Our tax systems (income, property, sales) share a common problem. They are applied in a discriminatory manner that harms some to the benefit of others. Rather than discrimination based on race or gender it is discrimination based on behavior or actions. Those that behave in a government desired manner pay less. Those that are good at hiding income or gaming the system pay less. Everyone else pays more. These systems are easily bypassed both purposefully and accidentally thus driving up tax rates in order to compensate for such losses. Lastly, they can transform the average citizen into an unwitting criminal if they happen to take a wrong step in the minefield of tax rules. In short they are an imperfect and unfair mess.

A fair tax system would have a universal/non-discriminatory target: those that benefit from core government services (defense, courts, contracts) by virtue of their residency: all permanent residents. It would have an inescapable calculation method: one’s tax bill would be based on a single universal metric and would not be a function of an individual’s behavior. What is this perfect tax system? I call it the “Equal Tax” which is otherwise known as a capitation or head tax. Each and every person would owe the same amount of tax.

What problems does the Equal Tax solve?

1) Fairness: The foundation of “fairness” is universality. Rules in a game are “fair” and  “uniform” because they apply to all players and they have an equal result. But sometimes a rule can be uniform yet still be unfair and it is this that we wish to avoid. For example if taxes were based on weight (i.e. pay $x/lb) this would be a uniform rule as it would apply to everyone but the result of such a rule would be obviously unfair. In the same way one might claim that an income tax or property tax is “uniform” because it is methodologically applied in the same way to each person, however the outcome is clearly unfair since some end up paying more following this “uniform” rule. The Equal Tax solves this issue because both the method and the result are uniform. It applies to every man, woman and child residing in the US (obviously parents would pay for their minor child’s obligation). The measure (i.e. amount) of this tax will be driven to the lowest level possible by altering the incentive structure that currently governs our tax system. Rather than attracting votes by promising local pork-barrel projects (i.e. leading to higher taxes) elected officials will attract votes by promising to decrease the tax burden. This inherent incentive of cost reduction will necessarily drive the genie of big government back in the bottle until government is reduced to its core essential functions.

2) Fraud: It is inescapable. There is no point in hiding income, no point in understating your home’s value, no point buying over the internet solely to avoid sales tax…your tax bill is the same as your neighbors and it isn’t going to change based on anything you do or don’t do. Payments won’t be 100% every year, but at least we’ll know exactly how much revenue is short rather than pie in the sky guesses.

3) Impossible to inadvertently violate tax laws. There are no complex rules to follow. You owe $x each year. Period. If you don’t pay it, you know you’re not paying it, so it can’t be accidental.

4) Engagement of all citizens in the political process keeps government in check. Congress will hear from every citizen “Why are we funding that program? It’s costly and I’m PAYING for it, get rid of it.” This would force government to provide only the essential functions that everyone agrees on. Our current system minimizes incentives for citizens to be involved in the political process because the vast majority don’t care because they pay little to no taxes. In short, the involvement of citizens would force government to remain affordable to even those with the lowest income thereby imposing real restraint on the growth of government.

How much would it cost? Assuming all Federal, State and Local governments adopted such a method and only core functions of government are funded it would cost roughly $2400/year/person (based on US Budget figure for 2010 (publicly available at Wikipedia) and public figures for local county and state budgets). I’m sure the idea of the Equal Tax has raised a lot of questions, some of them good and valid and some of them unthinking knee-jerk reactions. I answer those concerns here…

I wish someone would explain the objective criteria used to define “fair share” as it pertains to taxation. This term is used indiscriminately by those that assume everyone else’s internal fairness meter must be the same as theirs. Unfortunately “fair share” is not an objective standard, nor is it a subjective standard either because it’s not even a standard at all. It is merely subjective whim masquerading as some golden absolute. The peg of “fair share” moves to whatever arbitrary point will bring in enough revenue to pay for whatever government largesse the proponents are seeking to fund. It is a completely backwards approach to budgeting that always leads to debt and/or higher taxes. It is based on the faulty premise of spending driving revenue requirements vs the economically sound approach of fixed revenue driving permissible spending.

The various tax systems (income, sales, property) today are a cesspool of unfairness from which we will never find a “fair share” lurking beneath their depths. The income tax system is based on a foundation of fostering wealth redistribution and behavior modification using the carrot/stick model. For example, every time someone gets a deduction or credit on their taxes it is because they are engaging in behavior the government wishes to promote (“there boy, good boy, you’ve been a good doggy”) and those that don’t get those deductions or in fact pay extra surtaxes are engaging in behavior the governments finds objectionable (“bad dog, bad dog!”). Deductions and incentives are one form of tax unfairness as they benefit one group at the expense of another. The other more sinister form of tax unfairness is progressive income taxation. There is no rational basis upon which one can argue that as one obtains more income they have progressively less right to keep that income.  Few today realize that the idea of a progressive income tax is one of the primary tenets of communism*, its sole purpose being to destroy all wealth so as to more rapidly bring about the utopian order of the perfectly “fair’ communist society where all are “equal”. Oh, and yes, I did say “rational basis” for an argument. I don’t include the irrational ones like the argument that society has a right to tax the wealthy more because the only reason they are wealthy is because they have had at their disposal all the wonderful manna that has fallen from government run heaven (e.g. roads, public education, court system, etc). So, if all these things are what made wealthy people wealthy, then why isn’t everyone wealthy? These things are available to everyone, right? Or more to the point, based on this twisted logic one could argue that any tax rate imposed on the wealthy is fair. The argument doesn’t tie the value of these government services to some specific tax % therefore this argument can be employed for any tax %. Reductio ad absurdum.

When it comes to taxation the question of fairness must be broken down into two components: (1) the method and (2) the measure. To be considered fair the method must be (a) universal and (b) inescapable. A universal method is non-discriminatory and applies to every single citizen or non-citizen resident. Every. Single. One. An inescapable system is sufficiently transparent that it is not possible to hide one’s tax obligation. There is one tax system that would be universal and inescapable (hint: it’s not a sales/consumption/VAT tax). But, you’ll just have to wait until next week for the exciting conclusion when I reveal the identity of this new system and how it dovetails perfectly with the second component of tax fairness: measure.

* Manifesto of the Communist Party, Marx K., Engels F., 1848, Chapter 2.