That time of year for alternative Tax proposals

2013 March 29
by Daniel Lakeland

The time for an annual alternative scheme for taxation has come. This time I'm not fooling around. Here are the goals in no particular order:

  1. Eliminate accounting overhead.
  2. Increase privacy.
  3. Provide for reduced taxation of the poor.
  4. Discourage consumption of resources.
  5. Encourage working and income.
  6. Prevent special interest distortion.

The proposal:

  • Eliminate the income tax, corporate income tax, medicare tax, and social security tax entirely.
  • Create a national sales tax to be collected by the federal government, set it to something like 20-25% so that it is approximately revenue neutral. Allow states to participate so that an additional state-dependent amount would be added, collected by the feds, and then distributed to the states, based on the location where the purchaser lived (including internet based sales). Create a law that says that all advertised prices must include the sales tax amount, and that if desired a secondary amount may be listed in smaller type which describes the amount of the tax. This provides for consistent and not misleading pricing information.
  • Have each household register via a simple 1 page form for the number of adults, children, and disabled/adult dependents in the household. For shared custody the children would be listed as either 1/2 custody or full custody, and could be listed on up to two households, cross referenced by SSN.
  • Each household so registered would receive either by direct deposit or by paper check each month an amount of money from the government equal to the taxes paid on a poverty level of income for that size household. Some government statisticians would generate that poverty level as they currently do, and make it scale with household size properly. In addition to this poverty level tax refund, we could all argue about whether this mechanism should be used for some guaranteed level of income (perhaps some fraction of the poverty level). I would argue that if the poverty level were defined properly as an absolute wealth level (ie. the level required to buy some minimal amount of food, housing, utilities, and other fundamentals) then it would make a lot of sense to eliminate a lot of existing welfare programs and simply give this poverty level amount to each household.
  • In addition to the national sales tax, create a wealth tax, defined based on multiples of GDP/capita/household. At about 10x GDP/capita/household (currently around $500000) the tax would kick in at 0% and ramp up linearly to 3% by 50x GDP/capita/household and then stay constant at 3% above that amount. This is in essence a tax on investment income at the long-term "risk free" rate. It means that if you want to maintain your wealth you must invest it wisely enough to make a reasonable return on average. In fact, it would make sense not to make these numbers fixed in stone, but rather have them indexed to some measure of inflation. So instead of 3% let's call it the rate of inflation as measured by the average of GDP deflator and CPI, plus 2% or something like that.
  • Wealth measurement would be based on Real Estate, other Real Property (boats, cars, whatever), items of unusual value (artwork, jewelry, etc), holdings in investment accounts (stocks, bonds, securities/contracts of various types). Each household would file estimated wealth at the end of the year. You would be exempt from filing if your estimated wealth were less than say 8x GDP/capita. Securities brokers, banks, and soforth would all file your current account values with the govt on the first trading day of each month as a way of verifying. Auditing would occur at random and would particularly focus on those known to have significant wealth, but would occasionally include everyone, for example say 3% chance for any given household in any given year, but say 10% chance for anyone previously filing with at least 8x GDP/capita, and 20% chance for anyone filing over 20x GDP/capita. Corporations would be required to pay dividends directly to registered securities firms.

That's IT. No one would need an IRA, a 401k or any other special kind of tax deferred or exempt savings account, because there would BE NO INCOME TAX. You'd just take your income, and either spend it (with sales tax collected) or save it (free and clear until you are well above the typical level of accumulated wealth).

The accounting overhead is all concentrated on companies, but they don't have to pay corporate income tax, and they're already collecting sales tax for the most part, so it's  nothing additional.

Savings is encouraged, the welfare of the poor is taken care of in a simple way, and a lot of bureaucratic nonsense is eliminated. I can't see any downside for anyone except the Turbo Tax people, and Senators and Congressmen who want to fiddle around with their usual special interest buying votes via tax breaks stuff. To make it palatable for them, we could allow the "tax refund" to include amounts for special purposes if you choose to file a special purpose "I want the govt teat" form, you know, like form TEAT7405.


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