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.

Crazy good books: From Black Power/Grad Skool Rulz