This is the first year I have to file my taxes separately and I have already made the observation most Americans made the second after installing TurboTax: Taxes are annoying. We hate filing just as much as paying the actual money. There must be a better way of doing this.
In standard microeconomics we learn that most taxes are inefficient in the sense that the total welfare is diminished by the taxes. But often there are exceptions to this general case when we aren’t talking about a perfectly elastic market with efficient competitors, free entry/exit, minimum initial costs, etc. These exceptions include natural monopolies, goods with positive or negative externalities (like cigarettes), or cases of incomplete information. It is in these cases where taxes can actually have a positive impact on the overall welfare of society, and do so efficiently.
Instead of having an extremely inefficient and complex system of taxation on income, capital gains, consumption, (etc) and similarly complex systems of deductions for interest expense, capital losses, (etc), why don’t we just have a flat percentage tax on inelastic goods the use of which we want to discourage? Instead of the current system of taxes, a tax on land, oil, coal, cigarettes (and other goods with negative externalities if you can think of any) would be sufficient to finance the government’s operations with minimal negative impact on the broad society (perhaps the tax will be even beneficial).
Let’s start with complaints about why the current system is inadequate. Let’s discuss theory: It is inefficient, has high administrative overhead, encourages dishonesty, rewards people for special circumstances (having lots of children), discourages employment, is non-uniform, and in general is a huge waste of time. Wealthy people who don’t work pay no taxes (except for consumption). Energy waste is not discouraged. There is an entire political opening for all sorts of rent-seeking by lobbyists and special-interests, and biased pork-filled legislation. In essence, the individual incentives are completely misaligned with what is socially optimal.
I can also tell you anecdotally why the current system is inadequate. Last year, as we all know, was a terrible year for investors, me included. I was actually doing well in the first half–I had successfully traded my alternative-energy stocks up and down for a realized gain of over 1000 dollars. But when the stock took a sudden plunge, I plunged in, hoping for a quick recovery. Well, that recovery didn’t come and I’m still holding onto the stock. Hence I have to pay capital gains taxes on my 1000 dollar realized gain when in reality I lost nearly 3000 dollars on paper. Obviously a better strategy for me would have been to sell right when my tax liabilities broke even, then bought back immediately, but what did I know about taxes in 2008?
Clearly we are encouraged to game the system and the market doesn’t accurately reflect the investor’s belief about the prospect of future earnings. Nope. It also reflects the investor’s tax-minimization strategies, which are usually not the best way of allocating capital to those who will use it most productively. Now that we see why the current system sucks, let’s examine the components of the system I propose and why I believe they will be better.
The Land Tax
First off, the land tax. It will be a flat annuity of 4 cents per square feet of land you own. If you own a house on a 6000 square feet lot, you pay $240/year of land tax. If you own a gigantic casino on 10 acres of land, you pay $17424/year of land tax. If you own a 100 acre plot of land for growing corn, I suggest you do something else because this government won’t be paying you subsidies to leave land idle.
How is this better than an income tax?
- The supply curve of land is virtually vertical. Therefore, raising the tax will have a negligible effect on the amount of land available. This has been the principle argument used by economists in favor of a land tax
- This will discourage the ownership of idle land. Since the owners are paying the money no matter what they do with the land, people will be less inclined to squat on land and leave it unproductive. Therefore, land speculation for underdeveloped regions will be minimal.
- Along the same lines, people will be encouraged to use land more productively than before.
- This is essentially a wealth tax, which I believe is much more efficient than an income tax. Many people, when they achieve wealth, stop working and hence paying income taxes. This will make sure wealth people continue to pay taxes regardless of how much they work.
- Easier administration: Nobody has the incentive to under-report the amount of land they own. If they paid for 6000 square feet, why would they not claim the 100 square feet they’re entitled to? (It’s 4 dollars a year) Plus, since the exact property is explicitly described in the ownership-transfer contracts, filing the tax entry for this is as simple as finding out how many square feet you own.
According to the USDA, 1.38 billion acres of land were under private ownership in 2002. Hence, the 4 cent/square feet tax will net 2.4 trillion dollars per year. (At least 2 trillion dollars assuming private land ownership will not fall more than 17%)
The Commodity Taxes
Last year I made a strong case for an increase in oil taxes. A 200% tax on oil and coal–at current consumption levels and $50/barrel, $50/ton long-term average prices (respectively)–would net $900 billion dollars a year. Of course, with this kind of punitive tax, this is likely to go down significantly as the economy adjusts away from energy-intensive industries, so we can only consider this as a decreasing stream of revenue where we use land tax to compensate in the future. The environmental and social impacts are obvious.
Other Sin Taxes
Smoking and the consumption of alcohol have enormous social implications when not contained within each’s private quarters. That much is obvious. How much in revenue the government can expect to make from them is a dubious question, though. According to the JAMA (Journal of the American Medical Association), 43.4 million Americans are smokers; 33.8 million smoked everyday and 9.6 million smoked some days. If those who smoked everyday paid a dollar per stick and each person smoked a pack of 12 a day, that’s 338 million dollars/day. If the occasional smokers smoked twice a week, also 12 sticks per day, that’s 338*2=676 million dollars/week. In all, that’s 160 billion dollars a year.
In 2000, Americans consumed 27.1 gallons of beer per capita while beer accounted for 85.8% of all alcohol consumption. Therefore, Americans consumed 31.6 gallons of alcohol per capita, which is 9.5 billion gallons for the whole nation. Assuming that each six-pack of beer has half a gallon of beer (each can has around 300 mL and 6*300=1.8L which is very close to 0.5 gal = 1.9L) and each gallon is taxed twelve dollars (each can is taxed a dollar), that’s 114 billion dollars a year in alcohol tax revenue. We can lower the drinking age to 18 to humor people, but those who are too poor to (a) have a chauffeur, (b) get a taxi, (c) or drive a car with ABS and a good cruise-control system will be too poor to afford the beer just for the hell of it. (I’m sure they can muster the dollars for the occasional party). The social implications are clear. I don’t want to bore you with my explications.
Conclusion: The Combined Effect
Taxes will be much simpler. The beer and cigarette companies pay an annual tax proportional to the number of sticks and cans they produce. You pay an annual tax proportional to the amount of land you own. Energy companies pay an annual tax proportional to the value of oil and coal they use. Your beer, electricity and gasoline will be more expensive, but you don’t have to (and cannot) deal with that. Instead of earning our measly 2 trillion/year as we do now, this system can allow us to earn 114 billion + 160 billion + 900 billion + 2.4 trillion = 3.6 trillion dollars a year, pay down our debts, and save for the future. Considering President Obama’s 3.6 trillion dollar budget for 2010 and the projected 1.4 trillion dollar deficit, this tax plan will completely close the budget gap.
In light of this I think it might be a better idea to gradually increase the tax on energy, smokes and alcohol (starting at 100%, 50c/stick and 50c/can) because surely their demand (and hence our projected revenue) will fall with the increased prices. But despite that, the idea still holds that we need a simpler tax system so people can focus on working to produce rather than working to find how to work around the system and maximize their deductions.