Arnold Kling  

My Tax System

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Answering Jason Furman... North on Adaptation...

Jason Furman chides me for not describing my ideal tax system.

I once wrote,


let me offer the Bleeding-Heart Libertarian approach to income redistribution. Conceptually, it would involve abolishing public education, all forms of free or subsidized health care, and Social Security. It would abolish all forms of taxation other than a tax on personal consumption. All consumer spending, including spending on education and health care, would be subject to tax. To assist the poor, there would be a negative consumption tax, somewhat like the negative income tax that was originally proposed by Milton Friedman.

The entire Bleeding-Heart Libertarian Welfare State can be summarized by the equation:

T = .4C* - $7000

where T is the total taxes that an individual would pay and C* is the person's consumption expenditures including spending on education and health. $7000 is a constant term that creates a personal exemption of $5000.


I dodge all the tricky questions of implementation. I admit that Jason lives much more in the real policy world than I do.


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CATEGORIES: Tax Reform



COMMENTS (12 to date)
aaron writes:

Here's mine.

(No more payroll tax. Everything will be paid for out of general tax revenue.)

1. One Flat Tax Rate for income.
2. Another (lower) Flat Tax Rate for investment income.
3. One, and only one, deduction: A standard deduction, of the per capita GDP, for every individual.

No taxes until you make over $42,000.

Married, no taxes until $84,000.

Incentive to have a child for every additional $42,000 of income.

The only way for businesses to take advantage of the deduction is to hire more employees. Companies have incentive to hire more workers, especially for jobs with salaries $42,000 and below. There is also incentive to pay employees with families more.

Wild Pegasus writes:

Okay, I catch prostate cancer and dip into my savings to pay for the medical expenses. Under the Kling plan, I pay more in taxes. In point of fact, I pay 40% more than the medical expenses in taxes. This is so incalculably stupid that I can't even fathom proposing it.

- Josh

Josh writes:

RE: Wild Pegasus,

Okay, so I work my ass off to produce more things that other people want to buy from me and make more money because of it. Under the current system, I pay more in taxes....

In my example, I'm making things that other people can now use and paying for that "privilege". In your example, you're consuming a unit of a scarce resource that someone else now can't use (e.g. a doctor's time, etc.). How is it more stupid to expect people to pay for consuming things versus paying to build them? The former has a negative effect on others, the latter a positive.

In a perfect world there would be no taxes. But given we need to choose somewhere to get our money from, I would rather it come from the people who take more than they give, rather than the other way around.

Floccina writes:

Rather than a pay subsidy I would rather see an hourly wage subsidy. It would encorage more hours of work.
I understand that this would create problems for the self-employed but no system is without problems.

fmb writes:

If you're dodging all questions of implementation, shouldn't tax be proportional to consumer surplus (possibly minus a constant)?

In the private sector, a monopolist with a low-marginal cost good that can prevent free-riding would charge everyone their consumer surplus, and this would be an efficient outcome. Barring redistribution goals, shouldn't this be the objective of a taxation system?

For some public goods (e.g. national defense) it's easy to imagine that they're worth 0.5 C for the wealthy and 0.3 C for the poor. Not that this is easy to assess.

Even something like medicare might have consumer surpluses that are an increasing percentage of income or consumption.

Wild Pegasus writes:

In my example, I'm making things that other people can now use and paying for that "privilege". In your example, you're consuming a unit of a scarce resource that someone else now can't use (e.g. a doctor's time, etc.).

This is terrible reasoning. By your light, my earning money is also consuming a scarce resource - money - that someone else cannot. Or, the company who employs me is consuming something scarce - my labor. So the distinction between income taxes and consumption taxes dissolves. It seems to me that if the state is supposed to be a protective entity, than those with more to protect ought to be charged more. A neighborhood watch is basically free; the security of a nuclear plant is not.

You're quite right that a perfect world has no taxes. That is exactly the world we should be looking for. Kling probably wants to believe the same thing, but he wants things, and we're just going to have to pay for them.

- Josh

aaron writes:

Well, ideally we would find a tangible resourse that is commonly used in all economic activity and that is truly consumed (isn't recyclable). Energy seem to be the lowest common denominator, but there are still diverse energy resources. Do we tax food calories (I think yes), solar consumption (dark solar panels might contibute more to GW than CO2), solid waste???

Floccina writes:

One thing about negative income taxes or wage subsidies is that they discourage voters from allowing much immigration.
So it is probably best to go without and count on charity to help the poor.

quadrupole writes:

Your plan sounds remarkably like the FairTax.

Michael Giesbrecht writes:

Wild Peagasus:Okay, I catch prostate cancer and dip into my savings to pay for the medical expenses. Under the Kling plan, I pay more in taxes. In point of fact, I pay 40% more than the medical expenses in taxes. This is so incalculably stupid that I can't even fathom proposing it.

That's right. a 40% tax on health care consumption increases the cost of consuming health care by 40%. I missed the part where you explained how your simple restatement of Kling's position demonstrates the incalculable stupidity of it.

It seems to me that Kling is attempting to harness the power of incentives to reduce health care costs in the long term. By taxing consumption, consumers will be more selective in their health care consumption; and health care providers will need to work harder at lowering costs and increasing their productivity in order to win consumer dollars. From that perspective, I don't think Kling's plan is stupid at all, much less incalculably so.

Ian writes:

Playing off of Quadrupole's mention of FairTax: Here is why the FairTax will make a good U.S. tax system REPLACEMENT. The FairTax is:

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity

Its benefits are as follows:

FOR INDIVIDUALS:
• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or "pre-bate"
• Pre-bate equals payback for taxes on spending to poverty level
• FairTax's pre-bate ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates

FOR BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
• No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets

FOR THE COUNTRY:
• 7% - 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie"
increases
• No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow

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