OPINION: Taxation is Inevitable

by Mary Swim

A recent Liberalists editorial suggested the not very original thought that “Taxation is Theft”.  It is to be hoped that the Liberalists will be a party of solutions rather than slogans, and while it’s certainly entertaining to shout, “Taxation is Theft”, it’s not much of a way to design a serious political movement.  In addition, it doesn’t do much good to make criticisms without providing alternatives.

The fact is that government is a necessary evil, at least until we all turn into angels.  Even then, we’ll likely still need some level of government services and a way to fund them.  Perhaps those angelic folks will voluntarily pay just the right amount to do what’s needed, but the rest of us probably need some coercion.

With this in mind, we need to make the funding method as non-intrusive and reasonable as possible. The one useful thing about the phrase “taxation is theft” is that it does remind us that taxation means taking money from people essentially at gunpoint, if it comes to that, so we should remember to use that money wisely and frugally.

In some ways, government is just people pooling their resources to do together what they can’t do individually, something like an overgrown homeowner’s association.  As such, when tax revenues are used to pay for security and infrastructure and basic services and other things used in common like roads and parks, and even for a small safety net, then their use for the common good makes sense.

Taxation generally shouldn’t be used as a method of social engineering or wealth redistribution, beyond a small safety net for the poor. And taxes definitely shouldn’t be used for corporate welfare and rewarding campaign contributors and lobbyists, as then it’s no longer “our” government, and different votes are needed.

If we concede the necessity of taxation, what then is the best method?  Could we just tax evil corporations and landowners? It certainly makes great optics to say, “tax corporations” or “tax land”, but in the end only people pay tax, so these taxes just “trickle down” and are passed through to consumers, sometimes to those who can least afford it.  How about income tax? That’s certainly paid by people, but requires considerable time, effort and cost in compliance. It is also very intrusive, prying into details of how one makes one’s income and how one invests or spends it, and requiring long-term record keeping to account for capital gains.  In addition, income tax is prone to distortion by tax breaks and favoritism. Breaks like the mortgage deduction do less to help consumers than to just shift money from being paid in taxes to being paid as interest to banks. We also need to look at how tax money is spent. Farm subsidies, for example, benefit mostly agribusiness rather than family farms, and hit consumers twice, as with both sugar and tobacco which we subsidize on one end and tax on the other.  

So, what should be some characteristics of a reasonable tax system?

  • simple in both collection and enforcement
  • not designed to track financial behavior like income, expenses, capital gains
  • not prone to loopholes or gaming by special interests or evasion using tax havens
  • designed to broaden the base and lower the rate
  • ensuring that everyone has skin in the game, while still remaining progressive
  • collecting to pay for externalities, but not mold behavior
  • having a transparent true tax rate, not hidden in many different taxes and deductions

Considering these, certainly there are plans that cover these bases better than the income tax.   Here are some ideas that might be considered as a model for a new system:

FairTax — FairTax.org

This is an approximately 30% consumer sales tax on all new goods and services.  While this sounds high, the theory is that the elimination of existing embedded costs of  income, payroll, and corporate taxes will reduce prices enough that the actual cost increase is minimal.  In addition, the tax rate is made progressive by the distribution of a monthly “prebate”, currently estimated to be a little over $220/month, paid to all adult legal residents, probably as a debit card account.  This will offset tax paid on “necessities”, or any tax paid on income up to the poverty level.

Automated Payment Transaction Tax (APT)  — APTtax.com

This is a small percentage of around 0.35% on every financial transaction going in or out of a personal or corporate account, which would replace the current system of federal and state income, sales, excise and estate taxes.  This is a sort of financial “friction tax”, which would work roughly like credit card companies pay for transactions, or like the “Salami Slicing” scheme central to the movie “Office Space”.

Robin Hood Tax — RobinHoodTax.org

This is about a 0.05% tax which would be applied to trades in financial products such as stocks, bonds, currencies, commodities, futures, and options.  This would be a component in a larger taxation system.

These and other plans could be investigated, tweaked, and perhaps the best ideas combined in the pattern of Herman Cain’s sadly maligned 9-9-9 idea.  For example, perhaps it would be best if payroll taxes for Social Security and Medicare were still deducted by employers from income. Perhaps the “prebate” idea might be tweaked into a small supplemental UBI or “citizen dividend” to insulate the poor from excess costs of an APT tax.   Maybe the FairTax should include very small (1-2%) tax on used goods, to account for resale of high ticket durable items like yachts, airplanes, antique jewelry, etc.

In addition, we might look at dividing government funding into a two-tier taxation system:

  1. A compulsory system like we have now to support the true necessities.
  2. A voluntary or mandated “tithing” type system to support non-essential extras.

In this plan, essentials would be funded as they are now by a mandatory tax from some of the options above.  But for many other programs that are now tax supported—museums, NPR, Planned Parenthood, foreign aid, etc.—there would be a national “GoFundMe” type system where one could see funding levels requested and received, and pick where one’s money goes, with a societal expectation to give money to support the programs in which one believes.  This would end people complaining about their taxes funding this or that they don’t like, and help end lobbyists seeking political favors. Perhaps if everyone had a prebate account as specified above, the well-off could designate this money to be returned to the programs of their choice.

In conclusion, taxation is unpleasant, but we should make it as pain free as possible and take advantage of modern technology.  It’s time for a major overhaul of the tax system to bring more simplicity, fairness, transparency, and accountability to all concerned.