Arnold Kling  

Tax Day Thoughts

Economics of Hydrogen, II... More Tax Day Thoughts...

April 15th is an appropriate day to consider the complexity of the tax code. Here is a piece by Chris Edwards written in October of 2001 on the case for a consumption-based tax.

The key factor that causes rising income tax complexity is that the tax base is inherently difficult to measure. The Haig-Simons measure of income favored by many academic theorists is economically damaging and too impractical to use in the real world. As a result, policymakers have fallen back on ad hoc and inconsistent rules to define the income tax base. That intensifies complexity and creates instability as policymakers gyrate between different definitions of the tax base.

Edwards argues that a consumption-based tax would simplify compliance, enhance economic efficiency by promoting capital formation, and provide fewer opportunities for special-interest provisions.

For Discussion. What political factors make it difficult to reform the income tax? How would these factors play out in converting to a consumption tax?

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COMMENTS (3 to date)
scott writes:

As best I can tell, the current tax code is designed to turn us all into crooks. It’s impossible to figure out and hence impossible to comply with.

I think about half of the tax code deals with defining taxable income. The other half deals with taxes levied thereon. That’s the half we could simplify.

If we go to a consumption tax, I suspect that we’ll have just as many problems defining consumption as we now have defining taxable income. Then you’ll have the interest groups trying to modify or exempt consumption that benefits them.

I see it as just trading one set of problems for another.

Eric writes:

Is the tax code so complex? The vast majority of people take the standard deduction. If you are a prole, living in an apartment, with income that consists of wages only, your return is about as straight forward as can be. A Steve Forbes flat tax does nothing for you.

Chris Edwards is right, too. The complex thing about the tax code is often that cosmic question, "what is income". Our tax code is complex because income is taxed differently depending on the source. Again, Steve Forbes isn't going to fix that, so the flat tax is not necessarily going to make things simpler.

I'm not big on consumption taxes either. They can be evaded more easily that an income tax can, especially if the rate is set as high as it will need to be to fund the Feds at their current rate of spending.

Also, I think that state governments should be funded through sales taxes. Local government has property taxes, and the Feds have the income tax. That way there is less overlap, and no one tax gets too onerous.

Patrick R. Sullivan writes:

There's a very simple answer to the problem of defining income. Tax gross, not net. The tax percentage would be, of course, much smaller.

In fact, the State of Washington, which has a constitutional prohibition against a state income tax, does just this with it's "Business and Occupation Tax". There are fifteen different classifications of businesses, with most paying less than half of one percent of sales. The dead-weight loss in minimal in this scheme.

This could easily be adapted to personal tax returns (with a "standard deduction" to exempt the truly poor).

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