The Best Fix for Our Tax System? Replace Income Taxes With Sales Taxes

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It would mean simpler compliance, less cheating, and a lighter carbon footprint. It would even be an offshore-resistant job creator.

615 income tax alan cleaver flickr.jpg

Alan Cleaver_2000/Flickr

This week's Working it Out question was, "What one change would you make to our taxation system?" Readers' most frequent ideas were versions of "soak the rich." For example, "Eliminate tax breaks for the wealthy. We have been waiting for the 'trickle down' for almost ten years now and it hasn't happened." Or this: "Is investment really going to dry up if the capital gains rates are higher for the wealthy?"

Calls to soak the rich aren't surprising in light of the ubiquitous narratives attacking candidate Mitt Romney paying "only" $6.2 million in federal taxes over the last two years. A Google search on the term "Romney tax return" yielded 448,000 links that were posted in the last week alone! (In fairness, Republicans don't have a monopoly on mining tax loopholes. For example, John Kerry's wife, Theresa Heinz Kerry, has a net worth of $500,000,000, 10 times that of Romney, yet in the year Kerry ran for president (they filed "married, filing separately,") she paid a lower rate than Romney.)

Part of me is sympathetic to further taxing the rich. After all, the rich-poor gap is very wide. (Although in fairness, according to studies reported last week in the New York Times, the rich in the last two years are getting poorer and forecast to keep getting poorer.) In addition, no matter how smart, hard-working or innovative someone is, or how many jobs he or she creates, it seems cosmically unjust that some people have a mansion (or two), yacht (or two) and more money than they could spend in Methuselah's lifetime, while other people must eat ramen in hovels. Also making me sympathetic to squeezing fat cats is that the poor spend rather than save a larger percentage of their income, so by redistributing dollars to them, more money gets quickly pumped into the economy.

On the other hand, I am not immune to opposing arguments, for example, those made in The Economist, which points out that, as of 2006, the top 10% pay 45% of total taxation and that taking money from the rich to give to the poor punishes the innovators and job creators and rewards people who are not, and we'll get more of what we reward, less of what we punish. Plus, money left in the hands of the rich will create more jobs and more innovations--from disease cures to iPhone5--than if Robin-Hooded.

As a result, en toto, I am agnostic on the wisdom of redistributive "justice." Given that this week's Working it Out question was, "What one change would you make?" I'd be hard-pressed to join the readers' modal belief that it should be to further tax the rich. If, however, I could propose a second change, it might be to toughen the Alternative Minimum Tax to avoid the rich being such good miners of tax loopholes that they pay little or no tax.

The change in our tax system that I believe would most benefit America is to replace our federal, state, and local income tax with sales tax.

In 2004 testimony to the House Ways and Means Oversight subcommittee, University of Michigan professor Joel Siemrod estimated that Americans spend at least $135 billion annually on tax record-keeping and return preparation, In 2011, a Laffer Foundation study indicated that Siemrod was too conservative: We pay $431 billion, an extra 30 cents on top of every dollar we pay in taxes. We're all eager to find a way to get back even a few minutes in our day and a few extra dollars in our wallet. Imagine if all that money and the time we spend on tax record-keeping and preparing were returned to us.

Another problem with income tax is that underpayment is rife. The IRS reported that in 2006, the most recent data year available, Americans under-reported $450 billion, up by 1/3 from just five years earlier. An IRS report released just this week found that tens of thousands of federal employees, including in the White House, collectively underpaid billions of dollars. Alas, in our system, cheaters too often win.

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Marty Nemko holds a Ph.D. from the University of California, Berkeley specializing in the evaluation of innovation. His columns have appeared in the Washington Post and San Francisco Chronicle, and his sixth book, just published, is How to Do Life: What They Didn't Teach You in School. More

Marty Nemko was called "The Bay Area's Best Career Coach" by the San Francisco Bay Guardian. He holds a Ph.D. from the University of California, Berkeley and subsequently taught in its graduate school. His columns and features have appeared in U.S. News, the Washington Post, Los Angeles Times, and San Francisco Chronicle. The archive of his hundreds of published articles, his blog, plus chapters from his book, Cool Careers for Dummies, plus mp3s of his KALW-FM (NPR-San Francisco) show are on www.martynemko.com.
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