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Sunday, October 12, 2003

New Question!

Tax structure is one area that I think needs to be totally revamped. Without leadership (which perhaps only emerges once a crisis happens), I suspect there will be little more than tweaks -- mostly in favor of those who finance the tweaks, i.e., the rich.

My new question is about a radical tax system restructuring. Your assignment, should you decide to accept it, is to illuminate the effects of this radical change, and to pick holes in it. Here's the proposed structure:

- Eliminate income taxes
- Continue property taxes without substantial change
- Institute a 200% sales tax on all goods except food (and not on services)
- Rebate every U.S. citizen $5000 per year

The mathematics are approximately like this (percentages and rebate amount can be fine-tuned to provide the zero balance):

- Current state and local income tax (for corporations and individuals) is about $250 billion
- State and local sales taxes are about $300 billion
- Federal government receipts are around $2 trillion
- Current durable and non-durable goods consumption is about $3 trillion
- Food expenditures are about $800 billion (roughly 50/50 at home and away from home)
- Assume 300 million U.S. citizens at $5000 rebate = $1.5 trillion
So: about $2.5 trillion in current income and sales taxes, plus the $1.5 trillion rebate, needs to be financed by a sales tax on $2.2 trillion in non-food goods.
- A 200% sales tax would yield $4.4 trillion (this, of course, assumes that goods expenditures would continue to be $2.2 trillion not including the tax amount which, admittedly, is not a great assumption with such a large disincentive to consume; but, with people having so much more disposable income, consumption may not decrease)

So, very rough first pass calculations suggest that the mathematics could work.

What are the potential advantages of this approach to taxation?

- Tremendous incentive to save and conserve
- Incentive to replace goods with services (promoting employment)
- No distorting effects of income taxation
- Huge freeing up of income tax related resources -- e.g., tax accountants, lawyers
- Is in support of the long-term value trend from capital to intelligence
- Provides a straightforward lever to the government for stimulation or dampening
- Privacy would be greatly enhanced as there no longer would be a need for the government to monitor incomes
- Making money would be richly rewarded - spurring the capitalist juggernaut that we worship
- The $5000 rebate would enable all people to be lifted out of extreme poverty (at least having enough untaxed food)

I don't imagine that this change could be accomplished with a transition of less than 8-10 years.

Here are a few questions:

- What would happen to the economy?
- What would happen to the housing market? (I suspect there would need to be some method for distinguishing the goods component of housing prices so only that portion is taxed.)
- What would happen to the quality of goods?
- How would the black market in untaxed goods -- e.g., from other countries -- be controlled?
- Would we feel richer or poorer (our take home pay would be 20% higher or so, but an average new car might cost $75,000 instead of $25,000 - at least until manufacturers respond to the incentive to take costs out of their products)?

I've heard about national sales tax systems or VAT systems before, so this isn't a totally new idea. But, perhaps going to the extremes that I've suggested is. Why wouldn't it work? Why wouldn't it be a lot better?

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