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An Analysis of a Cash Flow Tax for Small Business  - WP 02/27

6  Conclusion

The theoretical case for a CFT is clear. It is simpler than an income tax, with lower economic costs. It can be made progressive, thus satisfying equity criteria for good tax design.

It is possible to design the core rules of a CFT that applies to new small businesses. As with all examples of a CFT, the core rules are very simple and easy to understand and apply. Integration with existing GST and PAYE systems provide significant simplification potential.

It does not seem possible, however, to design an acceptable set of rules that would cover the transition from an income tax to a CFT. While the “Bradford scheme” might hold out the prospect for a feasible transition, considerably more work would be required to validate this approach.

Allied to this, designing a set of rules to define what is a “small business” is possible, although there is a risk that these rules would involve some arbitrary features. A particular difficulty, however, is the transition from a CFT to an income tax for businesses that cease to be small. The main issues surround the treatment of enduring assets and mirror those involved in the general transition to a CFT.

Even if the considerable difficulties with a transition could be overcome, integrating a CFT into a world where most of the economy is subject to an income tax would also pose difficulties. There is a risk that the rules needed to maintain CFT treatment, while at the same time protecting the income tax base, might negate significant portions of the simplification gains from a CFT.

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