March 27, 2009 – Every year, consumers and businesses alike spend billions of dollars on tax preparation. They spend even more money, involving attorneys and accountants, to dispute the IRS. The result of this song and dance is that April 15th has become a day dread for many. A day that can cause even the soberest of tea-totalers to consider reforming their ways and drinking heavily. What if we could do away with this system and replace it with a system that was automatic, non-intrusive, and required virtually no outside assistance? Maybe there is.
The US dollar is worth something because the US government says that it is. That’s all. It is not backed by gold or any other precious commodity. It is simply paper that has purchasing power because… well, just because we THINK it’s worth something. But every year, people go to jail for not paying their taxes. They lose their homes, bank accounts and families for trying to hide their actual income.
The current US tax system is prone to error. The tax code is so long and so complex that even tax attorneys have trouble with it. It’s nearly impossible for anyone without professional training to have a reasonable chance of getting their taxes done the right way.
As for individual income tax filers, fully 41% pay no taxes.
According to the Tax Foundation, in 2008 individuals in the United States earned a combined $8 Trillion in adjusted gross income. The IRS will collect 12.6% of this money in the form of income tax. That amounts to around $1 Trillion in taxes, but due to loopholes in the law, various write-offs, and taxes being assessed based on your income level, the current tax system is not applied equitably.
We’ll concentrate on individual income taxes since corporate data is harder to assemble, but essentially, what this data says is that the government collects 12.6 cents for every dollar of earned income. This however does not include money that people are hiding from the IRS, or black/gray market payments.
Instead of trying to collect taxes on these moneys, what if the government eliminated the income tax as we know it. Instead, it would be replaced with a system in which the government simply said, “We know how much money everyone earned this past year and we’re simply going to print 12.6% more money for the government to use in government purchases and to fund the budget?”
At first, that may sound a little crazy. But remember, the Dollar is not backed by anything. There is no difference in paying you for work and then collecting taxes from you and paying you for work and printing additional money. They both accomplish the same thing. This way, instead of paying taxes by sending money to the government, we would pay taxes through a process of inflation caused by the government’s printing of additional money.
Unlike the current system however, there would be little incentive to hide income. And it is likely that overall government collections would increase. Personal income for anyone who was paying taxes under the old system would also increase for many since they would no longer have to hire an accountant or tax preparer. Additionally, the 12.6% number represents a reasonable marginal tax rate. It is very difficult to argue that anyone should be exempt from a system in which they get to keep $0.87 on every dollar they make. That is essentially what we’re saying here. In fact, this would allow everyone to enter the workforce with an equal chance of being an economic success.
Now imagine a similar tax structure for businesses. A studylast year by the Government Accountability Office (GAO) looking at corporate taxes from 1998 to 2005 found that 57% of US corporations paid no income tax at least one year during the study period. 42% of them avoided taxes for two years or more. Foreign companies operating in the United States were even worse with 72% of them paying no income tax in at least one year and more than 50% of them avoided taxes in two or more years. This despite Trillions of dollars in sales.
It is quite likely that this system would result in a much lower marginal business tax rate while increasing overall revenue collection by the government. Everyone would win.
Politicians however may not like a plan like this. Not only is it radical, it marginalizes their political power. No more tax favors for their favorite campaign donators. No more power brokering deals using tax policy. Just a straight forward system that doesn’t require corporations or individuals to ever write another check to the government.
By now, I’m sure that you are thinking of all of the wholes that you shoot into this plan. Please have at it. I’m expecting some ridicule here. All I ask is that if you do shoot holes in the plan, that you do so constructively. One thing is certain. Our current tax system is broken and it needs to be replaced. And the current system encourages people to try and cheat the system and leads to government corruption because of lobbying efforts.
Now, feel free to start lobbing the grenades.
byJim Malmberg
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