If I had any real power I would tax you all in the following manner:
First, I’d impose a consumption tax such as a VAT on traded goods and services. The consumption tax will have to be progressive, for example by way of a 0% tax on food and other basic necessities and a rate close to 100% for luxuries. A consumption tax encourages savings and investment and does away with the disincentives of income and payroll taxes which it will replace (disincentives to work, earn and hire). It also puts a stop to wasteful conspicuous consumption and status competition, at least at the top end. The sharply decreasing marginal utility at high levels of consumption means that the tax can indeed be strongly progressive, with close to 100% rates at very high levels of consumption. Such a strongly progressive consumption tax will leave incentives in place: a $1 million dollar home motivates just as well as a $200 million home, because people mostly care about how they are doing relative to similar others and all similar others will be subject to the same taxes.
Second: add an inheritance or estate tax because the wealthy, who will save more as a consequence of the consumption tax, will die with larger estates than before. Inheritance is inherently unfair because undeserved. A tax on inheritance not only reduces this unfairness, but does so without distorting incentives. Most other types of taxes have disincentive effects: when an activity such as consumption, investment, employment or pollution is taxed, the activity becomes more expensive. Hence, people will to some extent disengage from the activity (consume less, hire less employees, invest less, pollute less) or find ways to reduce their tax burden (offshore profits or assets, fail to declare income etc.). Disengagement is good in the case of pollution and consumption, but not for investment and employment. An inheritance tax is one that doesn’t have disincentive effects. People will not die less when wealth and assets are taxed after death. This tax is therefore sustainable, in addition to being moral.
It’s a kind of wealth tax. Wealth taxes, including an inheritance tax, promote consumption and are in conflict with the stated aims of a consumption tax (see above). But in the case of inheritance tax that’s a reasonable price to pay. Other wealth taxes – with one exception (see below) – will have to go, precisely for this reason, as well as other reasons: wealth taxes are difficult (they are a percentage of the taxpayer’s calculated net worth – total assets including cash deposits, real estate holdings, investments, trusts and shares in businesses, minus debt – and this net worth is difficult to valuate and easy to offshore); and they raise liquidity problems (the taxpayer may have to sell part of her assets in order to pay the tax, which will increase the supply of assets and drive down their prices, making wealth creation less attractive and possibly undermining the wealth tax). So, although a wealth tax is perhaps a fair tax – wealth is more concentrated in the hands of a very small elite, compared to income – it’s not necessarily a good idea.
Third: add a land value tax. This is a wealth tax, but not really a real estate tax, because the largest part of the value of real estate is the value of the land, not the value of the buildings. It doesn’t cost much more to build a house in Manhattan than to build an identical one in the Midwest. The house in Manhattan is much more expensive because it’s on Manhattan land. A land tax is similar to an inheritance tax: no one built the land, so people will not have less land when it’s taxed. And because no one built it, no one can be said to deserve it. So no incentives arguments against a land tax, and a strong moral argument in favor of it. Just as with inheritance.
Fourth: add some pigovian taxes (taxes on carbon and other externalities such as pollution, congestion etc.).
Fifth: abolish all other taxes, including taxes on investment income or normal income, on corporate profits, on labor/employment etc.
This system yields our tax revenues. A tax system can be justified on different grounds, and I’ve already mentioned a few, namely fairness, incentives (incentives to consume less, to save and invest more, to avoid pollution…) and efficiency (ease of tax collection and tax calculation). But an important justification of a tax system is its general purpose. What do we want to do with the tax revenue? Apart from the obvious goals – public goods such as a police force, a judiciary, a national defense, infrastructure, some regulatory agencies, public education, healthcare etc. – my main concern is welfare, or social security as they say in Europe. And like an increasing number of people I want to propose that we use our tax revenues to fund a universal basic income system which will replace all or most of the existing government support measures such as unemployment benefits, pensions, food stamps etc. I’ve defended the UBI in more detail before so I won’t burden this already longish post any more than necessary.
Now tell me why I’m wrong.