Disclaimer: I wrote the following paper this evening with only a simply premise to get me started. I am not a tax professional. My complete knowledge of tax issues came from only a few sources. These would be a textbook on Microeconomics, my partial reading of the FairTax proposal, recent completion of a 1040-EZ form, and liberal surfing of the sometimes unreliable Wikipedia. Let's begin.
Current US tax codes are very long and complex. According to various Republican representatives, the full text of the code is is somewhere between 2,500 and 2,500,000 pages long (http://www.trygve.com/taxcode.html). According to the US Government Printing Office, the adjusted gross page count is 16,845.
These figures are often used by politicians to paint the picture that our tax system is too complex and full of loopholes. Probably the most famous of alternative proposals is the so-called "FairTax" system which reduces the federal income tax, corporate income taxes, and capital gains taxes into a single sales tax. There are downsides not the least being it still allows for loopholes (because there is a ton of exemptions) and significant incentive for an underground economy. It only seems to be the best solution as 45 states already have a sales tax implemented and therefore there already is a large infrastructure for using this tax system. A a better solution would be to use other existing infrastructure that wouldn't put such a burden on businesses which would be watched by the IRS much more closely under the FairTax.
Property taxes were once a major source of revenue at the state level, particularly prior to 1900, which was before states switched to relying upon income tax and sales tax as their main sources of revenue (http://eh.net/encyclopedia/article/fisher.property.tax.history.us). But times were quite different back then as the federal government was still giving away unclaimed land to those willing to develop it plus there wasn't enough goods and services being traded to provide adequate revenue for the government. Even if there was, there certainly was no infrastructure to properly track the required taxes. Today's trading landscape is much different with billions of dollars worth of goods and services being traded daily and the record keeping required to stay compliant is massive. If you're going to simplify the tax code, moving the entire burden and responsibility to American businesses doesn't seem to be the answer.
The solutions I would search for are those that achieve three primary goals:
- Simplify and reduce the tax code as to place less burden on those required to be compliant. Emphasis would be placed on using existing tax infrastructure instead of implementing new systems.
- All taxes shouldn't explicitly create winners and losers by targeting specific groups of people.
- Reducing the number of exceptions, loopholes, tax evasion incentives, and overall level of bureaucracy.
Here's the plan:
Property taxes (at the municipal, county, or state level) would be increased for landowners and owners of personal transportation property (registered automobiles, boats, and aircraft). The most valuable properties are owned by corporations not individuals, therefore, all corporate-owned properties would be subject to this addition in place of the current 15% to 35% Federal corporate tax.
The reason I'm targeting property owners is simple:
- It follows rule #1 of using existing tax infrastructure.
- Real estate is a finite resource and since people of higher incomes are disproportionately likely to own more valuable property, the tax is progressive. For the nearly 1/3 of Americans who don't own real estate, they will pay the tax indirectly through the increased cost of renting/leasing passed on by the landowner.
- Personal transportation property has been added to help make up for the massive loss of sales tax revenue from new and used vehicle purchases. Instead of a fixed rate as implemented by the few states which tax personal property, we would use a variable rate based on a "blue book" value of the property.
As always SOME exemptions would have to be created for certain land types and landowners such as Indian reservations, non-profits/charities, unemployed and retired persons, and perhaps the Amish??? (I'm not sure how they handle property taxes right now).
The property tax increase would be implemented in two phases. The first phase would be to replace the income and sales tax at the state level with the property tax. Since most state already a property tax based on it's value, it just has to be determined how much of an increase would be necessary to match the loses from the removal of state income and sales tax. The property tax on corporate-owned property (which would replace the corporate tax) would by collected by the state and transferred by them to the Federal government. During this stage a Federal income tax would still be levied as usual. It would probably take several years the new system to stabilize and then it would be on to the second phase.
In phase two, property taxes would again be increased simultaneously when the Federal income tax is removed. The money would still be collected locally by the state so at the citizen level you would never be paying money directly to the Federal government.
Taxes also serve an additional purpose besides raising money to pay for government services. They also provide economic incentive (or penalty) for things that would otherwise not make good financial sense. The can help to equalize the playing field between products/services that are more beneficial, but would not otherwise make good financial sense. They can also make it financially costly to do things that would hurt society as a whole (such as polluting).
As such, a few existing secondary taxes would also be kept aside from the primary tax on property. There's a bunch of them: http://en.wikipedia.org/wiki/Tax#Kinds_of_taxes, but I'd propose keeping current Excises and Tariffs as they are right now and dumping most everything else.
Obviously, this kind of major change isn't likely to ever happen, but it was a fun thought exercise and I think I learned a bit more about taxation in America while researching it. So go ahead, rip it apart in the comments...