Replace Income Tax with Sales Tax?

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?