Why do we pay income taxes? The answer most give has something to do with the 16th Amendment, but maybe that answer is not the right answer because that question is not the right question. Why do we still pay income taxes? There have been a number of advances in tax systems since the advent of income tax. For example, we now have the sales tax -- a flat-rate tax that usually has exemptions for food. In parts of the world, we have also seen the advent of petrol taxes, energy taxes, and CO2 taxes. Sin taxes make cigarettes in New York more than twice the price of cigarettes in New Orleans. There has even been discussion of a "Twinkie tax" and a "Fresh Patent tax" among fiscally responsible citizens.
But back to the income tax. Let's look at the upside. Income tax is fairly simple, often filed by employers, and easy to make progressive. However, the income tax system has several drawbacks. (1) Income tax promotes a consumption-driven culture. If you have already paid taxes on money that you haven't spent yet, there isn't much motivation to save it (thereby subjecting yourself to further taxation). Your motivation is to go ahead and spend it. (2) Nearly half of Americans don't pay income tax. Just because you make $20,000 a year doesn't mean you aren't buying diamonds, cable television, alcohol, and fast food. Many people who don't pay taxes fail to contribute substantially to this country, while still making a very cozy life for themselves. (3) The income tax system can be subverted by the incredibly wealthy through the use of tax shelters. Tax shelters allow individuals (but usually corporations) to pay taxes in a low-tax country simply by locating a trading post there.
We are in the bowels of a recession that many believe was exacerbated by frivolous loaning, borrowing, and spending. A large portion of Americans have negative net worth from borrowing more than they can hope to reasonably repay. A system that motivates saving may seem like it would be bad for the country's businesses and therefore bad for us a whole, but for many individuals it will prove lifesaving. If we can retain 90% of the motivation to earn instead of 90% of the motivation to spend, we could be in a much better place as a country.
There are several changes to tax law that could motivate savings in various areas. The first and most obvious example coming to my mind is the energy tax. Energy companies are enabled by the government. You seldom see an energy provider trying to outbid a competitor for your patronage. That is because competition is stifled in energy. The government is responsible for that, and that is in the best interest of you, the consumer. I don't want to imagine a world where roads, electricity, and schools are run like airlines, the big three, or insurance companies. If you were motivated as an individual household to reduce your energy consumption you certainly could. However, you are not. Energy is extremely cheap because what you pay doesn't cover pollution, environmental degradation, future scarcity, or fluctuations in demand. If you had to pay a flat rate of 10 cents a kWh (about what you pay now), but a %100 tax between 3 and 6 PM, would you do your laundry right when you got home from work? If you had to pay a %100 tax all the time, would you double check to make sure you haven't left lights on inside as you leave for the day? A tax that motivates saving by eliminating things that are often unnecessary or untimely (peaking demand hours, construction of additional powerplants, dirtier air and water, and high overall consumption) can ultimately help do away with a burdensome and cruel income tax.
Another tax I am a big fan of is the "Sin" tax. As a smoker and a heavy drinker, you might find that a bit self-deprecating, but I enjoy these things as they truly are -- luxuries. Anyone who can afford to buy these things can afford a tax paired with it. For alcohol, a percent tax is important, but it might be more effective to also tax alcohol/ethanol/(C2H5OH), the ingredient that gets you drunk. I came up with this equation for the impairment tax:
(ounces*abv)/300=tax
Examples:
12-12oz bottles of Heineken (%5 abv)
normally $12.99
10% federal sin tax = $1.30
impairment tax = $2.40
new price = $16.69; % increase = 28.4%
22oz La Folie New Belgium beer (6% abv)
normally $12.99
10% federal sin tax = $1.30
impairment tax = $0.44
new price = $14.73; % increase = 13.4%
1.75L (59oz) McCormick's Raspberry Vodka (40% abv)
normally $15.99
10% federal sin tax = $1.60
impairment tax = $7.86
new price = $25.45; % increase = 59.2%
1.75 (59oz) Patron Silver (40% abv)
normally $79.99
10% federal sin tax = $7.80
impairment tax $7.86
new price = $95.65; % increase = 19.6%
Let's put that into terms of government dollars. The National Institute on Alcohol Abuse and Alcoholism reported that in 2000, the per capita annual consumption of alcohol was 2.18 gallons. Let's use 2 gallons to be conservative. 300 million people, of which about 40 million are under 21.
260 million * (128 ounces * 100%)/300
That's 11 billion dollars a year.
And what if it is not?
The result is less absolute alcohol consumed in this country.
Two good incentives, one great tax.
To some this may look like a regressive tax system, and in a way it is. However, in the big picture it is a luxury tax, because alcohol is a luxury good.
Petrol tax is even better. Imagine: cleaner air, similar gas prices (resultant of lowered demand), more U.S. government funds, and fewer funds for corrupt Saudi, Nigerian, and Venezuelan governments.
Most of all, I am in love with the "Twinkie Tax" that promises to revitalize the health of our youth. The algorithm for that tax might look something like these (although I admit, it needs improvement):
(A) = [(calories from fat * 3) - total calories] / 10 = %tax
(B) = fat + (saturated fat*2) - (carbs/4 - sugar) - (protein) = %tax
(units in grams)
throw a McDonald's Quarter Pounder in there:
calories:410, calories from fat:170
(A) 10% tax
total fat:19, saturated fat:7, carbs:37, sugar:8, protein:24
(B) 7.75% tax
then, to test the algorithm, a McDonald's Southwest Salad with grilled chicken:
calories:320, calories from fat:80
(A) -8% tax (subsidy or zero percent tax)
total fat:9, sat fat:3, carbs:30, sugar:11, protein:30
(B) -11.5% tax
I know I need to account for cholesterol and sodium as well, but as I said the algorithm needs improvement. It ought to be calculated using %DV. More on that later...
Isn't it time we stopped punishing people for making money in this country? Our government needs money. Let's get it from the fat drunks, lazy smokers, wasteful litterers, and those whose daily dealings aren't contributing to a better nation.
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