Description

This paper proposes the substitution of the current income tax system for a simplified consumption tax (SCT), consisting of a cash-flow tax (CST) with a rate of 26%, and a tax on wages with a maximum rate also of 26%. Preliminary estimates indicate that these taxes would maintain tax revenues constant while, at the same time, simplify the tax system and lower administrative and enforcement costs. Moreover, distortions would be diminished as an income tax would be replaced by a consumption tax. Vertical equality would not be significantly changed, but horizontal equality would improve. The paper also considers two alternatives to the CST: the hybrid tax and the tax on dividends, concluding that the second is the less attractive option.