Theories of Taxation

Much talk in the current Presidential campaign deals with the candidates' proposed tax policies.

One candidate wants to have taxes for the poor and the middle class reduced, or at least kept constant, and at the same time increase taxes for corporations and rich people. "Spread the wealth," he says.

Another candidate wants to reduce taxes for the wealthy, to bolster the economy by allowing them to expand their businesses and hire people.

Both candidates want to offer tax breaks or subsidies to companies that are developing alternative energy sources.

My dilemma is that these positions are totally wrong! They are wrong because the distort or conflict with the only valid reason for taxes in the first place.

To use taxes as a means of redistributing the wealth is the Robin Hood approach to taxation. Although we love the legendary Robin Hood, he was nonetheless a thief.

Some people view their taxes as a "use fee" for the services the government provides. While this view allays their disgust at having to pay their taxes, it does not constitute a valid taxation theory because each individual is necessarily paying for many government services that he never uses.

Some people believe we should use taxes to modify peoples' behaviors. That is, if we want people to stop smoking or drinking we place a tax on tobacco or alcohol. If we want people to buy solar panels, we offer them a tax break when they buy a solar panel. Neither of these is a valid use for taxation.

If we want to encourage the development of solar power sources or alternatives to fossil fuels for automobiles, we should neither tax fossil fuels nor offer tax breaks to energy companies. The proper way is for Congress to task and fund a government department to research and develop the new energy system, just as we task the department of defense to develop weapons systems. The department then issues competitive contracts for the design and development, or issues IR&D funds to companies that have promising technologies. These costs become part of the department's operating budget.

The only legitimate reason for imposing taxes is to pay the cost of operating the government.

The impact of operating on the assumption above is that it simplifies the tax code immensely. It also removes all of the politics from the process of determining how much tax a person should pay. Once the political issues are set aside, it becomes much easier to figure out how much each person should pay.

The simplest formula would be that each person pays a truly fair share, that is a fixed percentage of his total income. Some people consider this simple approach to be "regressive," however, because a poor person spends nearly all of his income on necessities (food, shelter, and transportation) while most of the income of a wealthy person is used for discretionary luxuries (entertainment, a vacation home, a yacht, or meals at gourmet restaurants).

A simple formula can be devised to compensate for this apparent imbalance. First, we compute the total amount an average person or household must expend to obtain the necessities of life. We then stipulate that for each person or household, all income up to that average amount is not taxed. But every dollar earned above that average total amount is taxed at a flat rate.

In some cases, this "average necessities" determination will appear fairly harsh. For example, the "average" housing cost may turn out to be the ownership cost of a 1500 square foot two bedroom home. The difference between that and the cost of a mansion or of two houses would be considered discretionary. The income that one pays for 3 pairs of $50.00 shoes may not be taxed; but most of the income that another pays for 40 pairs of $400.00 shoes will be taxed. This "average cost of living" would be recalculated each year.

Assume that it is determined an average individual needs to pay for reasonable necessities a total of $30,000 per year. An person who earns only $25,000 per year will pay no taxes. One who earns $50,000 per year will pay taxes (at a specified percentage) on discretionary income of $20,000. And someone who receives $1 million a year will pay the same percentage of tax on discretionary income of $970,000.

Simplicity is an important part of this approach. There are no "credits" or "adjustments" to gross income. There are no deductions for mortgage interest. There are no special rates for capital gains. There are no gimmicks to punish "bad" spending or credits for "good" spending. If the sole purpose for imposing taxes is to pay the cost of operating the government, we will probably find that the tax percentage is relatively small--probably in the neighborhood of 13 %.

As long as our politicians insist on buying the votes of the poor and middle class people with the income of corporations and wealthy people, nobody will entertain even a study of a simpler, more pragmatic approach. As long as the tax laws are written by politicians who are in the top 5% of income earners in the country, they will give the wealthiest individuals tax breaks that are not available to the other 95% of the people. And the more than 6,600 people in the top 1% income bracket who paid no taxes at all last year will continue to dodge paying their fair share of the operating cost of the government.

This country was formed as the result of a revolutionary war by colonial citizens who were unfairly taxed by the British government. How long will it take our citizens to realize that our current national tax policies are similarly unfair? When will we use the power of our votes to create an electoral revolution?