Taxation and Fairness

When discussing taxation, much ado is made about fairness. Most agree that "everyone should pay their fair share" but to different people that's a different amount. Some say that people should pay the same percentage of their income. Others say that people should pay the same percentage of their spending. Advocates for the poor say that the current system of progressive taxation (so named because it was championed by the Progressive movement of the early 1900s) is the most fair, because the poor have hardly any money already. (Calling Progressive policies progressive is a claim that I am not going to address in this post.)

In my opinion, the only fair tax is a head tax: every person pays the same. Since (without making the tax so high that some can't pay) this is not sufficient to pay for the government programs we need (much less the government programs we don't need) we should set aside our differing notions of fairness and look at what is practical.

There are many practical reasons why it's a bad idea for only rich people to pay taxes. If politicians are elected in order to hand money to the majority, the system will collapse. If the rich feel oppressed, they will leave and tax revenue will collapse. If it's more profitable to not work than to work, the economy will collapse.

If the poor and the middle class are taxed they will have financial incentive to vote for fiscally responsible government. To make this incentive more direct, taxation should not be concealed via payroll taxes, sales taxes, inflation or some other mechanism. Paying taxes should be as visible as possible: a check that you write (or an electronic funds transfer that you initiate) to the government at least yearly, better yet quarterly, and maybe even monthly. Treat it like any other bill, and people will take action to control it the same way we take action to control our other bills.

To make it easier to pay taxes quarterly or monthly the income tax system should be streamlined. This is worth doing anyway and should have been done long ago. (A positive side effect of massive tax simplification is that the IRS can be downsized, saving lots of money.) The current income tax system has thousands of exemptions, deductions and credits, and rather than cherry-pick which should be eliminated, it would be more fair to eliminate all of them and only add in the handful that are really needed, if any. I'm not even sure that the standard deduction is needed, but that's a topic for another post.

Abolish corporate income taxes

Corporate income taxes should be abolished. Here's why:

1. To a company, tax is one of many costs that get rolled into the price of a product. Customers ultimately pay in the end, making corporate taxes equivalent to a (complicated) sales tax, which is regressive: poor people pay more than rich people as a percentage of their income. Eliminating these taxes would disproportionately help poor people.

2. It would stimulate the economy by lowering compliance costs. Companies wouldn't employ people to do their taxes. Companies wouldn't do complicated things to hide income from the tax man like they do now.

3. It would give local companies an advantage, providing jobs and improving the economy.

4. It would decrease corruption. Currently, companies give campaign contributions (a.k.a. bribes) to politicians in exchange for favors such as tax exemptions. Reduce the favors politicians can give and you reduce political corruption.

5. Corporate income taxes don't actually bring in much revenue (compared to other income sources), making it easier for the benefits to outweigh the costs.