The most powerful tool that most societies have for shaping economic behavior is its tax system. America’s complex, convoluted and cumbersome system, overwhelmingly focused on income, is at the root of much of the economic behavior that accounts for our failure as a producing nation. At the heart of any viable tax system for the future will be a border-adjustable consumption tax. That may take the form of: a value-added tax as used in Europe, Mexico, China and the CAFTA countries; a national sales tax such as the Canadian tax on goods and services; or perhaps a business transfer tax that might rely on current financial statements but might tax the “value added” rather than “profit.”
Why should the US think of such a radical change in its tax system? Here are the top ten reasons:
1. We consume too much. If we collect more tax when dollars are spent than when they are earned, people will adjust. The more you spend, the more you tax pay, whether you are a lunch-pail factory worker, a high-flying stock broker or Paris Hilton.
2. We save too little. The solution: don’t tax savings by any American without any limitation or qualification. The more you save, the less tax you pay.
3. We invest too little. Solution: don’t tax invested funds; expense investment without any limitation or qualification. The more you invest, the less tax you pay.
4. We export too little. Increasing our net exports is the only way for the US to avoid a prolonged period of dollar weakness, high interest rates and steep inflation. Solution: rebate consumption taxes paid or due on all exports, just as more than 140 US trading partners do in a practice that is perfectly legal under international rules. The more you export, the less tax you pay.
5. Imports don’t pay their fair share of taxes in the US. Solution: impose the same consumption tax on imported goods as domestic goods must pay, also a perfectly legal practice under international rules. Outsourcers will be free to continue their supply chain practice, but they will no longer avoid contributing their full, fair share to the US economy.
6. The US is dangerously dependent on imported oil and gas. Solution: tax energy from renewable sources (overwhelmingly domestic in origin) at a lower rate than energy from non-renewable sources, whether domestic or imported. Instead of having an on-again, off-again policy of favoritism for specific technologies that are blessed with periodic subsidies, all technologies would benefit from the same tax advantage. The most competitive will win the biggest share of the market.
7. The underground economy, including many illegal immigrants, largely escapes taxation. Solution: tax people when they spend rather than when they earn.
8. Small businesses are unfairly burdened with bookkeeping, accounting and other administrative costs. The solution: substantially raise the minimum level for filing corporate and personal income tax returns, greatly simplify them (e.g. eliminate the alternative minimum tax), and do away with a host of smaller excise taxes now collected by the private sector.
9. Too much time and money are devoted to tax avoidance and evasion, leaving honest taxpayers to resent taxes as inherently unfair. Many taxpayers (and even their paid tax advisors) are often bewildered by the complexity of a tax code designed more to advance special interests rather than those of the nation as a whole. Solution: Rely on sellers to collect taxes from buyers; rely on the paper trail of purchases (taxes paid) and sales (taxes due); and devote the resources of the national tax agency to detecting and punishing
10. Lower-income families bear a heavy tax burden, taking into account the regressive effects of payroll taxes and those taxes imbedded in the cost of goods they buy. Solution: restore real progressivity to the tax system by eliminating payroll taxes on lower-income workers and refunding consumption taxes paid by lower-income consumers.
As a country we have become dependent on foreign borrowing to maintain our standard of living, ensuring that future generations will have to accept a reduced chance to live the American Dream. Every day we borrow more than two billion additional dollars to finance our trade deficit. The problem of America’s trade imbalance stems largely from systematic disadvantages stemming from our own tax system; the solution can be found largely in the same place. If America went from being a badly taxed country to be an excellently taxed one, we would start to benefit within a short period. By shifting towards a consumption-based tax system with progressive income taxation, we would also enable our government to immediately lower rates in response to a looming recession. No tax system is perfect, but ours is a perfect abomination to the national interest. Let’s change it – quickly, profoundly and with a steady eye on our performance as an international competitor. Good things will start happening once we do.