One single, simple tax
By Bruce Walker
Henry George, the Nineteenth Century advocate of a single tax on land, had an excellent understanding of problems of myriad tax systems, but Henry George also was influence by Marxist thinking about value which as material and not intellectual (in his case land and not labor). His passion, persistence, and eloquence in advocating a single tax on land has intrigued policy junkies ever since. The calls today for tax reform come for several different reasons.
Tax reduction is based upon the simple arithmetic of exploding revenues and decreasing percentages of national wealth available for private choices. Tied into arguments for tax relief is the almost tautological analysis of the Laffler Curve: Tax revenues are maximized at some rate between zero percent and one hundred percent, and without regular rousting by taxpayers, tax rates tend to slide away from the optimum revenue point towards increasingly higher rates.
The argument for tax reduction is also based upon a twist on Engel's Law, which postulates that the rich tend to invest a higher percentage of their income than the poor. Yes, those who have earned more will invest a higher percentage of their income than those who earn less. Those high-income producers also have the best handle on increasing the production of wealth in which all society shares.
Tax simplification reduces the burdens of tax compliance, reduces the silly decisions that tax breaks produce, and reduces the additional risk added to investments of money, thought, and time when the rules of taxation are needlessly complex and constantly changing. Tax simplification is part of a greater argument for simplification of law and regulation, an argument are based upon the premise that predictability increases compliance, respect, efficiency, and a perceived common investment by many members of society.
Tax fairness is an idea that leads to different policies based upon the conflicting visions of how wealth is produced. Under Marxist doctrines, success in a market economy is the result - intended or not - of exploitation of those without capital. Under libertarian principles, exploitation is impossible in a market free from coercion and with some mechanism for validating market information (with the best mechanism being the market itself over time). Fairness in a universe apparently filled will nothing but unfairness, produces as many theories of fair taxes as theories of fair societies. This process - what Dr. Sowell calls "The Search for Cosmic Justice" transcends generation, gender, and geographical boundaries.
Taxation without representation is another argument for tax reform. This argument involves much more than the clarion calls of our Founding Fathers. Tariffs are a tax imposed by a government against its subjects and people in foreign lands. Federal taxation and much state taxation is based upon regulatory interpretation and judicial decisions, both of which have the most tenuous and ephemeral connection to actual consent of the taxed.
Taxability is another component of tax policy which has always existed, but which tends to become more important as technology and information grow. Most wealth today is information. How, precisely, does government tax information? Which government has the right to tax information? As income becomes electronic, how is that taxed? And how are those increasingly important parts of what most of us would consider "the market" taxed?
Other values also elude taxation. People make huge investments in physical attractiveness and health: Are the returns on those investments taxed? Beauty, health, and life itself are more fundamental values than monetary taxation, and yet as medicine and biology grow more powerful, these may become over time greater parts of any values individuals can acquire. Taxability is largely based upon symbols and components that are increasingly irrelevant to modern life: wages, dividends, real estate, commodities, sales.
Is there a way to fold these different aspects of tax policy and tax reform into a single, simple tax? Yes, if we are willing to accept improvement rather than insist upon perfection. Many of the components of this single tax are straightforward: Income, for all its shortcomings, is the most reasonable type of wealth to tax - if a single tax is the desired outcome. Proportional taxes do not exactly meet the Marxist notion of fairness (our progressive income tax system does), but proportional taxes are what most people seem to believe that we have, and proportional taxes have the marked advantages of crediting no disincentives to creating additional wealth. Proportional tax rates should be adequate to pay the bills, which includes all obligations of the federal government.
The benefits of a single federal flat income tax rate replacing other federal revenue sources are much discussed, but a single, simple tax requires more. It should be extended to cover all expenses of all levels of government, including quasi-governmental assessments by public non-governmental agencies. States should be given the option of repealing all state taxes and receiving a percentage of the overall tax raised by the federal government from that tax, or maintaining their existing tax systems and receiving none of this revenue. The practical political pressure to repeal all state taxes would be irresistible, and those few states that did not quickly do so would face an immediate flight of capital and labor.
The true tax burden of federal, state, and local governments exceed forty
percent, and a flat federal tax to pay for the costs of all government
would produce a "sticker shock" on families dependent on regular
wages and salaries. This apparent loss would be quickly mitigated by a
dramatic reduction in prices for goods and services and a corresponding
increase in income, particularly for the self-employed or those working
for smaller and more flexible businesses.
Some low-income families could face temporary distress - in spite of the overall benefits increased income and lower prices - because of a tax withholding bite much bigger than before. One way to approach this might be to sell off substantial amounts of the federal land holdings in western states, with the possessors the likely purchasers and the land itself the collateral. This one time influx of revenue could allow a reduction in rates for the first $25,000 of family income for the first year of implementation.
As the true cost of federal operations became clear, and as the proportion of all incomes going to support that became connected in public consciousness, the flat tax rate necessary to support government would drop steadily because support for obviously wasteful or inefficient programs would confront not just the nebulous "cost of government" but could (and should) be explicitly listed each year in the income tax return that each taxpayer would file. All taxpayers, in short, would be given the equivalent of an itemized "bill" from the federal government listing the exact amount the taxpayer was providing to different bureaus, departments, agencies etc. Those states that opted into making the federal government their sole collecting agency (soon virtually every state) would likewise present a bill.
There is nothing like reducing down to the penny how much a consumer is paying for a list of services to make the consumer a picky buyer. One logical evolution of this would be allow taxpayers to indicate in a standardized way on their tax returns whether or not they felt that certain items were good or bad purchasing decisions by their elected representatives. This response should also solicit an opinion on what the standard tax rate should be (and what "hard decisions" should be made to make the income and expenses equal. When the results of this survey was made public, legislators would view pork as less delicious.
The cumulative effect would be to combine an explosion of entrepreneurial energy in the private sector with the liberation of many stagnant assets in the public sector. Most pleasant in this system of a single, simple tax with an itemized "bill" for services purchased by the agents of the citizen-taxpayer would be its self-correcting nature. Not all government services are wasteful and not all expenditures are unnecessary.
Few thoughtful people in 1942 begrudged heavy taxes and accumulated government debt connected with the building of Liberty Ships, P-51 Mustangs, Carrier Task Forces, and Jeeps. People much prefer spending dollars than the blood of their husbands, sons, and fathers and much prefer freedom to slavery.
President Eisenhower's commitment to building an interstate highway system was a good investment in economic, social, and military terms. Ike sold that package to the nation, and people understood that it would cost them tax dollars.
Childhood vaccination, public schools, parks for recreation and conservation, libraries, clean water supplies, and mass transportation systems are examples of government expenditures that taxpayers will support with their dollars if they work and if they are limited in scope.
The reason why governments routinely budget badly is that no real information flows back and forth between taxpayers and policy-makers, and the scant information that exists comes from those very people whose status and income depend upon success - how many factory managers did not meet Stalin's Five Year Plan goals? Taxpayers need two precise data each year: (1) How much am I actually paying to support government? (2) What am I getting for my payment? When this information flows back to government, then government will resemble much more a market and government efficiency will increase geometrically.
So who would be hurt? Those professionals whose income and wealth depend upon the complexities and variables of different tax systems, and those downsized government managers. Although tormented taxpayers might harbor a malicious delight in impoverishing these old foes, that sentiment is counter-productive and self-destructive. Those who believe that liberty promotes the general welfare, after all, correctly see that markets are not "zero sum" processes with losers equally balancing winners. And only a fool would undervalue the skill and solidarity of these defenders of our current system.
Many of these professionals could naturally migrate skills to the new and better economy and so might support reform for selfish or public-spirited reasons. Accounting, for example, is at its core a system for accurately measuring economic activity that is a valid purpose. Tax lawyers also could spend some little time explaining and reassuring corporate clients about the changes in tax law. And, of course, residual tax liabilities and determinations would linger for years.
Still, in this single instance, it might be valuable to reassure middle-aged professionals who have devoted their working life to mastering the intricacies of tax law by providing federal assistance in establishing new businesses. Call it a federal bribe, if you must, but the effect is still the same: Minimizing the political opposition to tax simplification, and so insuring its success. In fact, these tax professionals - those often most cognizant of the opportunities lost because of tax problems - might well be the leaders of a new generation of economic pioneers.
One tax, one very simple tax. One tax bill, one tax bill with a customer comment card attached.
Those howling monkeys, who rage at human happiness and individual freedom would, of course, fight this with every rock and stick they would grab. But this is one reform - perhaps "the" reform - that would resolve forever the dangers of the welfare state, the socialist mind set, and the smoldering battles of class, race, and gender. Pass this one bill and perhaps all legislation after that will be just commentary.
Bruce Walker is a frequent contributor to The Pragmatist and The Common Conservative.
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