Taxes, Taxes and Better Taxes

Oh my goodness....Hector speaks! I guess I shouldn't be talking, given my recent dearth of posts, but at any rate, it's nice to hear from you.

I guess my response would be simply that the entire tax system is one large wealth redistribution engine, and while different people can (rather subjectively) draw the line between "good" redistribution and "bad" redistribution as they see fit, I think it is probably more constructive to talk about how to tailor the tax system so that it best promotes sound macroeconomic policy while still providing sufficient revenue to accomplish our democratically determined social priorities.

In that vain, given the power to remake the tax code, I would shoot for a progressive consumption-based taxation scheme, with a progressive (rates based on consumption levels) "luxury tax" component on capital gains above a certain (quite high) threshold.

Unlike many consumption-based tax schemes which are bandied about, I don't think mine would necessarily make the tax code all that much simpler, but it would align incentives more efficiently. At a high level, I would set allowances for consumption of staple goods (a non-exhaustive list would include housing, gas, electricity, food, clothing) indexed to regional CPI indices. Beyond those allowances, I would back into consumption levels (by subtracting out what isn't consumption - savings, investment, home improvement, charitable giving, again a non-exhaustive list) and I would set marginal tax rates to be applied to taxable consumption based on total ordinary and capital income. So those who earn high incomes would be taxed on their taxable consumption at a higher rate than those who have low incomes. One huge drawback to this is what I'll call planning issues - for starters, withholding becomes a nightmare....

For the "luxury tax" piece, for those over some high threshold of capital gains income, I would apply a progressive luxury tax with marginal tax rates rising as the taxpayer's ratio of consumption to capital income rises. Put simply, Paris Hilton would pay a much higher luxury tax rate than Warren Buffet.

I think a system like this, while high on administrative costs to be sure, would correctly align macroeconomic incentives. For all those people Republicans love to talk about who create jobs, their tax bill would be low. For middle class and working poor America, the consumption allowances would be set in a way as to make their tax bill relatively small. The people who would carry the heaviest load under my system are those who consistently take from the economy and give nothing back.

As an aside, this also solves the estate tax issue, as inheritors of family wealth would still be taxed when they consume that wealth, If they never do, it goes untaxed forever, presumably because it is still doing "work" in the economy. It also creates a natural curb on what I think is consumer over-indebtedness on the part of Americans. Debt capital used for consumption still counts as consumption...

The big issue in this grand scheme is what to do with corporate taxation. I don't have an answer for this one, as I think double taxation as it currently exists is an inefficient yet vital source of revenue. State and local taxation also becomes tricky, as does managing tax revenue during periods of recession. This system could make the volatility in budget deficits and debt requirements go up...

Thoughts?