Blue Sky Tax Policy Idea

Consider a given that a progressive income tax is an abomination and counter to the moral foundation of our republic. It treats citizens unequally and provides a means for democracy to enact the old saw about two lions and a sheep voting on what to have for dinner.

I have long thought a flat tax would be the best policy with respect to income tax collection. Levy a single rate, applicable to everyone with earned income, without regard for the status of their family size, choice of abode, or level of charitable generosity. Tax policy should be about collection of a fair revenue stream for the constitutional activities of the federal government and applying a flat tax removes the social engineering effects. My second favorite tax policy would be a consumption tax. Were it not for the accounting burden and compliance risk placed on businesses to act as the government’s agent, it would be my preferred route.

Recently, Walter Williams guest hosted the Rush Limbaugh show. Dr. Williams was discussing the Bush proposal to eliminate the tax on dividends. He argued that it was a good idea, but would be even better if the tax was applied to the stockholder and there be no tax on corporate income. He made the valid case that corporate taxes are eventually paid by people anyway, and we should make the tax as transparent as possible.

A Third Way came to my mind. Eliminate individual taxes and apply a flat tax to corporate earnings. Coupled with immediate expensing of corporate capital spending, the result would effectively be a consumption tax. The government would be "rewarded" commensurate with the health of our industrial base, with more tax revenue being derived from the more productive and valuable corporations (which can be roughly, but fairly designated as those that make more money). Tax policy would be disconnected from social or economic policy except to the extent that it would not punish reinvestment.

There are some obvious downsides that would need consideration. Chief among them would be the negative price impact on US exports since goods and services would carry the full burden of US taxes. Perhaps foreign earnings could be separately accounted and taxed at a lower rate, although many would call that a "corporate subsidy".

On the upside, the plan would be difficult for the demagogues as the taxes would be coming from those evil corporations. The dirty rotten filthy stinking rich would be accused of paying no taxes, but it should be noted that the only benefit to being rich is in being able to buy more things. Having money and spending none of it results in a pretty fair facsimile of being poor. While this is my favorite argument in favor of a consumption tax, it serves the purpose here as well. The lefties could even be fed the red meat of noting that many of the rich are incorporated anyway, so they will still get their income taxed.

This is obviously a raw idea. I submit it to the cauldron of GIGO to see if any nuggets can be extracted from this ore.