Often time’s taxes appear to be collected more than once on the same dollar or item. Examples of this have been pointed out in prior post. It is legal as pointed out in prior post. The main purpose of collecting tax is to fund government. There seems to be a conflict between governmental services desired by the public and taxes willing to be paid. If these double taxes were eliminated then all other things being equal, an increase in tax elsewhere would be needed. Perhaps the issue is one of fairness.
In my view there are three main objective in tax codes. 1. Collect enough taxes to fund government. 2. Effect public policy desires including economic goals. 3. Taxes should be fair. Add to this the political process involving the special interest of many groups (we all got our own interest) and you get what we got. Some would say that we satisfy none of these goals.
I make a good living dealing with the federal tax code and I’ve got to tell you that my clients spend way too much money dealing with taxes and hedging against uncertainty in future tax liability. To say the least the federal tax code does not make me proud to be an American.
So what would I do if I were tax King?
Government should aim to collect enough tax to cover disbursements. I will admit that there may be times when the federal government needs to deficient spend for economic reasons. However the effect that the federal budget and taxation has on the economy is immaterial compared to the federal monetary policy. The tax code is a billion dollar stick and federal research is a multi trillion-dollar stick. If the Bush tax rate reduction had any real effect on economic growth it was because taxpayers had larger refunds due to the unforeseen tax rate reduction mid year. In other words they had additional cash to spend because of money that they had saved for taxes or received in refunds. Additionally, this use of the tax code created uncertainty for taxpayers. Uncertainty translates to cost in that taxpayers spend money to try to hedge this uncertainty. In short the managing of the economy should be left to the Federal Reserve.
I also think the tax code is a terrible place to pursuer public policy. It appears more palpable to give a tax break than write a check. Is there any difference? If we switch to writing checks to achieve public policy goals, then at least we reduce the complexity and cost of tax compliance. I also think that the cost of these policies would be more accountable.
Additionally, to me it is seems questionable if public policy through taxation really works. Even though we think about how economic systems work by examining the effect of changing one variable and holding all others the same, this isn’t the real world. For example, does increasing the personal residence interest deduction enable more taxpayers to own their own or a bigger home or does it result in the increase in the price of personal residences? Does it distort markets so that more investment is n personal residences as opposed to productive infrastructure that may increase the economic productivity? Does increasing the tax rates for higher income taxpayers really shift the burden of taxation to these folks or does it in the long run result in the increase of the value of these individuals’ services (Doctors) and in effect higher cost to the lower income taxpayer. Does tax policy distort markets resulting in economic inefficacies?
So let my wrap this up. If I were tax King I would:
No public policy in tax code. Make it a lot simpler, cleaner, less politics in the decision making progress.
Restructure as many collections by government as feasible to be fee based. For example I would move all taxes to build and maintain roads and highways to a gas tax. This would be very fair. The more you drive, the bigger vehicle your drive, the less efficient vehicle your drive the more your pay.
For the rest of the money needed to fund government, collect on a rational basis approximating benefit received from government. Rules should be long term with advanced notice of changes to reduce uncertainty. Or a value added tax as mentioned in a prior post.
Alan Greenspan liked the idea of the value added tax. The reason is because he believes that it would discourage consuming and encourage savings. You can replace the word savings with “investment in productive assets.” Can you hear the collective carping of the pants by retailers in this country?
BTW, none of this has any chance of ever happening.
