Reduce Corporate and Individual Taxes and Implement a Value-Added Tax

This option combination imposes a 5 percent value-added tax (VAT) and uses the new tax revenue to reduce other individual and corporate taxes. Tax reductions include reducing employer and employee payroll tax rates by 1 percentage point each, repealing the 3.8 percent net investment income tax (NIIT), reducing ordinary income tax rates by 10 percent, repealing the individual alternative minimum tax (AMT), reducing the corporate income tax rate from 21 percent to 15 percent, and repealing the corporate alternative minimum tax (CAMT).

A VAT would increase marginal tax rates on labor income. The VAT would not increase the cost of capital. The tax reductions would lower the tax burden on labor income, capital income, as well as saving. On net, marginal tax rates would be lower, leading to an expansion in hours worked and in capital investment, significantly increasing long-run economic output.

On a conventional basis, this option would increase the primary deficit by $404 billion over the budget window. Long-run GDP would increase by 3.4 percent and long-run GNP by 3.3 percent. On a dynamic basis, the primary deficit would decrease by $1,843.4 billion from 2027 through 2036, or $2,247.4 billion more than the conventional estimate.

Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be 24.2 percentage points lower than current law baseline, reaching 151.7 percent by 2056.

On average, taxpayers would see a 0.3 percent decrease in their after-tax incomes in 2027, with decreases for the bottom 95 percent and increases for the top 5 percent. All income groups see an increase in after-tax incomes on a long-run dynamic basis, averaging 2.1 percent.