I have a magic solution for our current problem of national deficit. I can more than double the individual tax revenue for the government while at the same time reducing the tax burden of the average taxpayer. How is that mathematically possible?
Like many other western capitalist democracies, the United States adopts a progressive taxation system. It means that wealthier people pay more taxes than poorer people, not only in absolute terms but in relative terms as well. The marginal tax rate is higher in higher income brackets.
The most regressive taxation system that is ever discussed in the United States is the flat tax system, where individuals of all income levels pay income tax at the same rate. During his 1996 Presidential campaign, Steve Forbes advocated for the flat tax for Federal income tax at 17%. The idea was largely ignored and rejected by everyone. However, there are many nations in the world, such as Hong Kong, Russia, and parts of the United Kingdom, which adopt a flat income tax. While the flat tax is often considered to be the most regressive taxation system, few seem to realize that, even under this system, the wealthy pay much, much more in personal income tax than the poor, not in relative terms, but in absolute terms.
But why should the wealthy pay more in taxes than the poor, just because they can? The rationale for progressive taxation has never made any sense to me. Taxes are a fee for living in a nation, and everybody should pay a fee for goods and services that they purchase and consume. A nation provides many public goods for its citizens, like national defense, interstate freeway system, and mail delivery. So citizens should pay for these goods and services that they benefit from. But the wealthy do not uniformly benefit more from national defense or the interstate freeway system than the poor, so why should they pay more?
A truly fair (and the only nonprogressive) system of taxation is not the flat tax, where the wealthy still pay much more than the poor, but a really flat tax, where everyone pays the same amount, not in relative terms, but in absolute terms. A wealthy person pays $50,000 for a Mercedes and $2.99 for a Big Mac, and a poor person pays $50,000 for a Mercedes and $2.99 for a Big Mac. Why should Federal income tax (which is a price for the public goods that the government provides) be different?
And there’s another problem. Thanks to Barack Obama, half of Americans currently pay no Federal income tax. (More precisely, 47% of households do not pay any Federal income tax. However, because poor people live in larger families and households than wealthy people, I am willing to bet that more than 50% of Americans live in households that pay no Federal income tax.) Why is this fair?
Our nation was founded on the principle of “no taxation without representation.” We colonials (rightly) felt that it was unfair of King George III to tax us without giving us a voice in the British Parliament. So we fought, and we won. Now everybody, including the British, agrees that taxation without representation is unfair.
But the principle of “no taxation without representation” also means “no representation without taxation.” One should not have a voice in the national government if one is not paying the fee to be a member of the nation. Yet half of Americans are doing just that. They still have a voice in the government – they can vote and otherwise participate in the national politics just like everyone else – without paying the membership fee. In fact, half of Americans who pay absolutely no Federal income tax have just as much vote in national politics as the wealthiest person who pays millions of dollars. Why is this fair?
According to the IRS statistics, in 2008, the total revenue from individual Federal income tax was $1.031 trillion, and the average person paid $11,379 in Federal income tax. (Technically, it is $11,379 per tax return, so, to the extent that many married couples file jointly, the average paid per person is less.)
According to the 2010 Census, there are currently 209.1 million adult Americans over the age of 18. If we implement a really flat tax (as far as I know, there is no name for the system of taxation that I am advocating here, because nobody is evil and heartless enough ever to think it is a realistic and morally defensible possibility), and levy, say, $10,000 from each adult American, then the total tax revenue would be $2.091 trillion, more than double the current tax revenue under the progressive taxation where half of Americans pay no Federal income tax.
And yet the tax burden of $10,000 is less than the current average tax burden of $11,379. It is at the very least comparable to the current tax burden, but would be much fairer, in that everyone who benefits from the public goods that the American government provides pays equally for them. And $10,000 a year is not a high price to pay for the privilege of living in the United States and all the benefits its national government provides. Even if we set the tax per person at $5,000 a year, the total revenue ($1.046 trillion) would still be slightly higher than it is under the current system, while making it a lot fairer.
And with no tax returns, no deductions, no exemptions, no exceptions, no writeoffs, no credits, and no refunds, it would also have the added benefit of vastly simplifying the current tax code. A much, much smaller staff will be necessary at the IRS, which will further reduce the government budget. A lot of accountants will be unemployed, and H&R Block will go out of business (not that it's a good thing).
We have rightly abolished taxation without representation (although residents of Washington DC might quibble). Why should we now have representation without taxation?
P.S. (03 January 2011): David Boaz, Executive Vice President of the Cato Institute in Washington DC, points out to me that I am wrong in my assumption that poor people live in larger households. It turns out David is absolutely correct. In the General Social Survey data, the bivariate correlation between the number of individuals in the household and the annual family income (household income is not available in the GSS) in constant 2000 dollars is small but statistically significantly positive (r = .185). In other words, the larger the household, the greater the annual family income. This is partly because larger households contain more income earners (the correlation between the number of earners in the household and the annual family income r = .398). Here’s the mean annual family income in constant 2000 dollars by household size:
1 $28,299 (n = 10,174)
2 $44,527 (n = 14,783)
3 $48,098 (n = 8,000)
4 $53,917 (n = 7,051)
5 $51,730 (n = 3,409)
6 $48,265 (n = 1,335)
7 $44,188 (n = 528)
8+ $42,160 (n = 400)
It may still be the case, however, that people who live in larger households pay less in taxes or are more likely to pay no taxes, as the average family income per capita monotonically declines with household size.