Why do we need taxes of any kind?  No matter how much someone hates government, even if a libertarian, he must admit we need some government services that have to be paid for.  We need a military and homeland security, we need embassies, we need a justice system, etc.  One can logically argue about how much government we need, but not whether we need one, must pay for it, and therefore raise money.

 

Since the Trump Administration has proposed a new tax plan to be detailed and voted by Congress, the topic is timely.  The aim of this post is not to critique either the Trump plan or Speaker Ryan’s plan, but to examine possible sources of revenue, comment on their desirability or lack thereof, and suggest improvements from where we are today.

 

Federal sources of revenue could include tariffs (or border adjustment taxes) on imports, sales tax or VAT (Value Added Tax), income taxes, wealth taxes, property taxes, luxury taxes, estate taxes, wage taxes, “sin” taxes (cigarettes, alcohol, possibly marijuana), and others I probably haven’t thought of.  Effects on state and local taxes must also be balanced in, and they have typically been income, wage, sales, and property taxes.

 

Tariffs discourage world trade, and trade is generally a good thing.   Tariffs are favored by the domestic industries which have difficulty competing profitably with foreign based companies. However, they raise prices for consumers, and invite retaliation by those foreign nations, hurting our exporting industries.  Workers in non-competitive industries can get hurt if they are not protected by tariffs, but that is the collateral damage of what Schumpeter called the creative destruction of capitalism.  There are other ways to handle the damage done to those workers, and we can deal with those in a later blog post.  The problem becomes the voices of the many who are helped slightly by lower prices or better quality are not as loud as the few who would benefit by hurting overseas competitors.

 

If tariffs are not appropriate, it is hard for me to see how a “border adjustment tax” is helpful.  I am not privy to the models and assumptions used by economists who say that a naturally occurring phenomenon of currency depreciation will smooth everything out, but I have trouble believing that as a panacea.   First, all industries will not benefit or suffer equally, second, the currency theory is untested and may not work as forecast, and most importantly, we cannot know how foreign nations whose industries may be hurt will react.  A trade war, where many nations erect tariff barriers to our exports, or devalue their currency, is in no one’s long term interest.  I am very skeptical of this idea.

 

Sales taxes are one of the primary sources of state and local revenues.  They are already in the 5% to 9% range for many locations.  Everyone will agree, I believe, that they are regressive, hitting poorer people proportionately harder than more well-to-do.  All in all, probably not a good source of Federal revenue.

 

Many European nations use a VAT, or Value Added Tax, which taxes goods at every level, for the value that producer added.  For example, if a steel producer sold $100 of steel, and it had $35 of iron ore it purchased and $11 of coal, the tax would only be on the difference of $54.  When the automaker used the steel, he would deduct its price to him from the sales price of the car, etc.  This tax, by any other name, is still a sales tax.  It increases the price of the products that all consumers purchase, and although it hides behind a maze, it is still a regressive tax.

 

Property taxes are used by almost all state and local governments.  If the Federal government were to begin taxing them as well, home ownership would be discouraged, and older people on fixed income might be priced out of living in a home they purchased years before.  Since we believe that home ownership helps society by giving people stability and a real stake in society, as well as a chance to enjoy gains in a growing economy and population, additional taxation at the Federal level is probably undesirable.

 

Wage taxes already exist in the form of FICA, or Social Security.  Since Social Security is headed for bankruptcy long term, we should look at increasing those taxes anyway, but that will not solve the problem of funding other government operations.  Actually, the solution to the long term Social Security funding issue is perfect for a Centrist.  The Democrats want to raise the arbitrary bar that only the first $105,000 of annual earnings are subject to the tax and to increase the tax rate, and to means test the payout, and the Republicans only want to raise the retirement age at which benefits begin and reduce the rate of increase in benefits paid.  There is such an obvious compromise available—do both, but to a smaller degree than if only one side was adopted—that only partisan ideologues would reject that compromise.

 

“Sin” taxes already exist—alcohol and cigarettes bear considerable tax, and if legalized, marijuana presumably will as well.  The taxes on those could be raised, even though as a sales tax, they are regressive.  However, there is some point where, as taxes, they become self-defeating, raising the price of the offending substance to the point that consumers buy less of it, reducing the taxes raised.

 

Luxury taxes have been tried, taxes on sale of yachts, private airplanes, mink coats, etc.  Of course, one man’s luxury is another’s necessity, and the makers of those products would scream.  The real problem is, that it would generate more heat than light; i.e., for all the screams, they would raise little revenue as their annual sales just aren’t that high.

 

That leaves income taxes (both individual and corporate), estate taxes, and wealth taxes as prime suspects.  They will be discussed in the next posting on this blog.