Tuesday, April 27, 2010

Alternative forms of taxation

Our tax system is broken.  It is too complicated.  There are too many loopholes.  The time cost for each person and business to fill out their paperwork is too high.  The time cost for the government to validate all of that paperwork is too high.  The enforcement costs are too high.

There are rumors of overhauls coming.  I think that some type of major change is inevitable.  Unfortunately there are few good ideas floating around.

I remember seeing an article that Megan wrote up about an alternative form of taxation that really interested me. I searched this morning and couldn't find it.  I think it was during the 2008 election cycle.  I'll have to do this by memory, and you can make up the details for yourself.

One of the core tenets of tax policy is that whatever you tax you get less of.  If you tax income you get smaller paychecks.  If you tax purchases you get less shopping.  If you tax cigarettes you get less smoking.  Etc.  That makes it difficult to predict how much revenue a tax will generate because of this effect.  If you have $1M in spending, and you tax that spending at 10%, then you will generate less than $100,000 in tax revenue because there will be less than $1M in spending after the tax goes into effect.

I'm not concerned with calculating the revenue amounts.  There are experts who can do that.  I think that we should start our tax planning with the idea that we want to tax something that we want to reduce.  Don't tax income or spending; because you want more of those, not less.  Don't tax employment.  Don't tax charitable contributions.

So what do we want less of?
* Resource usage
* Pollution
* Trash
* Crime
* Alcohol, tobacco, firearms, pornography (maybe)
* Banks that are too big to fail
* Predatory lending
* Overpaid CEOs and board members
* CDOs (maybe)

What else?

Megan's article only talked about resource usage taxes as an alternative to income/spending/employment taxes.  There was a dead economist who had made his reputation on this proposal, and I think that the green forces were picking up his book again.  The idea there was to have taxes on things like water usage, sewage treatment, trash disposal, land use, mineral use, etc., instead of having income tax, payroll tax, sales tax, etc.  There are a few big advantages to this idea:
* Lower collection enforcement costs.
-- Many of these taxes could be collected automatically, like on water bills.
-- The non-automatic taxes (like land-use taxes) would be straight-forward recurring bills.
* Local job creation.
-- The jobs of measuring and collecting taxes would have to be close to the resources, so inspectors can visit, etc.
* Better/faster dispute resolution.
-- Local officials are more responsive than distant ones.
-- In-person meetings and on-site inspections can get to the truth of a situation better than long-distance phone calls.

There is no reason why these taxes could not be progressive.  For instance, the first 200 gallons (per month) of water are tax free.  The second 200 gallons are taxed at $0.10 per gallon.  The third 200 gallons are taxed at $0.15 per gallon.

There are certainly many detail issues that would need to be worked out.  Well water used for agriculture within a certain distance from the well should probably be tax free.  Or something like that.  I'm sure that there are many factories that use lots of water, and that have multiple sources of water.  We would need to debate and figure out what the right answer is for those.

But those rules would need to be kept simple and consistent.  No loopholes.  No exemptions for one state, congressional district, or industry.

If this had been put in place during the Civil War (instead of the income tax) then I think we could operate without an income tax.  Since we already have taxes on income, payroll, etc., then we will need a plan to transition.  That probably means that we add these taxes in low amounts, and then phase over by turning up these rates and turning down the rates on the older taxes.

If we had a functional Congress that wasn't entirely beholden to special interests then this is something that would work.  As it is, we'll have to get along with whatever the special interests dream up for us, until our next revolution.

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