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Monday, October 13, 2003

Back to taxes

Bret's questions about the distinction between goods and services are good ones. A music CD, for example, only has a few cents worth of goods in it, whereas the intellectual "services" associated with it represent the actual cost of the CD. So, what's the tax on a CD? 10 cents or $24?

Unless the tax is levied on the retail prices of goods, rather than the wholesale value of raw materials, there wouldn't be enough revenues generated. I guess I'd have to say the tax on the CD would be $24. A further complication is that one could buy the music digitally over the internet without having to buy any physical "good" whatsoever. Would that be taxed differently? It wouldn't make much sense if it was (not that anybody is pretending that taxes make sense now).

Fair enough. So, let's try to (re)draw a philosophically consistent line. How about if we say that all consumer goods and services are taxed (at only 100% now since we've got a bigger base), except for the following services: healthcare, accredited education, food services, domestic and gardening services, handyman services, security services, and residential construction/carpentry services. There are probably some more that I haven't listed. The key tests are whether the service: (a) serves a basic need (e.g., health, nutrition, foundational education, housing, security) or (b) provides employment opportunities at the low end of the market (highly skilled people generally need less help making a living -- Honey Bee not excepted). Goods, such as wood, associated with these services, though, would be taxed. I'd probably add pharmaceuticals to the list with food as a good that is not taxed. Software and entertainment services, financial services, consultancy, air travel, hotels, rental cars -- all would be taxed at 100% (which sounds horrible, but, remember, you've got more money to spend because of no income taxes and your $5000 per person per year rebate). I'd still feel richer. (A fine-tuning might involve taxing some services -- like air travel -- at lower rates given that a substantial part of the cost to run an airline is to repay the debt associated with buying airplanes -- which would be taxed under the goods provision, so no need to double the impact on capital intensive service industries.)

Admittedly, this is getting messier with exceptions -- but it's still far simpler than our current income tax code.

I don't really think that edible goods are much of a threat. A simple rule about "primary function" of a good should take care of most of that problem (if it would be a problem at all).

Regarding the black market for untaxed goods, I grant you this could be a big problem. (However, I'm not sure the New York example is a great one. The small geography involved puts up almost no logistical barriers.) Substantial rewards for turning in the black marketeers might help (but could also get you killed). Modest requirements of manufacturers of commercial or consumer goods to track the path of goods being sold in the U.S. might be feasible (esp. with cheap RFIM).

Regarding Howie's points about the flat tax, I followed with interest Dick Armey's efforts. It certainly would be a major step in the right direction to institute a flat tax. It would achieve much simplification that leads to freeing many unproductive accounting, legal, and governmental resources. If I'm going to go down that path, while I wouldn't tax corporations, I would tax both earned and unearned income at the same rate. Exemptions help build in a reasonable degree of progressivity at the bottom end of the income spectrum where it's most needed.

The only thing lacking in the flat tax is that it doesn't do much for savings and, by extension, investment. In fact, it might encourage more consumption in that people like me now have to earn about $1.40 or so to replace the dollar I spend at the theater, whereas with a flat tax I'd only have to earn $1.17. Thus, more incentive to spend (assuming the sales tax doesn't change).

Why am I so concerned about people spending money? Because I think, in general, people are living beyond their means -- which is unsustainable -- which will lead eventually to a lot of miserable (older) people -- which, even if I didn't care about their suffering, will drag down the society I live in as we are forced to address the crisis caused by this accumulated misery -- because these people will vote and they will vote for those who promise to address their misery regardless of the consequences to the rest of society. You think things are tough on the productive ones now -- just wait.

So, perhaps the ideal is a balance between a relatively low flat tax (say 12%), and a relatively high sales tax (say, 25%, but not 100% or 200%). Anyway, thanks for helping me think about this issue.

(Just a little tweak: Howie, you should check out publications other than right-wing ones. Personally, I like reading a broad spectrum. I would not defend the liberal side as any more accurate in its reporting than the right (they're both full of inaccuracies, sometimes deliberate), but you'll get a fuller picture of the perspectives of all the stakeholders - which must be taken account of for anyone with interest in changing things. Have you read Michael Moore or Al Franken? If you want something more serious, check out Noam Chomsky's book, 9-11. Or, if you prefer, here's an interesting critique of it which I haven't yet finished reading myself.)

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