Many Americans would agree--taxes suck. But is there a better way to tax than others? Recently popular appeals for the elimination of the income tax in the U.S. seem to have an answer, but is it really the best one?
I am currently endeavoring to read Adam Smith's The Wealth of Nations, and he reminds us that taxes take from our productivity and give it to a fundamentally unproductive body: the government. In other words, no government agency produces wealth or actually adds value to any commodity. Taxes fundamentally hurt the economy.
So, assuming some government is necessary (even if it's 1% of what we have now), is there a better way to tax than others? Since taxes hurt the economy, the question is: Which part of the economy do we want to hurt the most?
An income tax, especially a "progressive" income tax, which taxes the richer at a higher percentage, discourages increasing one's personal income. If we seek a better overall quality of life, it would be best to reduce this tax
A consumption tax like the FairTax discourages personal spending. This might have the advantage of helping people reduce their personal debt load. It would also encourage personal savings if the Fed decides to raise interest rates above 0%. However, consumer spending keeps the economy moving, which is all-in-all a good thing.
An excise tax taxes certain products like cigarettes, alcohol, gasoline, or marijuana (if it was legal). The advantage of this is that it can act as a "sin tax," discouraging certain behaviors. In the case of tobacco, it has the advantage of charging those who cost the health system significant amounts of money....significant amounts of money. The disadvantage is that it places a heavy burden on certain job-creating industries.
An estate tax takes some of the left over wealth that a person acquired. The supporting idea is that whoever they would have left that wealth to didn't actually earn it, so they don't deserve to keep all of it. However, this discourages people from producing more wealth than they will be able to consume in their lifetime.
Tariffs are fees charged to corporations in other countries for the privilege of selling their goods in the U.S. This presents the possible advantage of protecting American jobs. Supporters would say that a Japanese automobile of equal quality to an American automobile should cost more than the American automobile. This, however, limits people's free choice of products and assumes that workers physically located closer to us deserve jobs more than workers far away. Historically, it has lead to "trade wars" where other nations, in return, charge higher tariffs, making our products more difficult to sell abroad.
A VAT tax is like a consumption tax, however it applies not only at the retail level but at every wholesale level. In theory, when a farmer sold their grain, the buyer would pay a tax. Then the retail store would pay a tax when purchasing it from the person producing food from that grain. Then there would be a consumption tax when the person bought it at the store. This encourages more people to buy at the wholesale level and produce the finished product on their own. It has the slight advantage of spreading the pain.
Spreading the pain may seem like the best way. One reason the current income tax seems so bad is that it makes up 84% of the federal 2010 budget (including payroll taxes). What if it was only 42% and a consumption tax was the other 42%? Is ending the federal income tax really the best way to reform taxation in America? Are the other options that much better?