Saturday, November 19, 2011

What about this method of taxation?

My general feeling is that the last thing we need in the USA is a more complicated tax code.  However, I just had an idea for a new, perhaps slightly complex, structure to the income tax system that I think might be worth mulling over.  I'll state right off the bat that this probably would never work for logistical reasons.  But if we cast aside that impediment for a bit, there might be something worth pursuing in this idea.

The basic idea is that each taxpayer would use their tax dollars to have a real say in how he/she thinks the government should run.  For now I'm just talking about income tax, and this may be the only area in which this idea would make sense.  There are, of course, arguments that an income tax is not an effective method of taxation, but that's a discussion for another time.  Anyway, here's what would happen in my proposed system:
  • As before, each taxpayer would be assigned a total effective tax rate based on their income.  There seems to be somewhat general agreement that a system that does this in a progressive fashion (i.e., the tax rate increases with the taxable base) is preferred, and I'm fine with that.
  • I would advocate eliminating all tax deductions and credits.  I agree with a wise friend (Tim Mason) who stresses that the point of taxation is to fund the government, not to encourage or discourage certain behaviors.  Assuming no other changes, the effective tax rates would be lower in this system while generating the same amount of revenue - this is because people would not be doing tricks to lower their taxable income through deductions and credits.  So far this idea is nothing new.  Time for the potentially novel aspects...
  • Of that total effective tax rate, each taxpayer would be required to pay some mandatory portion of it towards barely keeping the government running.  By this I mean keeping the lights on and funding prior obligations (debt, entitlement programs, etc.).  To give a more concrete example with simple numbers, lets say this mandatory portion is 50% of the total effective tax rate.  While we're making up numbers, let's assume that the total effective tax rate for an income of $100,000 is 20%.  Someone with that income would be require to pay 50% of 20% (= 10%) of $100,000, so $10,000.
  • The remainder of an individual's tax burden could be lower or higher than the remaining 50% of the total effective tax rate.  The final amount would be at the discretion of the taxpayer.  But this determination would not be arbitrary.  The taxpayer would be presented a list of departments of the US government (I don't know whether this would be a complete list, but the "major" ones should probably be on there) with information on what each department does and its funding needs.  For each department listed, the taxpayer would be given a choice of 5 funding levels, ranging from significantly reducing a department's budget, to maintaining its current budget, to significantly increasing its budget.  Let's say the choices are something like the following:
    • (A) Fund the department at 50% of current budget
    • (B) Fund the department at 75% of current budget
    • (C) Fund the department at 100% of current budget
    • (D) Fund the department at 125% of current budget
    • (E) Fund the department at 150% of current budget 
  • The system would presumably be set up so that choosing to fund all departments at 100% would result in paying 100% of the discretionary portion of the effective tax rate, and thus 100% of the total effective tax rate.  Using the numbers above, an individual could then pay between 50% (all budgets slashed) and 150% (all budgets boosted) of the discretionary portion - or between 75% and 125% of the total effective tax rate.  The final number would be dependent on his/her funding levels for each department.  The departments would also presumably have different weightings on the individual's final tax burden, with larger departments having more of an effect.
I like this idea because it gives taxpayers a say in how they think the government should be structured, and this vote is directly tied to something that most people care about - their wallets.  If you think that the work a certain department does is valuable, you can show it by increasing their funding.  If you think a department should be shut down, decrease their funding.  I think it would go a long way toward showing what people think the right size of government should be.

It also changes the dynamic of tax increases and tax cuts.  If a political figure or group wanted an income tax increase, they basically would have to convince the public to fund the government at higher levels.  Tax cuts would go the opposite direction, though I don't think most people would need convincing in order to reduce their tax outlay.

Obviously, there are also some drawbacks to this idea.  I see two main arguments against it, but I am sure there are many others.  The first deals with logistics.  Besides the fact there are many details that I glossed over that would need to be sorted out, it seems like an overwhelming burden to force each taxpayer to make these sorts of decisions.  And it may be that the departmental level is not an ideal partitioning for this project.  Imagine how much more work it would be to have to make decisions on individual agencies within departments.  Isn't that what we elect public officials to do for us?

The other argument seems to be one of fairness, and goes something along these lines...  If I'm funding a department at a higher level than someone else, should I not benefit more from that department than that other person?  If I give the Department of Defense 150% funding, I should be better protected from foreign militaries than someone who gives them 50% funding.  Or if I give the Department of Transportation 150%, I should perhaps drive on better roads than someone who gives them 50%.  Even if the current system has other flaws in distribution, I can at least say something like each person pays an equal portion of each tax dollar for each service that the government provides.

To the first point regarding logistics, I don't think the project is hopelessly doomed.  I certainly think that there would be many issues to work out, but I think it could be done in a way that preserves the basic ideas driving this.  Remember that filling out tax forms right now is not a straightforward task.  In fact, this is so much the case that a large number of people pay professionals to do it for them.  My proposal could conceivably be simpler than the current system if tax loopholes were closed and tax rate calculations were simplified.  The only remaining variables would be income level and departmental funding levels.

Even if the logistical issues could be overcome, the question remains of whether this would be a worthwhile method to try.  The second objection above is an argument that it is not.  I don't think that I currently have anything to say directly counter to that objection, though my response would be that I perhaps see fairness a different way.  I think that giving each person a voice regarding the structure of the government is fair.  And in the end the benefits of doing this could outweigh claims to individual levels of service based on contribution.

As I hinted at earlier, there are many more aspects to this idea that I have not even considered (despite the above-average length of this post).  Perhaps somebody will point something out that will make me realize that this is a profoundly misguided idea (and hence why I've never heard something like this discussed before).  But for now I'm kinda diggin' it.