Since I do not believe that my “The Greatest Tax Reform Of All Times In Honor Of Benjamin Franklin” (another, earlier blog of mine on this subject) will be implemented anytime soon here are some proposals for a fundamental tax reform.
Applicable Principles
Taxation is for government revenues only
The purpose of taxation should be exclusively for government revenues only. Any social or economic policies should be strictly carried out only through the expenditure side of the government budget. This promotes more transparency and accountability. It is preposterous, e.g. when sometimes certain advocates claim taxation is like market pricing (see taxes on fuel).
Only One Kind Of Taxes
In reality, most existing systems of taxation are a mix of income, property, and sales taxes. A fundamental tax reform should only allow for one type of taxation either property, or income, or sales to apply within the same jurisdiction. Each of these three types of taxation has its own serious flaws, to mix them only compounds those flaws. More importantly, such a mix introduces various forms of double taxation or cumulative taxation, which are presumably not always well understood by tax payers. E.g. sales taxes are paid with after tax income, the same is true for property taxes. In Arizona, various jurisdictions apply a sales tax to renting a residential home paid by the renter. So the owner of the rental property pays a property tax and the renter pays a sales tax plus he pays for the owner’s property tax. How sweet is that. Sales taxes tend to be regressive.
Only Humans Should Be Taxed
Only individuals should be taxed, never businesses. It has been an unfortunate fiction for way too long that businesses are treated as taxable entities. Businesses do not pay taxes, they only pass them through. Businesses can be ruined by property taxes. The side by side of individual and business taxes has introduced a number of complexities and double taxation creating superfluous jobs for accountants and tax advisors.
Only Income Qualifies As A Means To Pay Taxes
Income taxes are preferable to property taxes or sales taxes, because income resulting from economic activity represents the ability to pay taxes. Typically, property or sales taxes have to be paid whether you receive any income or not.
Minimize Or Better Avoid Distortions
Nobody likes to pay taxes and most people try to minimize paying them. To avoid distortions as best as possible taxation has to be simple and it has to be applied equally and uniformly.
Confiscatory Or Progressive Taxes Are Legitimized Theft
Taxation must never be confiscatory or progressive. Thus, well defined constitutional limits on taxation should be adopted. Any form of withholding taxes are to be abolished.
Income Taxation
Based on the foregoing principles that leaves us basically only with income taxation of individuals.
I would also like to point out here, the perverse system as can be found in member countries of the European Union, where besides high income taxes, they also apply up to or a higher than 20% VAT taxes (value added tax, quasi a sales tax) plus high payroll taxes for unemployment, health, and old age insurance.
I would also argue that proponents of a consumption tax (e.g. a personal expenditure tax) exaggerate the distortions of income taxation on savings and investments. They also favor savings or investments over consumption, which in itself is a distortion.
Individual income should be defined very comprehensively, but the definition may be limited to jurisdictional income not world income. To this income is then a flat rate is uniformly applied across all taxpayers, which cumulatively cannot be higher than, let’s say, 30% at most. Low incomes may be exempt.
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