The
United States has one of the most complex tax systems in the world. It takes
hours and hours to fill out the return for most people. Especially if you want
to claim any deductions or if you have more than one source of income, you got
to file your state taxes separately. Maybe even local taxes depending on where
you live. It's a nightmare.
There's
no doubt we can do a lot to simplify our tax system. But we could also do a lot
of other things to change it too. And the fact is we haven't really made a major
change in out tax system for about a hundred years. It's been a hundred years
since we got a constitutional amendment just so we can have an income tax. Now
maybe it's time to consider how we would refit our tax system for the 21st
century.
One
thing we could do is get rid of the corporate income tax. That's right, the tax
on corporate profits. Why? It's a terrible tax. Economists to this day don't
know who pays it. Is it the people who own shares in companies? Is it employees
of companies? Is it consumers who buy the products from companies? We don't
know. It could be a mix of all of them. And that means that we really don't know
who's bearing the burden.
Another
problem with the corporate income tax is it's extremely volatile. Unlike your
household where you pay taxes no matter what. Whether you spent all your income
or not. When a company spends all its income, it has no profits and it doesn't
pay any corporate income tax. So that means the corporate income tax revenue is
really volatile.
In
years when the economy is doing great we collect a lot of corporate income tax
revenue. When it's doing badly we collect much less. And that means it's much
harder for the government to plan. It's much harder for us to make sure that we
get a steady stream of revenue from year to year and we don't have to cut back
on spending during a down turn.
So
what could we do to replace it? Well one idea would be to change our income tax
into a sort of hybrid income and wealth tax. So we would still be taxing some of
the owners of capital in this country and not just people who own labor and
supply that into the work force. How would it work? Well, we would have a
sliding scale where, depending on your wealth, you would pay different rates of
income tax. If you didn't have any income coming off your wealth then you
wouldn't pay any tax. But the more wealth you had the higher tax rate you'd be
liable to pay.
The
great thing about this is if you hold income constant, then you're always
facing the same marginal tax rate, that's tax rate on the next dollar of your
wealth. If you hold wealth constant it's always the same marginal tax rate on
your income. So that distortions on the behavior that we might have and where
we invest and how we work are minimized.
Now is
this too crazy an idea to be implemented in the 21st century? Some people might
even say it's unconstitutional. But it's at least worth thinking about it
because we've done so little to change the fundamentals of our tax system for a
century. All we've been doing is messing with these little details that just
add more lines to the tax form. Let’s do something major and clean it up for
the next century.
Daniel Altman
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