Targeted Persuasion - Taxes

A different approach for different minds

As I elaborated on in the first post in this occasional series, persuasion requires meeting people where they are in a language (style) they are receptive to. Here is my latest attempt at this on the topic of taxation.

In this post I will attempt to present arguments in favor of a radically different framework and procedure of taxation. Specifically, I am advocating a full replacement of our current federal tax code (from income to estate, from corporate to tariffs, and everything in between) with a consumption-based tax (national sales, VAT, or related). The basic message is:

Stop taxing income and capital and start taxing consumption in a uniform and exceptionless manner.¹

In one case I will be writing to convince conservatives and in the other progressives. As always:

****DON’T READ THE MESSAGE NOT MEANT FOR YOU****

Conservatives Only

Government is explicitly expensive. This is true of the government we have, which many believe is too much government, but it is also true of the (smaller) government we would desire. In all cases it must be funded, and ultimately this means taxation. As with all things involving the government, the devil is in the details—how and what we tax is as important as the amount we tax.

The best tax policy is simple, neutral, and broad. Most importantly: Don’t tax success and prudence.

Simple means a minimal cost of compliance while being less intrusive into our lives. In other words, paying your taxes shouldn’t be so taxing. Time and money spent to calculate tax liability is a deadweight loss. But this regrettable loss isn’t just the direct time and money spent in the process. For Americans, privacy has always been a priority. A complex and cumbersome process requires taxpayers to yield precious details about their lives to a vast, unchecked bureaucracy that need not rightfully know even a fraction of what it forces us to disclose.

Neutral means minimal economic distortion. Bad tax policy has the very undesirable effect of taxing (reducing) economic growth. This means a world that is less beneficial for all including ironically less beneficial for the government itself as a smaller economy cannot fund a large government. This means national debt is higher than it has to be. More importantly it means all of us are less wealthy than we should be—the least off among us the most harmed.

Broad means minimizing unfairness so that everyone contributes. The weight of government hangs heavy and unevenly throughout our society. Among so many ways—regulatory impact, discriminatory favoritism, bureaucratic ineptitude—the ramifications of our current tax regime mean many pay nothing while others pay tremendously. The top 1% earn about 26% of income but pay about 46% of all federal income taxes while the bottom 50% earn about 10% of income and pay only about 2% of income taxes. Obviously this creates very bad incentive effects as well as natural adversaries among the citizenry.

The majority of our tax code is focused on taxing production through income, capital gain, and other wealth-creation taxation. Taxing income punishes work directly and savings doubly. Adding in taxation of valuation growth makes the tax impact triple, hidden, and destructive. And the discouragement for work has the biggest negative impact at the lowest levels—the thresholds between no tax and some tax. The solution is a tax policy centered on progressively taxing consumption.

We should not be taxed when we create resources. Earning income or realizing capital growth are both recognitions within the free market that we have created value for society. Rather than taxing this production, we should tax the use of those resources the productive activity is generating. Fully replacing our current tax kludge of personal income, corporate activity, capital gains, inheritance, and others with a uniform, consumption-based tax policy would simplify, neutralize, and broaden the tax impact.

Beyond these benefits, which themselves would be enormous, it would additionally allow us to have a straightforward and open debate about how much we should be taxing ourselves to fund government. It would show us all how big the burden truly is giving us all strong reason to limit its extent.

Progressives Only

Paying a tax to fund a well-run and appropriate government is representative of the privileges one enjoys in a good and free society. Good government requires good tax policy.

In designing this policy we should seek to optimize a balancing of several goals: fairness, completeness, and economic efficiency. Most importantly: Tax resource use not resource creation.

For a tax system to be fair, it must not play favorites among people, classes, or activities. It must be transparent and simple. Today we do not enjoy such a system. Instead we have layers of opaque complexity that create favorites both intentionally and unintentionally. Every hoop we have to jump through to complete the process is both an additional cost the taxpayer bears and another loophole some other taxpayer can use to dodge payment.

Fairness and simplicity result in compliance—leading to the attribute of completeness. Those who enjoy the protections of our government but who can evade their share of its expense burden us all while degrading our social integrity. As related to the next attribute, economic efficiency, this is most damaging when it is the wealthy and powerful who are able to escape their fair share. To be a complete tax system, it must appropriately apply to all.

Economic efficiency is essential for not just the obvious benefits of growth of wealth and wellbeing. It is also essential for the hidden benefit of environmental soundness. Efficiency doesn’t simply mean low cost of compliance and neutral impact to the fruits of economic progress—capital and labor. It also means unhampering those who create resources while making sure the burden a tax must require falls upon resource destruction and use.

The current tax regime is captured by those who know how to play the system. In the least they use it to minimize its effect on themselves and their interests. In the worst they use it to benefit themselves. All the while it is left to fall heavily on those who are outside of this position of control and favoritism.

A consumption-based tax has all the virtues described above greatly avoiding the pitfalls mentioned as well. If applied uniformly, it is inescapable for the wealthy short of elaborate fraud. And it can be as progressive as desired through explicit rebates on the level of consumption necessary to meet basic needs. In this manner a young, financially-struggling family or an elderly couple of modest means would be able to satisfy their needs without the additional burden taxes impose.

For the rest of us, our tax burden would be commensurate with our use of resources. Gone would be the days of the wealthy enjoying tax-advantaged arrangements that effectively subsidize their hobbies and incentivize them to spend (oftentimes frivolously) rather than save and earn. No longer would corporations play games with accounting, shell companies, and off-shore transactions just to avoid the spirit while technically obeying the letter of the tax law. The financially downtrodden could seek and received the rewards of work without the punishment of taxes that leave them worse off for having been employed.

We as taxpayers deserve a system that is fair for all participants, representatively complete, and economically efficient for our wellbeing. Undue complexity is a tool of the powerful wielded at the expense of the oppressed. When combined with a structure that encourages resource use relative to resource creation, the result is a world much worse than what can and should be. By taxing consumption rather than production and doing so simply, fairly, and progressively, we move forward in great leaps toward a better world.

1. Yes, technically I do allow for a tax rebate that would effectively exclude some consumption from the tax. However, this is an indirect effect that only allows some consumers to avoid the tax but still applies the tax to the entirety of consumption.