Monday, February 18, 2013

The Ideal Tax

What exactly is the ideal type of tax?  It depends, of course, on your definition of "ideal", but most folks would probably agree that the ideal tax is one that would would meet all of the following criteria:

  • Lowest possible rate on the broadest possible base
  • Painless for virtually everyone, yet everyone has some "skin in the game"
  • Progressive (the rich pay a higher proportion of their income than the poor)
  • No loopholes
  • As simple as possible (but not simpler)
  • Efficient (raises lots of revenue without hurting the economy)
So what type of tax would meet all of these seemingly contradictory criteria?   Certainly neither our current 77,000+ page Byzantine tax code, nor any of the specific types of taxes in it, would suffice.  The so-called FairTax (national sales tax) would also fail to meet all of the criteria, as would introducing a value-added tax (VAT) to replace all or part of our current tax code.  Ditto for virtually every other idea out there.  It seems like a rather impossible feat, until...

Enter the Universal Exchange Tax (UET).  This idea, taken from an anonymous website by a mysterious stranger, is very similar to Dr. Edgar Feige's idea for the Automated Payment Transaction Tax (APT), which we have discussed in a previous post.  It would be a very tiny tax, likely somewhere between 0.05% and 0.1%, on all automated (electronic) transactions between entities, period.  With a tax base of over $4 quadrillion dollars, such tiny rates can raise impressive sums of revenue:

0.01% = $400 billion per year
0.025% = $1 trillion per year (nearly the entire federal deficit)
0.05% = $2 trillion per year (half the federal budget)
0.1% = $4 trillion per year (the entire federal budget)

This idea is the logical conclusion of the ideas of economists such as Tobin and Keynes, since it is the lowest possible rate on the broadest possible base.  And while it may not appear to be progressive at first glance, it is actually highly progressive in practice since the rich have a much higher volume of transactions than the rest of us, while the poor have a relatively low volume of transactions.  Or, as the mysterious stranger would put it, "the more you play, the more you pay".  And the tiny rate would be painless and barely even noticeable, unless of course you're a rabid speculator.  Then it hurts a bit, as it should since excessive speculation imposes negative externalities on the rest of us.  Finally, something both progressives AND libertarians can embrace as far as fiscal policy is concerned.

The TSAP supports the introduction of the UET at the federal level (and possibly even at the state and local levels) as revenue-positive replacement for many of our current taxes.  Specifically, we would like to see a massive overhaul of our tax code in which the following changes are made along with the UET:

  • The income tax for individuals is drastically simplified and truncated to apply equally to all forms of income with no loopholes, but no tax on the first $100,000 per year.  Suggested marginal rates are 10% for each dollar over $100,000 and 50% for each dollar over $1 million.
  • The income tax for corporations is drastically simplified and truncated to apply equally to all forms of income by all entities with no loopholes, but no tax on the first $1 million per year.  A good rate would be 20-25%, and only undistributed profits would be taxed.
  • The FICA (Social Security and Medicare) payroll taxes are eliminated entirely for both employers and employees, since the UET would replace these taxes as well.
  • All giveaways (tax expenditures) in the old tax code would either be jettisoned entirely or replaced by direct (and transparent) subsidies from the spending side of the ledger.
  • State and local governments should give serious consideration to adopting the UET as a full or partial replacement for their own sales, income, and property taxes.  It would not be difficult to "piggyback" on the federal UET once it is in place, and the feds should make it as easy as possible to do so.
The benefits of such changes are astounding.  The massive simplification, reduced costs, larger paychecks, and relative lack of distortion would be like a giant B12 shot for our economy, which is currently stuck in neutral.  Our budget would be balanced for the first time in over a decade, and we would have a massive surplus to invest in our country.  Social Security will finally be put on a sound footing for the foreseeable future once a few more tweaks are made.  And for the vast majority of Americans, April 15 would be just another spring day.  In other words, nearly all Americans would be much better off as a result (except perhaps speculators and the ultra-rich 0.1%).

It's time to adopt a 21st century tax code, and to '86 the obsolete Internal Revenue Code of 1986.

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