Title: A distributional analysis of the current federal tax system and the alternative value-added tax system

Authors: Xiaoyan Chu; Ted D. Englebrecht; Yingxu Kuang

Addresses: Department of Accounting and Finance, College of Business Administration, Nicholls State University, Thibodaux, LA 70301, USA ' School of Accountancy, College of Business, Louisiana Tech University, Ruston, LA 71272, USA ' Department of Accounting, College of Business Administration, University of Houston-Victoria, Victoria, TX 77901, USA

Abstract: The growing public dissatisfaction with the current federal tax system and the ongoing national debt crisis are generating serious consideration of alternative consumption tax systems, especially the value-added tax (VAT). This study examines the distributional effects of the current federal tax system and the alternative VAT system under both annual income and lifetime income approaches. The results support prior findings that under the annual income approach, the federal tax system is progressive while the alternative VAT system (broad-based and narrow-based) is regressive. Under the lifetime income approach, both the federal tax system and the narrow-based VAT systems (zero rating on necessities) are progressive, while the broad-based VAT system is still regressive. But the current federal tax system is significantly more progressive than the narrow-based VAT systems by using bootstrap methodology. Furthermore, the study shows that the progressivity level of the current federal tax system is not decreasing, instead significantly increasing between years 2005 and 2009. Also, when only considering households who paid payroll taxes (working families as defined in the paper), the current federal tax system is significantly less progressive, even proportional for year 2005, under the annual income approach.

Keywords: progressive taxation; regressive taxation; annual income; lifetime income; bootstrap methodology; distribution effects; federal tax system; value-added tax; VAT; consumption taxes.

DOI: 10.1504/IJEA.2016.079938

International Journal of Economics and Accounting, 2016 Vol.7 No.3, pp.189 - 217

Received: 05 Dec 2015
Accepted: 20 May 2016

Published online: 21 Oct 2016 *

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