Taxation in America – The Ideal Paradigm

This post presents the theoretically correct approach to taxation in America.
It is vital to understand the ideal – even if it has no chance of becoming law. 
Taxation in America – The Ideal Paradigm
By: George Noga – July 9, 2017
       Economists often begin by defining the ideal. In that spirit, we present the ultimate plan of federal taxation. Our plan is transparent, fair, simple, pro-growth and neutral with no corporate welfare or social policy. Compliance (now $600 billion per year) is cheap, quick and easy; evasion is nigh impossible. It abolishes the IRS and the need to provide government personal financial data. It taxes the underground economy (an enormous revenue enhancer), broadens the tax base and has no exemptions or mandates. It taxes consumption and not income, savings, investment or wealth.

      The ideal tax is a tax on consumption collected from consumers at the point of sale. All other federal taxes are abolished. Individual and corporate income taxes, payroll taxes, capital gains taxes and death taxes are abolished. Every American would know each time a purchase was made that he/she was paying a tax and the amount of the tax. If government raised taxes, Americans would be painfully aware every time they bought something. The true cost of government would be manifestly transparent.

       Everyone, even the poorest, would pay the tax. However, government could make the tax burden fair to all by any one of several means such as tax rebates for the first tranche of annual consumption or by a form of UBI (universal basic income). It is the proper role of government to decide which citizens are subject to the tax and the best method to rebate money to those who are fully or partially exempt from the tax.

      The national consumption tax (“NCT”) would be progressive, as those who spend more would pay proportionately more tax. Lower income Americans would benefit enormously because an NCT would be incredibly pro growth. Without a corporate tax, jobs and investment would flood into America from abroad. Without taxes on income, savings, investment or wealth, capital would surge into new investments creating new jobs; productivity would go on steroids. Note: The NCT could be in the form of a VAT, provided the tax was collected from consumers and not embedded in products.

      Economists of all stripes agree on much, if not all, of this. There is widespread consensus to abolish corporate and business taxes as nearly every dollar of such taxes comes from higher prices paid by consumers. Since most consumers are not wealthy, corporate taxes are highly regressive, harming the poorest among us. Payroll taxes are regressive as they are imposed only on the first tranche of income. The 50% paid by employers is entirely regressive as it really is the workers’ money. All in all, the new NCT would be less regressive than all of the taxes that are abolished.

        America can enact a simple, fair tax regimen that is the envy of the world. We can create a veritable cornucopia based on sustained economic growth for all Americans. We could generate enough growth to defuse the crisis of spending, debt and deficits, buttress Social Security and Medicare and fund a robust national defense.

    Unsurprisingly, the main obstacle is the Sturm und Drang between politics and economics. Economists of all persuasions broadly agree on a plan such as presented herein. Politicians however, prefer things complex and opaque; they prefer class warfare and demagoguing about how to divide the pie rather than growing the pie. They prefer to milk the system for political contributions. Saddest of all, they prefer to see their political enemies fail far more than they wish to see America succeed.

We return to Taxation in America in a week or two, following other posts.