Tax Reform for Dummies

A recent editorial in a major  newspaper put forth the idea of setting a target date of December 31, 2013 for the elimination of the current income tax code and replacing it with a more equitable structure.  Now the idea of setting such a date is a good one, but the author knows very well that expecting Congress to agree on a replacement in such short order is completely unrealistic.  There are too many varied interests to be represented and their views considered.  Due to the complex nature of our nation’s economy no system can be created within such a small window of action that most Americans would consider truly equitable.  But perhaps no system at all is precisely what we need.

It can be said that the cardinal rule of taxation is the broader the tax the smaller the burden on any individual taxpayer.  This was a primary motivation for the institution of the federal income tax early in the 20^th century.  At first the rate was uniform and applied only to the top one percent of the incomes in the US; but as the income tax began to be relied on for a greater and greater share of the government’s finances, in the absence of anything more equitable graduated rates and targeted exemptions were devised.  Now we have reached a juncture where a sizeable portion, if not a majority, of Americans feel that the current income tax code is unacceptably inequitable.  It seems nearly everyone has his own idea of what would be fairer, but those which would ease current burdens on the wealthy would place more of one on the poor, and those which attempt to make things easier for the poor wind up putting a heavier load on the wealthiest of Americans.

 With hundreds of millions of persons being taxed individually based on their incomes we have long passed the stage where there can be any hope of achieving equity in taxation through simplification of the income tax code; no matter which way you slice it some significant portion of those being taxed will feel they are being expected to shoulder more than their fair share of the burden. The idea of allowing large scale tax exemptions for investing surplus income into areas that would reliably encourage growth of the economy ended with the Reagan era tax reforms and no one has had the stomach to resume the practice since then. In order to achieve both simplicity and equity nowadays it will be necessary to abandon the taxation of individual incomes altogether and instead base our taxation on the broader base of the wealth of the nation as a single unit.

At the current time our federal government’s revenue from income tax amounts to just under ten percent of the gross domestic product. If we establish that as the single rate at which to tax the nation’s income everyone will share an equal proportionate burden on his income.  But if everyone were paying this amount out of his own pocket we would be back at the idea that the rich would be benefitting from a very low tax rate while most poor Americans would be unable to afford to pay such an amount.  The solution, then, is for no one to be required to pay anything out of his pocket to finance any of the government’s activities currently financed by income taxes.

In this day and age of computerized record keeping and regulated markets it is fairly easy to keep track of just how much income is derived from all the nation’s economic activity.  With this information our government can determine with great accuracy how much revenue it would have at its disposal if the tax rate for the entire nation were ten percent of the gross domestic product. Having this knowledge, all Congress need do is allocate the revenue to the various executive departments and allow them to write checks accordingly.  Considering that the vast majority of all financial transactions in this country are now electronic and do not involve any actual currency changing hands, this is not any great change in the way things are already done.  The main difference is that, instead of everyone having fewer dollars to spend after paying taxes, the dollars that that everyone has are reduced in value by a uniform amount.  In either case the government has effectively taxed everyone’s income by that rate of ten percent but because by simply writing the checks Congress is actually taxing the entire wealth of the nation by the rate of ten percent of only the GDP, the value of your money is not diminished by that same amount.  The net worth of all private assets in the US is approximately $55 trillion and the projected revenues for 2012 of federal income tax revenues is $1.4 trillion that works out to only a 2.5 percent tax on the entire economy as a whole. Since under this system you are not required to give any of your money to the government even poor people are unlikely to feel much of an adverse effect from such a small individual burden, especially since it is being applied universally to everyone.

As previously stated, the broader the base of a tax the smaller the burden on individual taxpayers, and there can be no broader base than the wealth of the nation as a whole unit.  Complete fairness and equity is built into this system as the richest American pays no more or less than the poorest; everyone pays an equal share, even he who has no income at all, since the tax is more against the value of what he owns instead of the amount of money he makes in a given year. It would be hard to imagine a simpler plan than having Congress set a percentage of the GDP to which they limit their spending; they would even retain the ability to borrow when necessary, so long as the cost of servicing that debt is incorporated within the spending limit.  Leveling the tax burden in this fashion would also limit the scope of debate in Congress from which groups' taxes need raised and which ones' lowered to whether or not to raise or lower them for all. It would eliminate numerous opportunities for the bitter, class-based, partisan rhetoric we have all become far too familiar with; that is a fringe benefit I believe most Americans would welcome with open arms.