A ‘NAIVE’ TAX SYSTEM THAT MAKES SENSE

A second consequence of complex tax laws is that these laws are essentially unenforceable. Inadvertent or deliberate errors in tax reporting are almost inevitable as the number of pages and calculations in the tax form rise, so authorities focus on the larger taxpayers and those in ‘profile’ groups known to evade taxes. The mistakes the rest of us make, whether in our favour or the government’s, may never be caught.

Taxes are designed to generate revenues to pay for government programs by appropriating or withholding a portion of people’s and corporations’:

• Income (salary, investment income and capital gains), 
• Payrolls (social services taxes), 
• Wealth (property, capital and estate taxes), and 
• Consumption (sales and commodity taxes and user fees). 

The result is a combination of benefit-based taxation (where tax is proportional to benefits received from government programs) and ability-to-pay taxation (where the more you have, the more tax you pay).

Tax systems are very political, since capital moves globally where the tax is lowest, all other things being equal. No government wants its tax system to be significantly out of line with neighbouring states’, or it will lose taxpayers, individual and corporate. Over-hyped and convoluted tax credits deliberately obfuscate their ‘real’ tax benefits for political advantage.

The following system would probably therefore never work under current laws, because it is too honest and transparent. If however citizens were to enact laws that required tax regimes in their jurisdiction to be as simple as possible, fair, enforceable and transparent, a system like the following could be instituted:

1. Corporations would cease to be tax paying entities. Instead, their profits would accrue automatically and immediately to their individual shareholders in proportion to shareholdings, regardless of whether they were paid as dividends or retained in the company. All tax ‘shelters’ would therefore disappear.
2. Payroll and social services taxes would be eliminated. They are unduly complex and regressive and inadvertently act to discourage employment.
3. Consumption taxes would be replaced with production taxes, which would be paid based on the ‘full added cost’ (i.e. including the replacement and remediation cost for all materials and energy resources consumed and waste produced, using calculations developed by economist Herman Daly), rather than on actual out-of-pocket cost or retail price. The tax would be paid by the producing individual or enterprise at the time of production (extraction or manufacture) at one of three rates: 

• Zero-impact products and services — those that have no social or environmental impact (zero tax rate)
• Sustainable products and services — those that consume renewable resources (taxed at x% of full added cost)
• Non-sustainable products and services — those that consume non-renewable resources (taxed at 4x% of full added cost)

The general principle is to tax ‘bads’ not ‘goods’, and hence simultaneously achieve two socially desirable objectives: the raising of money for public infrastructure and governance, and the discouragement of activities that are socially objectionable (e.g. dislocating labour in favour of capital or foreign labour) or environmentally unsustainable. The production tax rate would be set to recoup the current cost of government infrastructure and social programs, so that the tax on current ‘bads’ ays for current public ‘goods’.

4. To recoup the unpaid cost of past government programs and infrastructure (i.e. the interest on the national debt), and to recoup the cost of reclamation and rehabilitation of public lands and the environment (i.e. to pay for past ‘bads’) a progressive wealth tax (not an income tax) would be charged to individuals with net worth in excess of one million dollars. 

The diagram above contrasts this tax system to the current one. It would result in large increases in the retail cost of goods that consume natural resources, pollute or use non-renewable energy. Everything else would become cheaper. There would be no income or consumption tax (though user fees would remain). This would drive both a production shift (to cleaner products and processes) and a tax burden shift (to the wealthier).

Simple, fair, responsible, enforceable and progressive. And revenue-neutral (total overall tax paid would not change). What more could one ask for from a tax system?