Friday, January 27, 2012

Utopian tax policy

Every month, the government would provide each citizen with a check for, say, $250. Businesses would report their revenue from sales, from which they would deduct the cost of their inputs (including labor costs), paying a flat rate of, say, 25% on the difference. Individual workers would report their wages and benefits, paying in line with a graduated rate schedule beginning at 0% for very low-wage workers, and ending at 25% (the rate on businesses) for very high-wage workers. There would be no further deductions, exclusions, credits, etc.

There would also be selective taxes on negative externalities (e.g., pollution), subsidies for positive externalities (e.g., basic scientific research), and if necessary, paternalistic carrots and sticks (e.g., encouraging retirement savings, discouraging addictive drugs).

That's it. It would take a worker about 5 minutes, and a business about 15 minutes, to complete their respective tax returns each year. No Turbotax, no tax attorneys, just your basic calculator and a postcard.

I'm a gradualist, so I wouldn't shift to this regime overnight. To move in the right direction, however, we should begin to broaden the tax base (eliminate wasteful deductions, exclusions, credits, etc.), lower tax rates on saving and investment (cut personal income, corporate income, capital gains, dividend, and inheritance tax rates, among others), up the progressivity of consumption taxes (e.g., payroll taxes), implement Pigouvian (externality-correcting) taxes/subsidies, and reform entitlements--substituting a lump-sum subsidy for Medicare, Medicaid, Social Security, etc. Doing a bit on each of these fronts would be a very good start, and would also be a good way to go about reigning in the long-run budget deficit (a la Bowles-Simpson).

My proposal (which is little different from the Bradford "X Tax") is rather uncontroversial in public finance circles. Note also that under the ideal system, Mitt Romney would (as far as I can tell) have an effective (statutory) tax rate near 0%. So, there's that.

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