The Tax Code We Deserve (and Why We Won't Get It)

Taxes discourage behavior. You could even call them a punishment. So it might surprise you to look at our tax system and find the government raises 90 percent of its revenue by taxing individual income, investment income, corporate income, and work (via payroll taxes).

Working is a good thing! Earning money is a good thing! Saving money and investing in a company that generates profit it can use to pay people to work and earn money is a good thing! But Social Security and the Defense Department are, we have decided, also good things, and we need money to pay for them. So we punish work and income, even though we don't always mean to.

It doesn't have to be that way, of course. We could tax carbon emissions. We could tax gas. We can tax consumption, which can get out of hand, and congestion, which makes the economy less efficient, and heavy vehicles, which put other drivers at risk.

"When we enter congested roadways, or buy heavy vehicles, or drink to excess, or emit CO2 into the air, we impose costs on others," economist Robert Frank told Ezra Klein. "Taxing such activities kills two birds with one stone: It generates much needed revenue, and it curtails activities that cause more harm than good."

These aren't academic pipe dreams. A progressive consumption tax would actually make the U.S. more like the rest of the developed world. Most countries rely on a value-added tax for between a quarter and a third of their revenue, nearly as much as we rely on the individual income tax. Despite state-by-state sales taxes, the U.S. is one of the few developed government that doesn't skim off a piece of what you buy.

VAT OECD2.PNG

But there's political catch. First, the problem with raising more money off of things we want less of is that it means taxing things we use a lot. Put another way: The problem with sin taxes (or Pigouvian taxes), is that one person's sin is another person's livelihood. And an industry rich enough to be worth taxing can afford a lobby movement big enough to crush the effort to tax it.

The second catch is status quo bias. Public policy reform moves through Washington at about the speed you can swing a baseball bat through molasses. (Even health care reform builds slowly and incrementally off the broken medical system we suffer today.) So as excited as I am about a VAT or carbon tax, I'm not holding my breath to see them appear in law.

Tax reform in the next few months and years isn't going to start with a new block of marble. Instead, we're going to chip away at the block we have, lowering income tax rates and stripping out benefits that go primarily to the wealthy. It



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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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