Sunday, February 20, 2011

How I'd Reinvent Taxation

Jeffrie, a commenter on my previous post, asked me to propose a reinvention of our tax system.

Here's my shot at it. Your comments for its improvement are welcome:

I am putting aside the question of whether taxes should be increased or decreased. Here, I merely propose what I believe would be a fairer, less time-consuming, and more societally benefiting system for collecting whatever level of taxes is deemed appropriate.

I believe that both the individual and corporate income tax should be abolished. Any form of taxation requiring voluntary reporting of information and a panoply of deductions and credits is too time-consuming and gameable.

I'd eliminate most payroll taxes: especially Workers Compensation and Unemployment Insurance. They are job killers and yield negative unintended consequences. Workers Compensation is truly rife with fraud. And Unemployment Insurance encourages sloth. Most of my clients who are unemployment say they won't look for a job until the payments run out. Then, such inertia takes hold that even then, they find it hard to do the aggressive job search that's usually necessary these days.

Fines in excess of the asymptotic amount needed for deterrence are forms of taxation. I would reduce fines so they fit the crime. For example, a stop sign violation, currently $300 where I live, would be $40. A San Francisco parking ticket, which currently is $85 would be $20. A DUI would be reduced from $3,000 to $500.

I'd heavily tax consumption. Government should promote a less materialistic lifestyle, most importantly because it promotes people having more important goals, but also because the American empire is in its decline, fewer people will ever afford afford a consumptive lifestyle, even with zero taxation. Also, less materialism will yield environmental benefits.

So to ensure a progressive tax system, I'd exempt from taxation all basic goods, for example, basic food, clothing, shelter, used cars under $2,000, etc. All other items would be subject to taxing at one of three rates: standard, luxury, and alcohol/tobacco. Only clearly luxury items would pay the luxury rate: hotels over $200 a night, cars over $40,000, jewelry over $1,000, etc. I would legalize prostitution and it would be taxed at the luxury rate. The highest rate would be imposed on alcohol and tobacco because I want to deter their use and because those items impose tremendous costs on family members and on health care. I'm imagining that revenue neutrality could be achieved with a sales tax rate of 25%, 35% for luxury items, and 50% for tobacco and alcohol. That consumption tax, like all sales taxes, would be collected at the time of sale so it is minimally gameable.

I would heavily tax estates, Passing wealth to heirs discourages productivity. My intuition tells me that the appropriate rate would be 0% up to $100,000 rising to 90% at $1,000,000 or more.

I'd lightly but progressively tax investment income. I want to encourage investment, because it makes capital available for lending to businesses, which in turn, creates jobs and better or cheaper products and services. But it seems fair that people who earn money without doing anything for it should have that income taxed. I conceive of a rate that would start at zero for a year's investment income of under $5,000 to a maximum of 20% for an annual investment income of $40,000 or more.

Corporations can move headquarters overseas if too heavily taxed. That would lose too many U.S. jobs and too much tax revenue. So I'd reduce the corporate income tax rate to nearer the world average, perhaps to 15%, but with loopholes closed to avoid such injustices as Exxon-Mobil and GE paying zero tax.

For all taxes, a 25-cents-on-the-dollar tax credit would be awarded for money given to charity. I believe that charities, on average, provide services more cost-effectively than does the government and so I want to give people the option of giving their money to charity rather than to the government.

Your thoughts?


Anonymous said...

Nitpicking, but I'd argue that drunk driving or running is worthy of a hefty fine. These both have the potential to take another person's life.

Serge said...

Like in Scandinavia, fines need to be imposed based on somebody's income. A $300 DUI might deter somebody earning $3000 a month but not somebody earning $30,000 a month. So a 10% of one monthly income for a DUI, and lets say 1% for a parking ticket is more fair.

Marty Nemko said...

Serge, the cost of the govt keeping track of income is too great.

Blaine - Moderator said...

Agree, eliminate the corporate income tax. Without it our country would be able to create millions of new jobs, wages would be higher, prices for all goods and services would be lower and our defined benefit pension system would be much healthier.

Rex said...

Hi Marty, your website, the advice, and the resources you offer are very helpful. In return, I thought I would leave a few comments on your blog.

I completely agree with what you said regarding abolishing the income tax, corporate tax, and payroll taxes.

I disagree with some of the other taxes. If we tax consumption, corporations will simply move somewhere else, because their domestic sales volume will drop. The other likely consequence will be the creation of black markets run by criminal organizations. This was a huge problem in many parts of Europe with cigarettes, and in the 1920s in America with prohibition. We do need a less materialistic lifestyle, but unfortunately, consumption drives the economy and creates jobs. Demand cannot be stopped.

In my opinion, the best way to make people healthier is to make them fully financially responsible for their lifestyle choices. Complete privatization and deregulation of the healthcare industry, especially insurance, would allow insurance companies to charge heavy users of healthcare services higher premiums, and lower premiums for healthy individuals. That way, people can choose to smoke, drink, do drugs, and enjoy prostitution as much as they want, but if they get sick, they'll have to pay more.

Taxing estates will simply transfer money to government bureaucrats. If I toil away all my life, I don't want the fruits of my labor to be stolen by the government, I want to be able to choose who gets how much. Some businesses that have high capital requirements would not be able to get off the ground if large estates are taxed.

Tax credits to charity would create an over abundance of charitable organizations that may do more harm than good. I actually think that if we lowered the tax burden down to the single digits, people would be more willing to donate to charity because they would have more disposable income.

Anyway, I will continue to follow your blog in the future. I think you are supporting some worthwhile causes, and the career wisdom you have gleaned from your many clients resonates strongly with what I believe and value.

Marc Joffe said...

I agree that taxes on consumption, inherited wealth and investment income would be an improvement over our current system that penalizes productive work. On the other hand, a very high consumption tax on luxury goods is likely to promote substantial smuggling. An 18th Century economist named Henry George proposed an especially efficient tax: a tax based on the value of land without any improvements. Unlike a standard property tax, this "ground rent" does not discourage development (since you don't pay more for improving your property). On the other hand, it does discourage landlords from holding on to unused properties in high cost areas like San Francisco.

Anonymous said...

I will bet that with a tax on estate as high as you propose, the taxes on consumption would not need to be nearly as high.

Something like 90% of the wealth in the US is concentrated in the hands of around 20% of the population. I completely agree that our inheritance tax rates and legal devices such as family trusts intended to escape them could do well with a revisit.

Warren Buffett and Bill Gates agree; the Waltons (Wal-Mart) and the Koch brothers disagree and have more sway in government now and probably forever.

Anonymous said...

I agree with Marc Joffe: Our society needs to seriously consider the land value tax.

K-Man said...

[Commentary originally made in 2004, part II]

But that 32% would have to apply to everything, including all goods—including food—and services: "rent, telephones, utilities, medical care, legal and financial services, taxi rides, ..., tuition"—and so forth. Even states that tax services don't go this far, and Florida's attempts to tax such things as mechanics' labor charges busted flat. If you rent an apartment or have a big medical bill, are you going to want to pay a stiff tax on it? (Do you think that your medical insurance company would pay that tax for you? Har har.) Taxes on services are so easy to evade that they might have to be exempted. If services are exempted, said Bartlett, the necessary tax rate on goods is now 65%.

But wait. You want to exempt food and all medical care too. Now Bartlett says to add another 17% to the total. We're up to 82%.

Good luck enforcing tax levels that high. According to repeated studies, anything above 10% is asking for trouble in terms of evasion. That's why even California has kept its sales tax just below that threshold. And this was written before purchases on the Internet became common. The states have complained about state sales tax avoidance by people on the net.

My thought is that you could just picture the feds trying to force you to collect a national sales tax when you hold a yard sale or sell something through a classified ad. That step would be necessary to combat evasion.

Bartlett noted that some federal body would still have to collect the sales taxes if the IRS were to be abolished. Some states might not be willing to pay a huge unfunded mandate. And if you abolish the IRS, what will be done about unpaid income taxes from years past (my thought)? Will income tax evaders from the past get a free ride, and is that fair to those of us who did pay?

If Social Security is still funded through payroll taxes, as most of the "realistic" flat-tax proposals of the 1990s envisioned, you would still have a federal bureaucracy monitoring individuals' income, he notes.

If we rebate part of the first so many dollars in tax to be fair to low-income Americans, then everyone including children would have to be tracked—there's that bureaucracy again—so that everyone could get a check. After all, with this plan the government isn't tracking income, right? So the government won't know who is "needy", right? And Bartlett figured that the tax rate would have to be several percent higher to cover the rebates and the cost of distributing them. He hinted that many of those who want a national sales or consumption tax really want a stiff European-style value-added tax (VAT), which can be 20% or more but is hidden and can be raised without being obvious. Europeans have had high income taxes and high VATs for decades. They aren't better off for it, I don't think.

K-Man said...

[Commentary originally made in 2004, part III]

There's more. At about the same time as this article appeared, a caller to the Rush Limbaugh radio show who claimed to be with the IRS said that the agency had contingency plans if a sales tax replaced the income tax. You would have to save all receipts for everything you bought to be able to prove you paid the new national sales tax—especially if rebate checks are involved. You would have to save the receipts for everything for your kids as well. Audits would be a way of life. And the IRS, or whatever replaces it, would closely monitor businesses for compliance. Sounds like the same old same old.

I have to point out a bit of real naivete on the part of many of those who want a national sales or consumption tax: they assume that those who evade income taxes by working under the table for cash and the like would get hit when they purchase stuff with that cash. Trust me: the neighborhood drug dealer will find a way to get a new SUV without paying sales tax. Any tax can be evaded. And the percentages necessary to make a sales or consumption tax cover the bills would simply beg for evasion.

Another thought: everyone knows how the government works. Everyone, that is, except many of those who want a consumption tax. The most likely scenario is that the old income tax would be kept around for "just a few years" until the new sales tax is "established". When it's time to eliminate the old tax, suddenly the politicians will claim a lack of resources or whatever and it will stay right alongside the sales tax. And neither tax will ever go away.

And a final note: do you really want the government tracking your purchases to enforce a sales tax? Haven't the PATRIOT Act and other governmental follies since 11 September 2001 made you reconsider that? Imagine the monitoring that would be necessary for Internet purchases. And imagine what could happen when you buy that controversial book or get a porn magazine and the government monitors notice.

I may have misgivings about the current tax system, but I'll take it over a stiff national sales tax any day.

Here's a link to the article using

The whole thing is about 25 pages when printed, and Bruce Bartlett's piece runs approximately on pp. 4-9.

[End of commentary originally made in 2004]

Marty Nemko said...

Thanks, K-Man for the very useful comments.

Candidly, I gave it just the quickest read but my reactions. Unlike the Bartlett scenario:

1. There'd be no tracking of anyone's income for any reason. Progressivity would be obtained by exempting basic products, yes, including health care from taxation and by taxing luxury products and services at a higher rate.

2. Yes, services would be included in the consumption tax. You're right that there will be more cheating re services than with products, but en toto I believe there would be more honesty than under the current system.

3. One must consider not only the costs of the income tax bureaucracy but the incredible number of hours spent in tax preparation and minimization by taxpayers, accountants, lawyers, etc.

Anonymous said...

I have to respond to Rex's comments about health care. Lifestyle choices, such as drinking, drugs, and obesity, may indeed cause chronic health problems and high medical expense.

But not always - there are LOTS of people with genetically-based disorders who had no personal responsibility for the cost of their medical care. They maintain a good body weight, eat a good diet, don't smoke, don't do dangerous drugs, and don't drink to excess. Yet, they might still need more care than others for factors beyond their personal control.

Unless you are really supportive of "death panels", the approach you describe is inhumane and unacceptable.

And back to the tax issue - I'd rather see a sharply graduated income tax, rather than a consumption, which is more regressive. I'm fine with higher investment and estate taxes as well.

Good luck!

Ted said...

Again you've pocked at my imagination Marty... And this time it's helped, "Second Hand Work!" In fact, for most of us who've cached together a little pile. Of over-the-years wealth (I exclude the Paris Hilton's from this group)... That's what our investments represent .... Managed savings, or Second Hand Work. Any taxation on the returns is consequently double taxation ... Not the redistribution of bucks received for , "Not doing anything."

For most of us they represent both the incentive to forego consumption, and the essential maintenance of the purchasing power of that postponement of immediate gratification. Once again making the returns to investment the wages of second hand work :-)