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The three 'intelligent' ways to raise taxes

Clive Crooks is making sense on taxes:

Get used to the idea. Taxes are going up -- a lot. The only question is, which taxes?

There are countless stupid ways to raise more tax revenue but really just three intelligent ways. First, introduce a carbon tax; second, broaden the base of the income tax; third, design a national sales or value-added tax. In principle, each by itself, carried to an extreme, could close the gap. But it would be better to combine two or even all three approaches so that the rates of each tax would be lower for any amount of revenue raised.

We would need a VAT at close to European levels -- 10 percent or more -- if that were the only change. That would be quite a jolt. It would be easier to swallow, say, a 5 percent VAT together with a small carbon tax and a moderate broadening of the income-tax base. For further sweetening -- not to mention, added economic efficiency -- a revenue-boosting package of that kind could be designed around lower income-tax rates and more generous income support for the working poor.

More here.

By Ezra Klein  |  March 18, 2010; 12:16 PM ET
Categories:  Tech  
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Comments

let's see in NJ we have the federal income tax, state income tax, gas tax, property tax, sales tax. Did I miss any???

So now we're going to add a VAT on top of that.

How much is enough of my income to tax? I'm at about 45% now.

Can we stop when we get to 100% please?


i'm still waiting for the Democratic solution as to how all these taxes save me money. I can't wait for that one.

Posted by: visionbrkr | March 18, 2010 12:28 PM | Report abuse

Clive is not making sense. What he wants is to avoid raising marginal income tax rates on the rich. So he proposes a consumption tax and a carbon tax, so that the wealthy can keep the massive reduction in their share of taxes that they achieved in the last 30 years.

We need to remember that the baseline is pre-Reagan. The upper middle class and the wealthy have dramatically increased their share of national income, while radically reducing their marginal income tax rates from 90% under Eisenhower to ~31% under BushJr. They are getting the longest free ride in history, and our national interest requires that they start to pay their share.

It is time to simply reset the rates for the top 10%, since they make 48.5% of the national income. That is everybody above $100k, not $250k, Mr. President. A plan to raise those rates to Clinton era levels over four years, along with ending the wars and reducing defense spending to 2004 levels, would balance our budget without consumption and carbon taxes on the middle class.

Clive is doing class warfare. Shame on the oblivious Ezra for fluffing such destructive policies.

Posted by: Dollared | March 18, 2010 12:30 PM | Report abuse

A carbon tax essentially is a VAT, just even more opaque.

Posted by: tomtildrum | March 18, 2010 12:32 PM | Report abuse

visionbrkr brings up a good point: how would a VAT or carbon tax affect states that already have very high tax burdens? I would think that these new taxes would encourage even more people to move out of NJ, NY, and CA among other states. Perhaps, over time, higher taxes at the national level would force these high tax states to lower their tax burden. NH, TX, and FL would start to look like even more attractive places to live for the upper middle class.

Posted by: MBP2 | March 18, 2010 12:36 PM | Report abuse

Of course there's also this pot of money that isn't being tapped. From the NY Times:

Most U.S. Corporations Pay No Income Tax
August 13, 2008, 8:00 AM

Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

Posted by: AuthorEditor | March 18, 2010 12:42 PM | Report abuse

A modest proposal on taxes"

There may not be enough on taxing the super rich, but there is a lot. Combine this with a derivative tax and a financial transaction tax (designed to catch high volume computer arbitrage trading and multiple day trading. first 500K (indexed for inflation) of retirement account exempt from the tax. If these three aren’t enough, the defense budget has some fat in it. I think a tax on oil companies to pay for the Iraq war, as they are getting access to the country with the second largest oil reserves. There has to be some way to pay for the war repiglicans started, didn't pay for, and consequently f*uck up SNAFU style.

Oh I forgot a wealth tax. Right now, if a family is lucky enough to own a house or condo, they pay tax on their single largest part (perhaps the only part) of their net worth. Rich and super rich (the oligarch class) people, OTOH have the vast majority of their wealth in other wealth media, stocks, bonds, bank accounts, etc. These things that only the top 5-10% of people own in any quantity (of course retirement accounts would be exempt up to say 3 million or so indexed for inflation, obviously these numbers can be tweaked to make sense) are not taxed on their value the way property is. A very modest tax on total financial assets, starting say over 150k indexed for inflation, would raise a great deal of money while balancing the ways differnt kinds of wealth that are taxed. Seems fair to me.

After we have exhausted these items, we can look at a consumption tax or higher income tax on the bottom 90% of people.

Posted by: srw3 | March 18, 2010 12:44 PM | Report abuse

A couple States like Texas are going to catch on that REDUCING taxes but attracting twice the population of high-earners will bring in more revenue than raising taxes and driving those people out.

Posted by: JakeD2 | March 18, 2010 12:45 PM | Report abuse

New Jersey also has the highest ratio of government (state and local) to population, resulting in boatload of inefficient taxation and administration. It's also produced entrenched interests that conspire to defeat every consolidation bill the Legislature tries to pass. Corzine's went down a few years back. I'd genuinely like to see Christie try it and I hope he succeeds.

As for VAT tax and carbon tax, I just finished up with Bruce Bartlett's "The New American Economy" last night. He argues for precisely those two taxes, coupled with selective reductions of other taxes (as part of comprehensive tax reform) and careful realigning of entitlement program (increasing the retirement age, e.g.) to deal with the deficit.

Even Reagan's top economic advisers are abandoning tax cuts as panacea.

Posted by: gmart68b | March 18, 2010 12:54 PM | Report abuse

That's it? Where's the tax on all the financial gamblers who recently took us to the brink of Great Depression 2.0?

Posted by: redwards95 | March 18, 2010 12:54 PM | Report abuse

A broad based progressive carbon tax (people below the median income get their carbon taxes rebated when they file their taxes) does make some sense to stop hiding the costs of burning fossil fuels.

@JD2: The idea of states racing to the bottom by competing with each other to see who can attract the most rich people does nothing for the national wealth picture. It is very much like states competing to see who can offer the most welfare to companies that move to their states. It doesn't help the country as a whole, it just aids the companies at the expense of schools, fire, police, public health, roads, etc.

Posted by: srw3 | March 18, 2010 12:58 PM | Report abuse

@ redwards95: see financial transactions tax and derivatives tax above, good policy (reducing micro-arbitrage computer trading that adds little value) and adds fairness, as the financial system was put on govt life support after it imploded from greed and lack of oversight.

Posted by: srw3 | March 18, 2010 1:02 PM | Report abuse

By all means lets all move to Texas for the excellent health care outcomes and their public school systems...

Posted by: JkR- | March 18, 2010 1:24 PM | Report abuse

A couple of predictions:

1. A VAT tax is a non-starter. They can float it, they can even try to pass it. It's just not going to happen. To seriously pursue it is just going to be a waste of time.

2. A Carbon tax is much more likely. But it has to be simple, and start out very low. Otherwise, it will be extremely difficult to pass.

3. Raising the top marginal rates on the folks who make the most money seems to be the least controversial tax that could be passed, although it will has some problematic effects in some cases (folks who earn over 100,000 a year might and live in NYC might end up better off if they make 50,000 a year and live in Wisconsin, so there might be some moving money going on). The least controversial tax should be a wealth tax--a property tax on investments and savings (stocks, bonds, t-bills, money in the bank) over a million dollars. And it should be a very low tax, indexed to the current interest rate.

I don't see Washington directly raising taxes on the middle class, or seriously pushing a carbon tax or VAT tax or anything else that will heavily impact the middle class. Because they like getting votes. And they don't want to give their opponents something easy, and powerful, to run against them on.

Posted by: Kevin_Willis | March 18, 2010 1:26 PM | Report abuse

Hey Kevin, I appreciate your endorsement of raising the top tax rates and a very modest wealth tax, hopefully exempting the first 100-150K or so of wealth or so. I think there also needs to be a floor on retirement savings of say 2-3 million, maybe indexed for age (so older people have more of their retirement savings exempted until they retire).

Posted by: srw3 | March 18, 2010 1:30 PM | Report abuse

JKR,

you don't think I could move to Texas (or North Carolina) and pay a TON less in taxes than I do in NJ and pay for the best private education around and STILL have something left over?


Kevin,

they're already raising taxes on the middle class within the healthcare bill. That is unless you think insurers are just going to "eat" the tax on medical devices etc. But with subsidies we're being insulated from the tax.

Posted by: visionbrkr | March 18, 2010 1:30 PM | Report abuse

Hey VB, don't you agree that moving to a low tax state is like rearranging the deck chairs on the Titanic? It doesn't add anything to the national income or productivity, just shifts around where those people live and short changes roads, schools, fire and police, and other essential govt services. Isn't it the same as corporate welfare to companies that locate a plant in a particular state?

Posted by: srw3 | March 18, 2010 1:39 PM | Report abuse

I would think one way to reduce state taxation burdens would be to shift most social spending to the federal level. Federalize Medicaid, unemployment benefits, etc.

Posted by: Isa8686 | March 18, 2010 1:39 PM | Report abuse

@VB: That is unless you think insurers are just going to "eat" the tax on medical devices etc.

This is why we need price controls (or at least use the leverage govt programs have to bargain for better prices) on drugs and medical devices (and doctors and hospitals) like every other advanced democracy has.

Right?

Posted by: srw3 | March 18, 2010 1:45 PM | Report abuse

srw3,

well sure you're right but if it saves me money why should i worry?

Isn't that the premise that people that can't access healthcare due to pre-ex use? Or people whose premium goes up due to claims, oops or insurer profit.

Just replace government with insurers, taxes with costs/premium and I could make the same argument.

Now I wouldn't and I'm not moving anywhere but why shouldn't I? For the better good because my state government is WISELY using my tax dollars? Do you know how many local municipalities we have here? Let's just say we have more municipalities than the US has insurers. And how's that working?

Posted by: visionbrkr | March 18, 2010 1:45 PM | Report abuse

srw3,

you get no argument from me there. Price controls (capitation) work for me. Same goes for Pharma.

Posted by: visionbrkr | March 18, 2010 1:46 PM | Report abuse

VB, off you go then! Keep in touch!

Posted by: JkR- | March 18, 2010 1:47 PM | Report abuse

As long as we don't dare contemplate raising taxes on people who make tens, if not hundreds of millions of dollars a year above the 17% effective tax rate they pay now.

It'd be totally unfair if we taxed stock brokers at the same rate as everyone else!

Who would oppose a tax on those that make $30 million or more a year that charges 50% no matter the source of the income? Are people really going to argue that we'd suffer a mass exodus of REALLY IMPORTANT PEOPLE if we force them to live on only $15 million a year?

Posted by: nylund | March 18, 2010 1:50 PM | Report abuse

srw3 - i need to disagree that lower states taxes is "rearranging deck chairs on the titanic". Lowering local taxes (by moving to a lower tax state) reduces the cost of starting new businesses, lowers the cost of hiring a new worker and increases the incentives for business owners to invest in and expand their businesses. It's no coincidence that NJ has seen a net loss of private sector jobs over the last decade and is also 1 of the highest tax states in the US. And it's not like the very high education spending in places like NJ, NYC, Philly and DC are really buying a better education than lower spending in TX and NH.

And while moving to a low tax state doesn't directly add to GDP (although i think it does indirectly) but it shifts the % of GDP away form the gov't and towards the private sector which is the engine of job and wealth creation.

Posted by: MBP2 | March 18, 2010 1:57 PM | Report abuse

@srw3: "I think there also needs to be a floor on retirement savings of say 2-3 million"

I argue that you would make IRAs immune from a wealth tax. You pay regular income taxes on the money as you take it out, and if you have $100 million in your IRA, you might take out $10 million in a year and pay the top marginal rate on it . . .

This would easily protect retirement savings from the wealth tax, but would also encourage investment in IRAs, Roth IRAs, etc, where saving for your own retirement will be rewarded.

Posted by: Kevin_Willis | March 18, 2010 2:09 PM | Report abuse

@visionbrkr: "they're already raising taxes on the middle class within the healthcare bill. That is unless you think insurers are just going to 'eat' the tax on medical devices etc. But with subsidies we're being insulated from the tax."

I don't think they'll eat the tax. What I expect will happen is that it will restrict consumer choice, as certainly products will be priced out of the market, and so will simply cease to exist as offerings. Economically, such tactics tend not to constitute taxes on the consumer (in this case, the middle class) but as a constraint on supply. The more likely outcome is that the middle class will have fewer choices, and will end up with a lower quality product, or none at all.

Which is my functional problem with price controls or capitation.

When it comes to pharmaceuticals, I've long thought we ought to have a patent formula--ergo, companies can extend by a certain period of time the life of their patent on lifestyle drugs for each new life saving (or legitimate medical) drug they bring to the market with a much shorter patent time. They'd still have a motivation to innovate real healthcare drugs, while making money hand-over-fist on the lifestyle drugs and, as long as they continued to develop real healthcare drugs, their patents on lifestyle drugs (I named one, but then I couldn't post, so I've taken that out, but you know what I'm talking about) would never have to expire.

Posted by: Kevin_Willis | March 18, 2010 2:17 PM | Report abuse

MBP2, isn't there a corresponding loss to the state that loses the business (or wealthy person, in the case of moving to a low tax state)? In terms of a person moving to a low tax state, they don't suddenly become more productive, they just pay less in taxes. Doesn't corporate welfare (that is what tax incentives are, in reality) just force states to race to the bottom in terms of tax revenues to support social services?

In terms of spending vs education outcomes, there is a big difference between running an urban school district that through segregated housing patterns concentrates the poorest and least well prepared students in urban school districts. Of course those students who start out behind the curve require more resources to even be on par with places with a more heterogeneous population. And it may also be the case that we are not spending enough to break through the floor of creating achievement. If it costs $5 to get good student results and tx spend $2 and NYC spends $3, it looks like spending more doesn't produce results when actually until you spend $5, you don't get the critical mass or instruction and support services to make a difference.

Posted by: srw3 | March 18, 2010 2:17 PM | Report abuse

The rich have been paying an increasing portion of federal income taxes over the past 20+ years. Yes, I know about FICA, but funding a progressive pension program and a health insurance program which is much more beneficial to the middle class than the ultra wealthy. This is because they are earning more, but also because the income tax has become broader (the rich might well be reporting more income too, as the return to avoidance/evasion fall).

http://economix.blogs.nytimes.com/2009/07/30/top-1-paid-more-in-federal-income-taxes-than-bottom-95-in-07/

The 90%+ income tax rate only kicked in at very high levels - in 1958, the top tax rate was 91% after $400,000 of income. Adjusted for growth in nominal per capita income (~$2,100 - ~$40,000), that would be like starting the bracket at $7.5 million today.

http://www.truthandpolitics.org/top-rates.php

Also, the people with that kind of income are very mobile. The world is a much more mobile place today than it was under Ike. You might not like that hedge fund manager John Paulson only paid $450 million when he made ~$3 billion a few years back (note: neither do I, I do think hedge fund income should be considered labor income, not capital gains), but that $450 million is better than zero if we find that 91% tax driving Paulson to move to Singapore or Hong Kong.

Also, corporations do pay a lot of income tax. In 2007, corporations paid $451.5 billion of taxes on $1,541.7 billion of income, a 29.3% rate. On top of that, they paid $767.8 billion in dividends, of which something like $100 billion was captured by the dividend tax (of course, some dividends go to tax free accounts, but the wealthy don't get to make extensive use of these) - capital gains taxes are also taxes on capital but I'll ignore these for now. If we assume $100 billion of dividend taxes, or $551.5 billion of total capital taxes, then corporations paid tax equivalent to a 35.8% flat tax.

The study cited earlier includes a sample of 1.3 million corporations, although there isn't a whole lot of money beyond the top 1,000 or 2,000 worth taxing. I think we'd be better off with something much simpler - perhaps a 25% or 30% flat corporate tax rate, expensing of investments, but no deduction for interest expense.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=53&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1999&LastYear=2009&3Place=N&Update=Update&JavaBox=no

Finally, I don't see how anyone can believe global warming is a problem and not support a carbon tax. Yes, it hits the poor, but unfortunately the poor and rich alike need to cut their carbon usage.

Posted by: justin84 | March 18, 2010 2:19 PM | Report abuse

Well Kevin, there are lots of ways to skin the wealth tax cat. I would be happy to consider different ideas on sheltering some retirement savings from the tax or wait until the money is withdrawn and capture the revenue then. There are many things to work out, but I appreciate your willingness to consider equalizing the taxes paid on real estate and all other forms of wealth.

Posted by: srw3 | March 18, 2010 2:22 PM | Report abuse

We definitely need to reform our tax system. Start with a flat tax and a simplification of write-offs (mainly by eliminating all but a few--perhaps keeping things like donations to non-profits, child credits; eliminating write offs for property taxes, student loan interest, etc., etc.). Institute a national sales tax (i.e., a consumption tax) and a carbon tax, and tax employer provided health care as a benefit.

We also need to tax, to some degree, the nearly 40-something% of Americans that don't pay taxes. Or just don't let them vote.

Posted by: Fletch_F_Fletch | March 18, 2010 2:31 PM | Report abuse

@Justin: The rich have been paying an increasing portion of federal income taxes over the past 20+ years.

True, but the the proportion of national income going to the rich (the top 1-5% of all income earners, I like to be specific here) has skyrocketed over the last 30-50 years. Most rich people pay less than 17% of their income on taxes. As warren buffet said, he pays a smaller % of his income in taxes than the person who cleans his office at night. This have to change.

"Yes, I know about FICA, but funding a progressive pension program and a health insurance program which is much more beneficial to the middle class than the ultra wealthy."

Not sure of your point here. We all pay taxes that do not directly benefit us. I personally hate paying taxes for an illegal war and occupation in Iraq that only benefits military contractors and multinational oil companies. I am not getting any benefit out of my tax dollars going to kill innocent Iraqi citizens. I could say the same thing about our web of military bases that spans the globe. What benefit am I getting? Again multinational corportions benefit from our force projection, making it safer for them to scour the world for raw materials and cheap labor, while depending on the US military to protect them and their profits. See the history of US intervention in Latin America for a case study in how this works. Our tax dollars go to things that only benefit the very rich and corporations all the time.

So, I think fica does need some adjusting. This is the biggest tax burden for people at or below the median income level and it is the most regressive tax we currently have. Even if it was flat with the income cap removed, it would be a huge improvement and make social security solvent at current levels of benefits for the foreseeable future. I am not as clear on the medicare tax but I think the same thing happens there.

Posted by: srw3 | March 18, 2010 2:38 PM | Report abuse

@FFF We also need to tax, to some degree, the nearly 40-something% of Americans that don't pay taxes. Or just don't let them vote.

There are no people that don't pay taxes. Everybody who works pays FICA and medicare taxes and everyone who buys anything pays gas taxes, sales taxes, etc. I would note that these are the most regressive taxes paid by the poorest people. As warren buffet said, he pays a smaller % of his income in taxes than the person who cleans his office at night.

I don't have any problem with simplifying the tax code by eliminating the tangle of loopholes and tax credits that we have and replacing it with a much simpler system. But a simple progressive tax structure with very few deductions makes more sense from a fiscal and social point of view than a flat tax.

Posted by: srw3 | March 18, 2010 2:47 PM | Report abuse

srw3: "Doesn't corporate welfare (that is what tax incentives are, in reality) just force states to race to the bottom in terms of tax revenues to support social services?"

Is that an argument that Texas and North Carolina have a quality of life, and level of social services, that is significantly worse than New Jersey?

"I appreciate your willingness to consider equalizing the taxes paid on real estate and all other forms of wealth."

Well, I'm very skeptical that we'll ever get a wealth tax. A basic, bipartisan truth is that, for most of the folks in Washington, their income pales next to their wealth. I don't think they'll vote for it, unless they can exclude themselves from the tax, somehow. A "people in public service" exclusion, let us say.

And it should be pointed out that another obvious tax to increase in raising the ceiling of payment of Social Security taxes from $102,000 to $100,000,000 or so. I wouldn't even object to lowering it so that they only pay 3% to SS on money over $102,000, but if were worried about long term solvency, that seems like a good way to address the problem. Then attach a "private option" to that bill like Bush's SS reform. ;)

Posted by: Kevin_Willis | March 18, 2010 3:33 PM | Report abuse

Hm. No one's mentioned payroll taxes. Where I work, we are always looking for capital solutions to personnel needs: it's cheaper to get a machine than to hire someone. Let's have a gradually increasing carbon tax, and in exchange, phase out the payroll tax. Make it easier to hire people, than to purchase capital equipment.

And raise SS and Medicare taxes basis too. No fair for the fat cats to get off free after $95K/yr.

Posted by: Lonepine | March 18, 2010 3:38 PM | Report abuse

@KW:
I haven't lived in any of those places, so I don't have first hand knowledge. I am willing to bet that there is a more complete safety net and more government provided services in NJ than there is in TX. I bet they have a more robust unemployment insurance program, better medicaid benefits, more police and firemen per person, etc. That is not to say that there aren't layers of govt that are unnecessary or bloated, but there is probably a substantive difference in the level of services that are available, especially to those in the bottom quartile of the income distribution. Just a guess.

I don't think the wealth tax, no matter how fair, will happen either. I always bring it out when the VAT or flat tax people come around and try to sell broadening the tax base by sticking it to people at or below median income.

I also mentioned significantly raising or eliminating the ceiling on FICA taxes in another post. Currently FICA is the most regresssive tax and the largest single tax on people below the median income level, I bet. The less you make the higher the FICA tax is relative to other income taxes.

This would get rid of the meme that SS is going broke. Medicare is, but social security can pay out benefits at current levels with CPI adjustments for at least 30 years. With the FICA ceiling removed and/or modified, it will be solvent for the foreseeable future.

Posted by: srw3 | March 18, 2010 3:50 PM | Report abuse

@LP: I don't think the payroll tax will be eliminated as it is dedicated to SS. significantly raising or eliminating the cap (even if the rate went down as income went up starting at 500k or so) would be a great idea to insure SS solvency.

Posted by: srw3 | March 18, 2010 3:54 PM | Report abuse

Srw3,

The 17% average rate doesn't include corporate income tax paid on behalf of the rich. My calculations from above showed that corporations paid 29.3% of their income as taxes (some of that is state tax - we'll assume 25% of it is federal). Assuming a large chunk of their income is from capital gains and dividends, then to get a true sense of tax actually paid it is probably closer to a 35.75% effective rate (assuming 75% of income was from capital). The other issue is that capital gains aren't indexed for inflation. So if you've bought a stock for $100, hold it for three years and sell it for $110, you pay $1.50 in capital gains tax. However, if the price level rose 10% over the same time period, you paid a tax on flat purchasing power - that is, you earned no real income yet you paid a tax.

As for FICA, it is different in my view because the amount you pay is explicitly linked to future benefits to you, and a formula which is progressively constructed.

On wealth taxes, a VAT is essentially a tax on wealth, since wealth is essentially the present value of future consumption.

My preferred system would be a guaranteed minimum income / basic income grant, a flat tax of equal size on labor and capital income (leading to a progressive trend for effective rates).

Posted by: justin84 | March 18, 2010 4:04 PM | Report abuse

@justin: On wealth taxes, a VAT is essentially a tax on wealth, since wealth is essentially the present value of future consumption.

Just don't see this. I pay real estate taxes on the current value of my home, but no taxes on the current value of my stocks, bonds, bank accounts etc (if I had any of those). Since the rich and oligarchs have the vast majority of their wealth in financial assets, it seems fundamentally unfair to tax one form of wealth and not another.

Posted by: srw3 | March 18, 2010 4:24 PM | Report abuse

Fletch, the 40% something that you talk about don't pay income taxes, but that does not mean they pay zero taxes. They still pay property taxes (either implicit or explicit), payroll taxes, sales taxes, excise taxes, implicit corporate taxes etc....

You have to look at effective rates of taxation, and they range from around 10%-25% for ALL income quintiles according to the CBO.

Don't fall for this BS that there are ONLY income taxes.

Posted by: truth5 | March 18, 2010 5:08 PM | Report abuse

A carbon tax is an excellent idea, but with problems.
Replacing current taxes with a carbon tax on fuels plus an income tax on high incomes would make it a lot fairer, but there would still be the problem of generational inequalities: older people who paid their share of taxes as income taxes in the past, now would be paying taxes again as carbon taxes.
The best idea I've heard yet is what I would call the 'Alaska Fund plan'. The oil revenues from Alaskan oil are distributed on an equal share basis to every Alaskan annually. If we likewise consider our environment to be equally owned by all (and not disproportionately owned by the wealthy), each person is equally damaged by pollution and each person entitled to compensation. It's also been described as "Tax and Dividend".
One politician described it as 'taking from a grandma in Iowa and giving it to Paris Hilton', which conclusively proves that politicians can be very, very bad at math. Since the rich use a disproportionate amount of fuel, such a tax would be progressive: a Grandma in Iowa would get much more than she puts in, and Paris Hilton, much less.
One problem with a carbon tax is that poorer people can least afford energy efficiency technology: the Alaska Plan give them the means to buy efficient technologies and so reduce the amount of carbon tax they owe.
It could be distributed as a tax credit, which would solve some taxation problems. Or it could be distributed as a health insurance voucher (good for medicaid, medicare, or insurance).

Posted by: Denswei | March 18, 2010 5:15 PM | Report abuse

Also, there ought to be a very small tax on stock transactions & such, to discourage speculators from buying and selling stocks several times a day as the price varies by a few pennies. This kind of high volume arbitrage only destabilizes the market while enriching the few at the expense of the many.

Posted by: Denswei | March 18, 2010 5:22 PM | Report abuse

You'll never get anyone in this country to support a VAT on top of the exiting federal income tax. Won't happen. Governments love the VAT because they can raise it whenever they want to generate more tax revenue for the politicians to spend on their special interest programs and most taxpayers hardly notice because it's hidden in the price of everything they buy. I would support a national sales tax which would be enumerated at the bottom of the sales slip of every purchase as a separat line item.

Posted by: RobT1 | March 18, 2010 5:24 PM | Report abuse

Srw3,

That is a fair point - wealth taxes aren't all equal (although its hard to tell net effects in some cases, since you have property taxes, homebuyer tax credits and mortgage interest tax deductions all in play wrt real estate). The VAT might actually be a fair way to tax wealth.

Let's say you have $1,000 in stock. A VAT is instituted at 15%. If you decide to sell your stock and buy goods on which VAT is placed, then you are taxed 15% on your wealth. You can buy goods worth $850. Alternatively, you can hold onto your stock, and five years later you have earned $338.23, a 6% compounded annual return. In five years, you decide to buy something for $1,338.23. You pay $200.73 in VAT and buy something worth $1,137.49.

Conversely, consider a one-time wealth tax of 15% (wealth taxes are usually annual but at much lower rates, but I'm using a large one time tax to show how VAT is like a wealth tax). Your $1,000 is reduced to $850. You can decide to spend that $850 on goods now, or you can leave it invested. At the end of five years, your $850 grew at a 6% compounded rate, leaving you with $1,137.49 worth of purchasing power.

Kept at a constant rate and never repealed, a VAT is a flat tax on lifetime consumption, which is determined lifetime wealth (it is an estate tax too, since wealth spent by heirs is subject to the tax). Obviously some money can be spent on the black market, overseas, or on goods from which politicians don't levy VAT, but then no tax is perfect. If the proceeds of the VAT are provided in a flat or progressive manner (equal rebate to all citizens, health care, education, EITC), then on net your VAT system is essentially a progressive wealth tax. The FairTax operated on this principle (consumption tax + rebate). The FairTax's primary failings were it didn't raise enough revenue, the rate was likely to generate a large black market, and the rebate was so low that it was in effect a middle class tax increases.

Posted by: justin84 | March 18, 2010 5:33 PM | Report abuse

RobT1, a VAT has the same effect as a sales tax but with better enforcement (flip side being higher compliance costs). Would the VAT be okay if the amount were listed at the bottom of the receipt?

Also, without significant spending reform, income tax rates are going up. Instead of 10%, 15%, 25%, 28%, 31%, 33% and 35% brackets, we might have to live with 15%, 30%, 45% and 60% brackets. Or higher FICA. Or a VAT. Or the inflation tax. Economically, a VAT is one of the least distortionary taxes. If we can't cut spending, we'll be paying more one way or another, and I'd prefer it to be a VAT or carbon tax.

Posted by: justin84 | March 18, 2010 5:39 PM | Report abuse

thinking about getting into politics. will need plenty of special interest kickbacks to stay in office. i think we should keep things kinda status quo.

Posted by: FairMark | March 19, 2010 8:02 AM | Report abuse

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