Government programmes (expenditures, mandates, regulations) should be evaluated for their benefits and these compared with their costs. The resulting level of government expenditures politically prioritised and determined (hopefully on this basis) should be financed in the most economically neutral, equitable, and efficient (costs of compliance, collection and enforcement) ways possible.
The following proposals are based on these assumptions and objectives. Stress is placed on the high compliance costs and enforcement difficulties of existing taxes in an increasingly globalised world.Very simply stated, the ideal taxes in terms of neutrality (minimal distortion of relative prices) are either a comprehensive income or consumption tax. A comprehensive consumption tax is more neutral than an income tax, which distorts the choice between saving and consumption by taxing saving. For some, however, an income (the return for what you give society) tax is more equitable and for others a consumption (what you take from society) tax is more equitable. Use taxes (such as tolls or gasoline taxes for the use of highways), which are generally considered both neutral and equitable and thus desirable when feasible, are not otherwise considered here. However, the ease of avoidance and costs of compliance are very different for income taxes (whether based on the residence of the tax payer or the territories in which the income is produced) than for a consumption tax, which necessarily applies to the territory in which consumption occurs. US efforts to prevent income tax evasion (both business and personal) by hiding income abroad have become increasingly costly, intrusive and obnoxious to foreign governments. For these reasons, and the reasons of neutrality and equity, I favour a comprehensive consumption tax (Value Added Tax) combined with a rebate (negative income tax) to every man, woman, and child legally resident in the US and the abolition of all income, wealth, and wage taxes.
Taxes on business income violate almost every standard of good taxation and contribute most to political controversy and to business costs aimed at reducing evasion. With increased globalisation, efforts to define business income within the tax jurisdiction and to detect taxation evasion by moving income (as apposed to actual economic activity) abroad are becoming more difficult and invasive into the policies of other countries. The taxation of business income should be totally abolished.Payroll (wage) taxes used to finance pensions might be thought of as a use tax. However, in the case of the payroll tax, which is nominally linked to the Social Security pension in the US the pay-as-you-go financing of the Social Security pension makes the link weak. Furthermore, payroll taxes are very regressive.
The primary appeal of an income tax over a consumption tax rests on the public’s perception of fairness. Why should income from clipping bond coupons be taxed less than hard labour? A preference for an income tax may also reflect the desirability of limiting the accumulation of wealth and income inequality even potentially at the expense of less investment and thus lower incomes for everyone. An often overlooked drawback of income taxation is the relative ease with which the wealthiest can evade taxation via various off shore (or even on shore) vehicles for hiding it. IRS efforts to find all income earned or sheltered abroad raise similar problems for international co-operation and relations as do such efforts with regard to the corporate income tax. Defining and measuring properly net income subject to taxation can also be problematic as is the fairness of taxing US citizens living and earning their income abroad. None-the-less, under the existing tax code those with incomes in the top 1 per cent paid 40 per cent of all income tax revenue in 2006 and earned only 22 per cent of all income, the top 10 per cent paid 71 per cent and the bottom 50 per cent less than 3 per cent.
I support a comprehensive consumption tax for all residence in the US when combined with cash rebates to all legal residents equivalent in value to the consumption tax paid on purchases of essential goods and services by every man, woman and child, the tax becomes modestly progressive and satisfies a sensible notion of fairness. As I also think a minimum level of retirement savings and medical insurance should be mandatory as part of making our social safety net more efficient and equitable, the per person cash rebate should be large enough cover these mandatory minimums. To insure compliance with these mandatory payments, these amounts could be deducted from the cash payments and invested in a standard retirement fund or health insurance policy for anyone unable to document that they have satisfied these requirements.
Residents would support government services in proportion to what they take (consume) from the economy rather than on the basis of what they give (produce). By every calculation of actual tax collections, the wealthy would pay more than they do now with existing taxes. Its collection and enforcement would yield enormous simplifications and compliance cost savings. The IRS could stop chasing money around the world. A tax rate of 23 per cent on after tax consumption (which makes the rate comparable to an income tax (i.e., 30 per cent of pre tax consumption) is estimated to raise the same revenue as existing federal income taxes, including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment and corporate taxes.
This is a simplification. A good may be purchased in another state or country and carried across borders to be consumed at home. Border tariffs for the difference in the foreign and the local consumption tax rates would be needed2 Wall Street Journal, ‘Their Fair Share’ July 21, 2008 p A123 Funding private pension plans attached to individuals rather than through companies in place of the existing, pay as you go social security system.