Tax System in the U.K.....................................................................................68 Indirect taxes- a look at how the consumption tax (VAT) is applied in the U.K....69 The Structure of the Tax Base in Jamaica prior to the Tax Reform........................72 The General Consumption Tax in Jamaica .............................................................74 Reform Policy..........................................................................................................75 viii 9 Countries without an Income Tax...........................................................................78 The Tax System in the Bahamas .............................................................................78 The Tax System in Bermuda...................................................................................81 10 The Tax System in the Channel Islands.......................................................................83 11 Applying the Facts to the American Situation; Would a Fair Tax Act be Advantageous to the American Society?.....................................................................84 BIBLIOGRAPHY..........................................................................................................................94 ix LIST OF TABLES Page Table 1: ........................................................................................................................................10 Table 2: ........................................................................................................................................35 Chapter 1: Statement of Thesis Statement of Thesis This paper proposes to make a comparison of a consumption tax and the current United States federal income tax seeking to establish which would be fairer, simpler, more efficient and feasible. The question of feasibility looks at which would be easier to apply in the society, but more importantly it contemplates which would be fairer and whether such a tax regime could adequately yield enough revenue for the government’s fiscal budget. Clearly, there will be competing interests since the controversy lies between the people’s interest (the populous) and those who govern.1 The controversy is that those who govern do not put the people’s interest first, nor do they protect the people’s interest.2 In an ideal society no such controversy ought to exist since the role of the government is to protect the people and to put the people’s needs and interests first.3 However, as history and experience have shown, the sad reality suggests otherwise.4 1 See, e.g. , Robert E. Hall et al, The Flat Tax, 16 (Hoover Institution Press 2nd ed) (1995) (1985) (the author urges
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