The Shelby proposal is a modification of the tax proposal formulated by Hall and Rabushka in 1981. The proposal is a flat tax that levies consumption tax in which would replace the individual, corporate, income, estate and gift taxes. The proposal has two parts namely the wage tax and the cash-flow tax on businesses. The Shelby proposed that instead of the normal VAT, there should be a subtraction from the VAT base and individuals should be taxed directly.
However, unlike the VAT, some wage incomes would not be part of the tax base. The initial wage tax on individuals would be 19% but as time goes on, it would later reduce to 17% and this applies to all incomes gotten by individuals except on Social Security receipts. However, Social Security contribution tax will still be in operation and individuals would pay wage tax on them. There would be standard deductions from individual wage tax plus equivalent to the additional standard deduction and the basic standard deduction.
Businesses will also pay a tax of 19% will reduce to 17% with time. On the other hand, the Specter Proposal which is also a modification of the Hall and Rabushka tax reform of 1981 has features that are related to that of Senator Shelby. In the proposal, “flat rate consumption tax would replace the federal individual and corporate income taxes and the federal estate and gift taxes. ”(Bickley, 2005). Like the Shelby proposal, it is also divided into two parts namely the wage tax and the cash-flow tax.
Wages are taxed individually and this would be 20% on all wages. Like the Shelby proposal, standard deductions which are equivalent to the basic standard deduction and the additional standard deductions would be applicable to the individual wage tax. Business tax would stand at 20% on total revenue lower than the amount of procurement from other firms. In addition to this, the tax proposal would allow individual to deduct $2,500 yearly for charitable returns. The tax proposal was meant to take effect from January 1, 2004.
Reference: • Bickley, J. M. (2005). Flat Tax Proposals and Fundamental Tax Reform: An Overview The Library of Congress. Retrieved from http://kuhl. house. gov/UploadedFiles/flattax. pdf on November 2, 2008 • CRS Report RL30351. Consumption Taxes and the Level and Composition of Saving, by Steven Maguire. • CRS Report RL32603. The Flat Tax and National Sales Tax: Overview of the Issues, by Gregg A. Esenwein and Jane G. Gravelle. • CRS Report RL32266. Transaction Tax: General Overview, by Maxim Shvedov.