A reader asks the good professor what tax law he would enact if he were President for a day. After reading his response, I think we should figure out a way to get him there, for a day:
I begin with three ideas. First, by taxation I mean government revenue generation. In other words, whether something is called a tax or something else isn't critical, other than, perhaps, in the practical world of politics. So, for me, taxation includes user fees, tolls, taxes, and even, yes, "revenue enhancements" for those who remember how that creative phrase entered the public policy lexicon. Second, there is a distinction between federal and state (and local taxation) and it is important, and necessary, to consider those differences in responding to Nakul's question. Third, government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government.
"Government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government." I'd make Congressional tax writers repeat this like a pledge of allegiance while facing a portrait of Dr. Maule. The tax system shouldn't encourage research, or home ownership, or health care, or... you name it. It's there to pay the government's bills.
The good doctor thinks an income tax would be the way to go, for reasons he sets forth. It would be like this:
Income would include income, with very few exclusions. It ought not matter whether the income is from wages, employment benefits, pensions, annuities, life insurance, dividends, interest, rents, royalties, gains from the disposition of property, or other sources. Taxing dividends means, of course, that corporate income would be taxed twice. Does it make sense to impose a second level of tax simply because the business is conducted in the form of a C corporation and not a partnership, LLC, or S corporation? Perhaps, if one wants to laugh at those who didn't know any better, or dish out "serves 'em right" if there were tax-savings motivations for forming a C corporation that didn't pan out. Unless one imposes a flow-through regime on C corporations, corporate income that is not distributed would not be taxed unless there were a corporate-level tax. Just as important, dividends paid to tax-exempt persons and entities would escape taxation if there were no corporate-level tax. The second problem is more easily solved, namely, taxing tax-exempt persons and entities with respect to dividends paid from income earned by corporations within the jurisdictional reach of the United States government.
The only thing I would add is that I would tax corporate income and allow the corporation to deduct distributions to shareholders. While there is some double taxation that still occurs on a sale of stock in such a system, it wouldn't be worth the complexity needed to avoid it. To make sure all income is taxed once, I would impose a flat excise tax on distributions to non-profits at the top individual rate, to be withheld by the corporation.
As for outgo, there would be two basic deductions. One would be for the expense of producing the income. In other words, I reject gross receipts taxes, which are one of the most perfidious exactions imposed by state and local governments except in those instances where gross receipts is a proper measure of a user fee, but I've yet to see such a situation. The other would be a deduction (or perhaps a credit) that would reflect the wisdom of not imposing a tax on those whose incomes were barely sufficient to live life.
There would be no depreciation on real property. Business real property so rarely goes down in value over the long-term that those few instances where it does so would be taken into account when the property is sold for a loss. Depreciation on personalty used in generating income would be computed over five years. Period. Arbitrary? Yes. Simple? Yes. Sensible? Yes.
Go and read it all. It is long, but that is the Professor's way. It's worth it.
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