Two weeks ago, I shared some video from a presentation to the New Economic School of Georgia (the country, not the state) as part of my “Primer on the Laffer Curve.”
Here’s that portion of that presentation that outlines the principles of sensible taxation.
Just in case you don’t want to watch me pontificate for nearly 14 minutes, here’s the slide from the presentation that most deserves attention since it captures the key principle of good tax policy.
Simply stated, the more you tax of something, the less you get of that thing.
By the way, I had an opportunity earlier this year to share some similar thoughts about the principles of sound tax policy with the United Nations’ High-Level Panel on Financial Accountability Transparency & Integrity.
Given my past interactions with fiscal people at the U.N., I’m not overflowing with optimism that the following observations with have an impact, but hope springs eternal.
The ideal fiscal environment is one that has a vibrant and productive economy that generates sufficient revenue with modest tax rates that do not needlessly penalize productive behavior. Public finance experts generally agree on the following features
- Low marginal tax rates. A tax operates by increasing the “price” of whatever is being taxed. This is most obvious in the case of some excise taxes –such as levies on tobacco –where governments explicitly seek to discourage certain behaviors. …but there should be a general consensus in favor of keeping tax rates reasonable on the behaviors –work, saving, investment, risk-taking, and entrepreneurship –that make an economy more prosperous.
- A “consumption-base.” Because of capital gains taxes, death taxes, wealth taxes, and double taxation of interest and dividends, many nations impose a disproportionately harsh tax burden on income that is saved and invested. This creates a bias against capital formation, which is problematical since every economic theory –including various forms of socialism –share the view that saving and investment are necessary for rising wages and higher living standards.
- Neutrality. Special preferences in a tax system distort the relative “prices” of how income is earned or how income is spent. Such special tax breaks encourage taxpayers to make economically inefficient choices simply to lower their tax liabilities. Moreover, loopholes, credits, deductions, exemptions, holidays, exclusions, and other preferences reduce tax receipts, thus creating pressure for higher marginal tax rates, which magnifies the adverse economic impact.
- Territoriality. This is the simple notion that governments should not tax activity outside their borders. If income is earned in Brazil, for instance, the Brazilian government should have the authority over how that income is taxed.The same should be true for all other nations.
By the way, “consumption-base” is simply the jargon used by public-finance economists when referring to a tax system that doesn’t impose double taxation (i.e., extra layers of tax on income that is saved and invested).
Here’s a flowchart I prepared showing the double taxation in the current system compared to what happens with a flat tax.
P.S. At the risk of understatement, it’s impossible to have a good tax system with a bloated public sector, which means it’s not easy to be optimistic about future fiscal policy in the United States.
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The tax bases of wealth, income, and consumption can be balanced in more productive and fair ways that distinguish and account for the cost of basic necessities verses excesses and extravagances. Taxing land (see Terry Dwyer above) or any asset at a different rate than other assets diminishes the free market by artificially rendering some assets less fungible and improperly valued. Money is ultimately the fluctuating measure of the relative value for all assets that are owned by people and protected by government enforcement. The government taxes people not assets.
My own calculations suggest that taxing wealth at 2%, consumption at 4%, and income at 8% (all with no tax expenditures) would create reasonable revenue for basic government operations.
The realities of human biology require some tax expenditures to adjust for children and retirement. The tax burden over our work life must encourage procreation and accumulation of perhaps $1,000,000 in family wealth to supplement retirement needs. Tax free accumulation of $500,000 per person over a lifetime is reasonable.
A more significant and novel approach is needed for wealth and income. Consider an elective tax table that uses wealth and income inversely so that anyone can choose to pay a high wealth tax rate for a lower income tax rate or choose to pay little or no wealth taxes and pay the highest income tax rates. The ability to manage such a scale has been made possible by vast cloud based databases and reasonably accurate and simplified methods of valuation for 99% of assets.
Reblogged this on Boudica BPI Weblog.
Dear Dan
As you know, all incomes are created as the rent of land, the wages of labour or the profits of capital. There are only three things you can tax in the end – land, labour or capital – and only one of them can’t run away, stop working or breeding, emigrate, rust out or wear out. The Laffer Curve was well known long before Arthur Laffer but it does not apply to land value taxes. There cannot be a supply side withdrawal. God has done His work, it is our right to be allowed to use our talents free of taxation to make good use of Nature. As Adam Smith observed, many countries have survived without taxes and relied on land revenues – look at the Oil States. As John Stuart Mill observed, a land value tax is simply a State re-appropriation of rent as sovereign.
One of America’s fiscal disasters is the property tax on land plus buildings. It creates a perverse incentive to sterilize sites at a low combined value by leaving derelict buildings on the sites instead of recycling the sites and buildings to higher and better uses. You can see the results all the way from Chicago to New York City to Boston as factory after abandoned factory passes your gaze from the train. If land values only were taxed, landholders would have no incentive to indulge in such economically destructive practices.
‘Fraid there is no way to pass a flat tax, UNLESS you include a UBI to make it progressive (liberals will be against a flat tax, without this “liberal” provision).
The benefit of the UBI and flat tax combination is that the collection and distribution functions can be separated.
Businesses would withhold the flat tax starting from $1. They could then file annual tax forms for their employees. NO EMPLOYEE TAX FILING, unless you have business income.
Distribution would be similar to Social Security, a lot more volume, but far simpler, since all adults would get the same, as would kids.
Business taxes would also be simplified. A flat tax on domestic sales, with deductions on expenses (capital assets expensed), on which the flat tax has already been paid. (Salaries, purchases from domestic companies)
We currently spend 7.8 billion man-hours on tax compliance. That could be cut to less than 2 billion, releasing those workers to provide an extra 2% national growth.
The only sensible taxation is the Fair Tax as described by Neal Boortz. Remember, only the end consumer pays taxes. No business pays a tax. They pass all taxes (costs) on to their customers.
The graphic is wrong. I am taxed on every dollar I spend as well.