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abolish tax rates, create tax bills

One of the most puzzling things about public policy is the insistence on tax rates. For example, there was constant debate over Mitt Romney’s tax rate. Did he pay more or less of annual income in taxes than the average American? Probably less, but I find the whole discussion odd because nobody has told me the “correct” tax rate. What, exactly, should Mitt Romney pay? What should anyone pay? What’s the magic number? No one told me.

The underlying point is that the federal and state governments are not funded in the same way we fund other things. Normally, we demand certain items, like food or housing, and then we are handed a bill. In contrast public services are funded mainly through income taxes. The state garners a portion of your income which goes into a pool of funds, and the legislature decides how to spend it.

I am wondering if there is a serious argument to be made for replacing the income tax with a tax bill system. In other words, the legislature decides what is to be spent for the year and Americans each get a bill for their portion of the services. The benefits of a “tax bill” system would be:

  • Transparency – People would actually understand their tax obligation. “We spent $14 trillion and I owe 1/300 millionth of that.”
  • Simplicity – Instead of having all kinds of differing tax rates for different types of income, you would get one bill.
  • A focus on services, not guessing the “right” rate for people of various income levels (rich or poor).
  • Easy to make progressive – The tax bill would be weighted by income. The very poor would have their bill marked down to zero. To compensate, wealthier citizens would have a “multiplier.” People, say, in the top 1% might have to pay for five additional people at the bottom.
  • No surprises – folks who come into money or assets wouldn’t be socked with little known tax laws such as the alternative minimum tax or estate taxes
  • Equality between capital and labor – currently, investments get a huge discount. That would be done away with.
  • Caps on tax – In exchange for explicitly subsidizing low income people, the wealthy would have a cap on their income tax. Once you have paid your share and helped out some folks at the bottom, you are done paying your taxes for the year.

The tax bill method still has some problems. For example, to figure out your discount or multiplier, you would probably need a system for allowable deductions and gains/losses, and that would almost certainly be subject some arcane regulations. Despite that problem, the tax bill system is worth discussing because it shifts the discussion from “you owe X% of your income” to “these are the services that you consume.” I’d be interested in knowing if economists or policy wonks have ever studied such a system.

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Written by fabiorojas

November 20, 2012 at 12:01 am

Posted in economics, fabio

9 Responses

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  1. It would undermine the fiscal illusion – people think they pay less than they do and receive more than they do.

    Arthur Seldon in the uk did argue for a system where you paid for what you used. http://books.google.ie/books/about/Charge.html?id=UUGwAAAAIAAJ&redir_esc=y

    The poll tax in the uk was an attempt to run local taxes on a basis somewhat similar to what you proposed. It did not go well.

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    Aidan Walsh

    November 20, 2012 at 7:58 pm

  2. Pierce the illusion? Yes, this is a torpedo of truth.

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    fabiorojas

    November 20, 2012 at 8:00 pm

  3. And Thoreau refused to pay taxes because of his opposition to the Mexican-American war and slavery…
    It would be a truly democratic system that would expose the state to face the rejection of some of the “services” it provides.

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    nathalielallemand

    November 22, 2012 at 2:43 pm

  4. What you’re describing would better align incentives and information, but would be billed as neoliberal market reform and crusaded against — you’re turning the government into a business with an actual responsibility to its customers rather than an opaque Leviathan that we all putatively trust for good will.

    Thinking on the history of income tax for .03 seconds, it seems as if income taxes descend from feudal traditions where rents were taken in kind from the “income” of agricultural produce.

    Economists have long proposed we just do away with income taxes and only tax consumption. It is cheaper to manage. And it continues to be progressive — the rich spend more. And then you do away with all of this nasty business of sorting people into arbitrary class brackets and invading their privacy annually.

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    Graham Peterson

    November 25, 2012 at 1:15 am

  5. It’s hard to know where to begin in explaining why this idea would not work and should not be attempted.

    Tax experts going back to Richard Musgrave, at least, have attempted to calculate complete tax burden/spending benefit ratios. But that’s nearly impossible to do. Why? Even with taxes — the easier side of the tax/benefit ledger — determining who ultimately bears the burden is maddening. There’s little consensus, for example, as to what proportion of stockholders, workers, and consumers bear the corporate tax burden. It’s all about the assumptions. Often, too, these assumptions don’t even fit political ideologies well. Conservative think tanks, for example, regularly argue that consumers and workers ultimately bear the burden of the corporate tax, but then, in different circumstances, go on to argue that, say, Mitt Romney actually paid more than 15% because he also implicitly paid the entire corporate tax burden, too. The fact that those assumptions are mutually exclusive doesn’t seem to matter. Just change the assumptions to fit the short-term political need.

    In other words, simply adding up all the taxes would be a political battle. And we haven’t even gotten into state and local taxes. There are thousands of combinations of state, county, local, special service district, etc. taxes that Americans pay. Who would calculate all those combinations of taxes and the resulting spending (and do it correctly)? How much tax money would now be wasted by states and localities hiring accountants to compute the burden and/or programmers to write and rewrite software to automate the process? It would make TurboTax look like Snood. Think we’re going to replace state and local taxes with federal levies? That could certainly make the system more progressive, given how regressive state and local taxes are. However, Nixon did that with Revenue Sharing and it only lasted until the next elected Republican, Ronald Reagan, did away with it. Once again, a political football.

    Getting to the spending side, there’s even more headaches. Who benefits from, say, defense and law enforcement spending, and in what proportion? Should we get specific (military contractors)? Or would it be based on a more abstract accounting? Does every American value “freedom” (whatever one thinks that means or entails) equally (or would, say, gays and lesbians get a discount, since they don’t have as many rights as heterosexuals, or would be have some type of poll and how often would we do so)? Wouldn’t we need to think about potential loss of property, too? If so, should defense/police bills be apportioned according to wealth? After all, it’s often argued the primary role of the state is to protect private property. So, it would make sense that people should pay in proportion to that property, right? Kind of like insurance rates varying with the value of the property being insured. That would mean the top 20 percent of Americans would need to foot 85 percent of the defense and law enforcement bill. I don’t think they’d go for that, do you? But it hardly seems fair to say that a Taco Bell employee renting an apartment has as much of a stake in defense and police as a wealthy homeowner. (Heck, many people of color might feel that they’re being harassed by law enforcement more than they’re being service by them.)

    What about second- (and third- and fourth-….) order effects of different tax and spending policies? Dynamic scoring is controversial enough. Imagine if we needed to net-out all of the effects of taxes and spending to determine who — in the long run — benefits. It would be impossible.

    In other words, this idea is no “torpedo of truth.” It’s a sledgehammer of obfuscation.

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    TaxHistorian

    November 25, 2012 at 2:47 am

  6. By the way, Graham, anyone who’s “thinking on the history of income tax for .03 seconds” and then suggesting that consumption taxes are progressive might want to spend a little more than “.03 seconds” thinking about all taxes before making such a completely incorrect statement about incidence of consumption taxation.

    Sales taxes are regressive. Always have been. Please, look it up. Lower income people spend more of there money on goods and services that are taxed than upper-income people.

    There are various proposal that could — in theory — create a progressive consumption tax, but (for better or worse) they’re attempting to build in personal exemptions and things from the income tax in order to make consumption taxes look more like income taxes. This plan will probably never happen and, in my view, probably shouldn’t.

    But, most importantly, the consumption taxes that we have now (state and local sales taxes, most significantly) are very, very regressive and only slightly less so in places that exempt food, drugs, and other essentials.

    So, please, think a little longer.

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    TaxHistorian

    November 25, 2012 at 3:00 am

  7. I made a self-depricating joke designed to dress my internet speculating with some candor — you might have appreciated it considering how upset you seem to be with people making assertions about your field in blogs.

    Further, I qualified my historical speculation about early and pre modern economic history — a field I’ve done some work in — but no particular questions on tax policy. Feudal land taxing practice may have created a (strikingly illiberal) path dependency. Or maybe not. I don’t know. But it seems strange that no one outside a small circle of policy wonks and a handful of libertarians ever talks about taxing consumption. And indeed in a country where on other topics like say gun owning and uterus owning, people have nearly religious feelings about the individual liberty implications — when it comes to the widespread withholding and taxing of income — privacy et. al. almost never comes up.

    I further qualified that it’s an argument economists sometimes make. Because that’s how I discovered it, casually, in pedestrian conversation with economists.

    Is your mission here to demonstrate your own lack of a sense of humor and insult me, or to talk to people about your work?

    “Sales taxes are regressive. Always have been. Please, look it up. Lower income people spend more of there money on goods and services that are taxed than upper-income people.”

    That’s not incredibly surprising considering the amount of capture involved in writing tax policy. The statement I made about the rich consuming more is correct. I said nothing about whether they currently do or probably would engineer exemptions to consumption taxes just the same as income taxes. But that is a nice point.

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    Graham Peterson

    November 25, 2012 at 3:33 am

  8. Graham, I can assure you that I’m not “upset.” Rather, I’m simply setting the record straight about a topic that seems to have been posted about and commented upon without enough research.

    For example, you just said that national sales taxes “almost never come up.” Actually, it was part of the Simpson-Bowles negotiations, but didn’t make it. And a VAT (called a “debt reduction sales tax,” if I recall correctly) actually did get included in Domenici-Rivlin. So, it’s far from something that’s not being discussed.

    Once again, though, “the rich consuming more” does not mean that the tax is progressive. Taxes are measured as a percentage of income. The rich consume more, but they consume fewer taxable goods as a percentage of their income than the poor. This is true today (http://www.itepnet.org/whopays3.pdf), as it has always been. Even Ronald Reagan’s economists’ incidence studies when he was governor of California pegged sales taxes as highly regressive.

    It’s theoretically possible to engineer a national sales tax that could be progressive. But in practice it would be very difficult.

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    TaxHistorian

    November 27, 2012 at 4:20 pm

  9. [...] few months ago, I wondered if it would be better for people to pay a tax bill instead of an income tax. In that scheme, the state tallies up the cost of gov’t and divides by the size of the [...]

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