Tax Policy
Goals:
- Recognize and Include Hidden Taxes
- Simplification of Tax Code
- Reduction of Regulatory and Tax Compliance Costs
- Reduce Government Expenditure
Recognizing Hidden Taxes
In his book The Law Frederic Bastiat explained that many economic errors are due to focusing on the seen and ignoring the unseen. One unseen aspect of taxes are the ones already embedded in prices. End-user customers ultimately end up paying all the taxes of all the businesses and employees that contributed to production of whatever particular good or service they are purchasing. In a highly interconnected and specialized economy, that's a lot of taxpayers. These taxes are included as a cost in the final sale price of a good before any additional sales or use taxes are applied. A Harvard study by Dale Jorgenson estimated that an average 22% of the price of all retail purchases go to the IRS. The long list of “other” taxes (property tax, fuel tax, licensing fees, sales tax, phone/internet/utility taxes, inventory tax, registration fees, tariffs, fines, currency inflation, medicare tax, payroll tax, incorporation fees, social security tax, and so on) are often left out of tax discussions but constitute a significant portion of every retail sale price. When nearly every activity is taxed in some way, it begins to get difficult to separate where the actual costs of production end and taxes begin. Considering that 10-40% of individual income is skimmed right off the top, it's easy to see that most of our money goes to some government entity in the form of taxes. Obviously, there are no official data on what percentage of a sale price ends up in the public purse. Recognizing and including unseen taxes is necessary for any meaningful discussions of tax reform. Separating various taxes only makes it easier for politicians to shift them around and slip in new ones when nobody is looking. Discussing and calculating taxes in terms of total cost will also allow taxpayers to see how much they are actually paying for government services. I believe most would be shocked, especially since the majority of the burden ends up on the lower and middle income people that politicians claim to care so much about.
Tax Simplification
The benefits of tax simplification to the economy and majority of taxpayers is undisputed, except by the few who profit greatly from the current system. These few also happen to be the ones in charge. Simplifying the ever increasingly complex tax code should be the primary goal of any tax reform. In the current political climate this must also include an overhaul of campaign finance, foreign policy, government spending, and just about everything else. Since the beneficiaries of corporate tax favors have extra money from not paying taxes, they can afford to hire teams of the best lawyers and lobbyists to preserve their favored status. Government bureaucracies, seeking to preserve their budgets and jobs, will not go down without a fight either. There are no real incentives for tax reform for either policymakers or their wealthy and well-connected buddies in the quasi-private sector. I think overcoming this hurdle may be impossible without some sort of major crisis, such as a collapse of the current system and a serious rethinking about how societies do government in the modern era. By maintaining the status-quo collapse is all but assured, it's only a matter of when. Until then, we can only talk about what may come next. Some proposals for tax reform include:
Fair Tax – The fair tax is a reform proposal to eliminate tax on production and shift it to consumption. A federal sales tax of 20-25% would be added to the sale price of all new goods and services. Although the Fair Tax would be simpler and be an improvement to the current code, it includes a monthly “prebate” to consumers for the purchase of necessary goods such as food and housing. This doesn't sound simple to me and provides incentive for fraud. It also requires taxpayers to continue filing returns. Many transactions will move into the black market as well to avoid paying the sales tax. Some also argue that lower-income people will end up paying a larger portion of their incomes in consumption taxes than the wealthy, thereby making it a regressive tax.
Flat Tax – The Flat Tax would set the income tax for all taxpayers at a low fixed rate while eliminating all deductions, penalties, and credits. The rate must be less than the cost of tax avoidance to discourage rent-seeking and encourage businesses to produce and sell in the US. This would greatly reduce or eliminate the enormous costs associated with both filing and collecting taxes. To alleviate concerns about unfairness, a progressive element can be added to this plan by having a reduced rate for those below a certain income and/or asset level. For example, a fixed rate of 10% for all income above say $30k/year for individuals with a reduced rate of 7% for $20-30K, 4% for $10-20K, and 1% on anything below that. All workers will contribute and have a stake in the system since we all use government services and goods. The increments are also small enough to prevent discouraging workers from attaining the next income bracket. Although not perfect, a Flat Tax or some variant seems to be the most effective method to simplify the tax code and maintain tax revenue.
Value Added Tax (VAT) – Popular in Europe (along with every other kind of tax), the VAT is similar to a sales tax and collected by producers at each stage of production. This acts as a corporate tax but is paid by the end user making it a consumption tax. This reduces costs of tax collection, however may exacerbate avoidance and the hidden tax problem. As Europeans have found out, it also makes it very easy for politicians to pile on additional taxes and increase rates without anybody noticing until after the fact. All of these proposals have pros and cons, however they all have one aspect in common: they are simpler and better than what we have now.
Compliance Cost Reduction
Productive work can be defined as any activity that creates economic value by saving other people time, effort and/or resources - whether it's a paid job or not. At every business where I've ever worked there has been at least one employee whose job entailed nothing but regulatory and tax compliance. Excluding all the other regulatory burdens, businesses spend about $17 billion each year just for tax filing costs, individuals spend another $20 billion for a total of $37 billion before any taxes are collected. It can be argued that $37 billion provides jobs, but these jobs are primarily a deadweight loss of value for both producers and consumers. Another way to put it is, the policies that create these jobs produce negative value in that they make people's lives more difficult by requiring time and resources be spent on non-productive work.
Compliance costs are usually discussed in monetary terms. One unseen aspect that's often ignored are the social costs of millions of people working in negative value producing jobs. Psychologists are baffled by the high prevalence of mental disorders in advanced economies, particularly depression. They should be since they often confuse depression symptoms with causes. Aristotle wrote a lot about the sources happiness and pleasure. Briefly, he said happiness is a semi-permanent state (linked to work); while pleasure is discreet and limited to pleasurable activities, and does not contribute to happiness. My economic interpretation is that happiness comes from production of value, while pleasure derives from consumption, the opposite of what our society seems to practice. The government policy focus on demand/consumption-side economics codifies this false belief. Many of us have been trained from birth that work sucks and happiness comes from acquiring stuff. People who derive happiness from productive work (and know it) are often labeled and vilified as “workaholics” or “greedy.” Those who don't are prescribed anti-depression medication and told to suck it up. Indeed, unemployment (lack of value production) is the leading “cause” of depression, followed closely by negative value jobs such as regulatory compliance, military service-members, tax accountants, and the many workers that chose public-service careers that actually do little or nothing to serve the public. Personally, I'd rather paint a wall with my own brain matter than spend another minute in a non-value producing corporate or government job. Social costs are the subject of another paper, but they can't be separated from monetary costs of compliance and valueless work. A large portion of the workforce now work in some Keynesian hole-digging type job that entails a lot of hard work without producing anything worthwhile.
Reduce Government Expenditures
It goes without saying that by reducing how much the government spends, the amount of revenue they need will also be reduced. How and where cuts can be made are also the subject of another paper. If recent half-a**ed efforts to reduce expenditures are any indication, this is a futile discussion anyway.
Conclusion
Developing and implementing an efficient tax code may be impossible under current conditions. There are too many well-funded special-interest groups benefiting from the tax code as it is, and they will use their considerable resources to preserve a system that grants them favors and protections. Not only that, but the art of marketing has been broken down into a science and organizations with political goals can and do spin their privately beneficial aspirations as “serving the public good.” For example, large corporations that benefit greatly from regulation often publicly oppose regulation. Because opposition (to anything) is a sure bet, those who benefit from regulation can manipulate their opposition to do all the dirty work, by tricking feeble-minded activists into demanding that government regulate corporations. Of course, these companies' lobbyists will write the regs because they are the industry experts that policy makers rely upon for advice. The current campaign against the sharing economy, Uber in particular, is another example. I can't help but laugh every time I see an article on Salon or Motherjones blasting the unfettered capitalism of the sharing economy that is destroying the livelihoods' of cab drivers. Apparently, voluntary socialism achieved through capitalism just isn't as good as government-imposed socialism. Do these people not know they are being used as dirty work pawns by wealthy rent-seeking quasi-capitalists they hate so much, i.e. Yellow Cab? But I digress, the moral of the story is that I don't see much happening in the realm of meaningful tax or government spending reform any time soon.
Although I would advocate reforms that eliminate corporate taxes altogether by only taxing individuals, I am not aware of any specific policy that can fix the mess that's already been created. Any specific policy would require overhauls in another area to even have a chance of being effective, hence it would not be a specific policy. The people with the power to reform the system also happen to be the ones that benefit most from current arrangements. At the expense of sounding defeatist, I'm not holding out much hope for a Volcker-esque public official with the political will or clout to implement economic tough-love policies. Any such official would likely meet fierce opposition from the very people who would stand to benefit most from reform, anyway. Since manageable crises are not allowed to go to waste, and typically are used to increase the scope of government, a crisis would probably have to be devastating to the point of collapse to force any real change. Economic crises, like forest fires, clear out old growth to make way for new growth. But, there is also a lot destruction in the process, which is not necessarily desirable. Tax reform in that situation would probably be the last thing on anybody's mind. Not only is there no easy answer, there are few incentives for those in power to kill their golden geese.
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