The Perfect Tax
The expansion of government
is limited by the consent of the governed. Once upon a time, that consent was
harder to come by. In 1776, American colonists took up arms against a
government far less oppressive than the one that now spends 40 percent of our
incomes. We're more docile now, but the threat of revolution--or at least mass
dissatisfaction--remains an important force for good. We can harness that force
by designing laws and institutions that require each new government burden to
be widely shared. Politicians are less likely to risk annoying 60 percent of
the electorate than 10 percent.
That
wisdom underlies the "takings clause" in the Fifth Amendment to the
Constitution, which says, in effect, that the government can't take your front
lawn and turn it into a park without paying you for it. The takings clause
forces taxpayers to share in the cost of any taking, and so ensures that
frivolous takings will meet broad opposition. Inspired by the same logic, I
propose a constitutional amendment capping everyone's tax bill at (say) five
times the average. Thus, if the average American pays $10,000 in taxes some
year, no American could be required to pay more than $50,000 that year. That
would force many taxpayers to share the cost of any new government spending,
and so ensure broad opposition to the growth of government.
It's traditional to evaluate tax proposals according to the
twin standards of "equity" and "efficiency." Before I subject my own proposal
to those standards, let's talk a bit about the standards themselves.
A tax system is "inefficient"
when it discourages beneficial economic activities. By discouraging working,
saving, and investment, the United States tax code--like any tax system--meets
that standard with ease. The only completely efficient tax would be one that
does not depend on anything the taxpayer can control--such as a "head tax" of
$5,000 per year. If your behavior can't affect your tax bill, your tax bill
won't affect your behavior.
That kind
of head tax is interesting not as a realistic policy proposal but as a
benchmark for comparison: Economists like to say that a head tax has the
advantage of being perfectly efficient (it does not discourage any economic
activity), but the disadvantage of being perfectly inequitable (the rich and
the poor pay equal amounts). But those economists are wrong on both counts.
Let's talk first about equity. It is an act of
violence against the English language to describe as "inequitable" a tax that
charges everyone an equal amount. In the rhetoric of tax policy, the word
"inequitable" almost never means "inequitable"; rather, it means something like
"less redistributionist than the speaker would prefer."
But I
don't want to dismiss a substantive concern just because people frequently
choose the wrong word to describe it. Instead, let me make a substantive
response: Even if you believe that the tax system should be used to iron out
income differentials, it's still perfectly easy to devise a head tax that is
consistent with your redistributionist philosophy. The key is to make taxes
dependent on variables that are good predictors of income but entirely
outside the taxpayer's control. For example, whites (on average) earn more than
blacks do. A direct tax on income might discourage work. But taxing whiteness
would not discourage anything, while still redistributing income (on average)
from the relatively rich to the relatively poor. A tax of "$10,000 per year if
you're white and $5,000 per year if you're black" is a perfectly .
On similar grounds, we could tax people for being male or
tall or beautiful; all these traits are positively correlated with income. In
the case of beauty, though, we'd have to be careful to tax only natural beauty.
Otherwise, we'd discourage expenditure on shampoo, cosmetics, and dentistry.
(In fact, if we enjoy having beautiful neighbors, we might want to
subsidize beauty rather than tax it; you can't always pursue two
goals--in this case income redistribution and an attractive
population--simultaneously.) Regardless of what you mean by "equity,"
therefore, you can always adjust the head-tax system to conform to your
philosophy. Thus "inequity" (or, more accurately, "insufficient redistributive
power") is not a good .
But just as the alleged
inequity of head taxes is no vice, so may their vaunted efficiency be no
virtue. The problem with an efficient tax system is that it provides no
built-in brake on the government's avarice. A government that takes $10,000
from everybody this year could decide to take $20,000 or $30,000 next year.
That is much less likely under an inefficient tax system. The income tax, for
example, is gloriously inefficient. The higher the tax rate, the less people
work. If the government raised the income-tax rate to 100 percent, we'd all
stop working, and tax revenue would be zero. To convince us to earn an income
worth taxing, the government is forced to let us .
The challenge is to make
taxes more efficient without making them too easy to raise. This brings
me back to my proposed constitutional amendment: capping individual taxes and
tying the cap to the average tax bill. Adding a cap to the current system would
improve efficiency (there would be no disincentive to earn income beyond a
certain level), while maintaining the natural safeguards against confiscatory
government that are built into the income tax. In fact, those safeguards would
be strengthened by the fact that any tax increase would have to be quite
broad-based. As a bonus, a cap would bring the income tax closer to being
equitable, in the true sense of the word. The offsetting disadvantages? None,
as far as I can see.
