President Biden is under heavy pressure from progressives to levy taxes on wealthier Americans and corporations. In a tightly divided Congress, this is a difficult affair, and it might be better for it to raise public support for replacing income and corporate taxes with VAT to fund its political agenda.
The Trump tax reform didn’t reform much; The old system of excessively high interest rates and large deductions and credits continues to a large extent. Although nearly $ 90 of each filer is making new, larger standard prints, we now have two parallel systems.
Most of the people who have listed previously will need to keep the same records and enter the same information into the tax software to determine whether it is better to list them or to avail of the standard $ 12,400 allowance for individuals or $ 24,800 for married couples.
Providing so many details about our activities and expenses to the federal government and tax professionals is an incomprehensible invasion of privacy.
As we learned in the Obama years, the leftist bureaucracy is not overwhelmed by harassing those involved in conservative causes and organizations. The IRS’s predilection for abuse was cultural and don’t be surprised if zealots reappear during the Biden presidency that Treasury Secretary Janet Yellen is not yet aware of.
The whole system benefits high net worth individuals and corporations who can afford expensive K Street accountants, lawyers, and lobbyists to work through the insane details of tax legislation and special treatment during the complex processes of constantly recasting tax laws and translating them into IRS rules to obtain.
Companies make decisions for reasons of tax avoidance and not for reasons of sound profitability. Democrats in Congress and left-wing think tanks claim U.S. corporations still have tax incentives to relocate overseas, despite efforts to curtail the 2017 Republican-led revision of corporate tax law.
The most effective reform would be to simply remove income and corporate taxes in favor of value added tax (VAT).
The Treasury Department raises approximately $ 1.9 trillion annually through income taxes. That money could be replaced by a national sales tax on all personal purchases and payments – be it machine tools to eradicate microprocessors, restaurant meals, or dry cleaning.
Businesses and institutions would then pay a fixed rate of tax on income minus taxes on expenses for materials, software and equipment, rent, and so on. This subtraction would avoid double taxation of intermediates and services used in the manufacture of other products as they enter the end-users through the supply chain.
By taxing goods and services instead of individual income, VAT would forever end the requirement that ordinary citizens – including those with capital income or retirement pensions – have to file income tax returns.
For businesses, this would remove all of the problems and hassles associated with assessing inventory levels, depreciating buildings and machinery, and qualifying for special breaks, and saving billions in accounting and legal costs.
Taxing goods and services at the point of sale would solve the problem of US companies parking assembly lines off the coast to avoid taxes.
Overall, companies and institutions would file much easier tax returns.
To replace the revenue currently generated by individual and corporate taxes, the VAT rate could be set at around 10%, but two problems remain. A VAT would tax rich and poor consumers at roughly the same rate. Older people, who typically rely on savings, have already paid taxes on the income those savings generated during their years of work and would be taxed again.
An effective answer would be to increase the rate to 13% and give $ 4,000 to parents for every child under 19 and to seniors 65 and over.
A working single mother with two children who earned just $ 7.25 an hour would have a family income above the poverty line. According to WTO rules, VAT would apply to imports and provide additional resources to reduce inequality.
Going a step further, Social Security and Medicare taxes could be eliminated by raising the tax rate to 19%.
Such sales tax could seem high. However, companies and individuals would no longer pay a wage tax of 15.3% on most wages plus income taxes. And companies would no longer levy corporate taxes on the prices they charge.
Mr Biden proposes around $ 430 billion in new revenue to fund his political agenda – that would raise the rate to 22%. He would have the opportunity to explain why his priorities are worth such a visible tax hike.
Elegant, efficient, and terribly transparent, a sales tax would show voters how much the government costs and eliminate inequality.
• Peter Morici, @ pmorici1, is an economist and professor emeritus at the University of Maryland and a national columnist.