This begins our series about taxation in America; it coincides with the debate over tax reform and Trump’s tax proposals. Our tax series consists of several parts that will run during the summer; some parts will run consecutively and some intermittently. We begin by presenting ten wholly objective and nonpolitical principles.
- Taxes should be simple and transparent. Citizens should demand transparency and simplicity; however, it is in the interest of government to make taxes complex and opaque. A sales tax collected from consumers at the point of sale meets these criteria as people know they are paying a tax and the amount. Conversely, a VAT, embedded in the cost of products, is opaque; consumers don’t always know they are paying a tax nor the amount. Business taxes, which are passed along to consumers as higher prices, are totally opaque. Government always goes to great lengths to maximize opacity.
- Only living, breathing humans pay taxes. Businesses and corporations do not pay taxes; they may remit taxes, but it is not their money. The burden of all business taxes falls on owners, employees and (95% of the time) on customers as higher prices. Business taxes are a myth propagated by government to beguile voters into believing they are not paying tax. The 50% of payroll taxes “paid” by employers is really borne by the employee – not the employer – and is simply government maskirovka.
- Taxes should not impede growth. The goal of taxation should be to maximize economic growth. Politicians can and should debate how to carve up the pie but never should do anything to shrink the pie as this harms all Americans. Taxes on capital (such as capital gains) are harmful to economic growth and result in locked-up capital, misallocation of resources, under-investment and loss of productivity.
- Taxes must be stable. Once enacted, a tax regimen should be permanent and rarely amended. Politicians can’t resist using the tax code for class warfare and political fundraising. Individuals and businesses need long-term tax stability to plan their lives and investments. Uncertainty is a mortal enemy of investment and productivity.
- Taxes should be neutral. Taxes should impose identical burdens on all taxpayers regardless of the nature of their businesses. Under the current tax code, businesses with substantial fixed assets are taxed much differently than service businesses.
- Know Hauser’s Law. Tax revenue as a percentage of GDP is constant regardless of the top marginal tax rate. From 1945 to 1963 when tax rates were 90%, tax revenue was 15%-18% of GDP. In the late 1980s when the top rate was 28%, tax revenue was 18% of GDP. Tax revenues vary according to economic conditions but not tax rates. Hauser’s Law works because taxpayers modify their behavior based on tax rates.
- Taxation is not for corporate welfare. Simple, transparent, neutral and low corporate taxes would eliminate most of the rationale for corporate welfare. Businesses never should be rewarded for lobbying activity more than for growing their businesses.
- Governments should compete on taxes. Nations and states should compete on rates. People always win with competition. Competition from much lower tax rates abroad has created tax inversions. Ultimately, this will be solved by lowering US tax rates.
- Taxation is not for social policy. Taxes are for raising revenue in the simplest, most efficient, transparent and economic friendly manner possible; they never should be an instrument for social policy. To the extent government has legitimate social goals, they should be addressed directly and not via the tax code. The worst abuse of this principle is the death tax, which is not about revenue but about class warfare and politics.
- Understand the Laffer Curve. Tax revenue maxes out at 30%-35% for individuals and 20%-25% for corporations; anything higher actually produces less total revenue.
Keep these ten principles in mind throughout our series on taxation in America and as Congress debates tax reform this summer. The closer the final outcome conforms to these principles, the better for every American.
Don’t miss our next posting on Independence Day (July 4th); it is a real keeper!