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Real Tax Reform

Our federal tax system is a nightmarish mess…and that’s putting it as kindly as I possibly can. It’s not enough to just tweak it around the edges or play around with the brackets. It’s certainly not enough to soak the rich and hope it all works out. The whole system needs to be tossed out and recreated from scratch.

First of all, it is better to tax consumption (e.g., sales) than to tax income. Switching to a federal sales tax would significantly reduce the paperwork burden on the individual taxpayer, and eliminate virtually all of the needless complexity. More details about how this might work below.

Second, so called “progressive” taxation — where the effective tax rate increases as income increases — is not “progressive” at all. If anything, it is regressive, because it violates the principles of equal treatment under the law. If some citizens pay 0% of their income in taxes, and others pay 30%, that is basically the definition of unfair.

Third, the complexity of our tax system unfairly benefits the rich, since they can afford to hire the team of accountants they would need to pay the lowest possible tax rate allowed under the law. Regular Joes like me don’t have that option; we have TurboTax and prayer. There shouldn’t even be loopholes in a tax code, let alone thousands (millions?) of them.

So let’s come up with something better.

A National Sales Tax

I propose eliminating all income taxes and replacing them with a simple, straightforward, transparent tax system built primarily on a national sales tax.

I can’t set a specific rate at this early stage; that would take a lot of smart people doing a lot of smart math to come up with a figure. Of course one criticism of such a system is that the cost of consumer products will, effectively, go up…but on the flip side, so will everybody’s income now that they aren’t paying an income tax. Except for the poor, who currently pay little or no income tax…so yeah, what about them?

Rather than setting tax rates in a way that discriminate between people, we will, instead, discriminate between goods. A just government can’t discriminate between people but there’s no reason it can’t set different rules for different inanimate products.

Think about the ways that poor and rich people spend their money, relative to one another.

If you’re very poor, it’s a good bet that most of your money is going to a few types of things for you and your family: food, the rent, the utilities, the phone, the car payment, clothing, school supplies, and so on.

If you’re very rich, on the other hand, you’re probably spending your money very differently. Oh sure, you also have to pay for your home, car, utilities, and so on. But then you’re buying a plane or a boat, a few more cars, a $10,000 watch, fine artwork, and solid gold light switch covers.

So if we wanted to create a sales tax system that was both fair (i.e., not ‘targeting’ people based on income), but also one that did not unnecessarily burden the poor, how would we do it? The answer is surprisingly simple. Don’t tax necessities.

The way a national sales tax would be structured is so that it applies to most consumer products and most investments, but excludes those that are determined (through a transparent process) to be necessities. So there would be no tax on food, no tax on rent or on the purchase of a primary residence (at least up to a certain dollar value), no taxon the first two cars per family, no tax on utilities, no tax on children’s clothing and school supplies.

What this means in practice is that a poor person, who is spending most of their money on necessities, has a very low effective tax rate. But a rich person, who spends most of their money on non-essentials and investments, pays a much higher (but still fair) effective tax rate…and all without violating the principle of equal treatment under the law.

This is what a “progressive” tax looks like.

Corporate Taxes

Under a national sales tax system, individuals would be relieved of much of the paperwork burden of taxes, and of having to actually cut a check or have money withheld from their paychecks. Businesses, however, would have a somewhat increased burden.

Each business that sells products or investments would become a tax collector. Of course, many already are, since many states already have sales taxes…but we must still acknowledge that this would be a new and possibly difficult requirement, especially for small businesses.

To counter this, it would be appropriate to lower the corporate tax rate by an amount that would fairly compensate them for their new responsibilities. However, this must also be tied to a major reform of corporate taxes. They don’t get any loopholes either. I want to see the overall corporate tax rate come down, but a complete elimination of every loophole and back-door and cheat buried in today’s tax code.

The corporate tax should be a simple flat tax. Every company should pay a flat percentage rate on their annual revenues. Period.

How Does This Help?

First, this kind of tax reform just makes things simpler. People know what they’re paying. There are no surprises every April, or unexpected annual changes to withholding or deductions. Life gets that much easier for every taxpayer. This applies to businesses too. Though they have to deal with the new complexities of the sales tax, they will be repaid with a lower and more predictable corporate tax.

But this will also have effects on the government.

We’ll be able to downsize the Internal Revenue Service, thus saving untold amounts of tax dollars that can be redirected to debt repayment or infrastructure or anything else.

We’ll be able to more accurately predict government revenues year-over-year. Better information means better budgets and fewer surprises.

And lower and fairer taxes on both individuals and businesses is good for the economy. How many billions of dollars are wasted each year by businesses that need a huge tax compliance staff? How many by individuals who have to pay tax professionals or buy TurboTax? Those dollars can all be spent more productively…which helps the economy…which raises the GDP…which raises tax revenues and helps us get the budget balanced.

So it’s good for everybody.