Of course there are some huge differences between libertarians and progressives over what those legitimate functions are. While we may not be able to resolve that problem, there may be some ways that we can come to some agreements about the most broadly acceptable way to tax.
Progressives have traditionally favored a progressive income tax to provide revenue while not overburdening those at the lower and middle portions of the income scale. Libertarians have tended to favor consumption taxes because they see purchasing as a voluntary action.
With all our inside the box, tribal thinking, these two ideas seem irreconcilable.
For progressives, consumption taxes are regressive, forcing poor and middle income earners to have less disposable income than they would otherwise have under a progressive income tax structure. For libertarians, the progressive income tax is punitive on people who are the most productive (I'll withhold my disdain for this assumption for another article...) and discourages investment (a much more tenable criticism with which I tend partly to agree).
What if we could we could address both sides of this issue in a a mutually acceptable way? What if we could have a tax policy which maintains progressivity and establishes "voluntarism" while encouraging work, savings and investment? Here are two elements of tax policy which I think could bridge one of the biggest chasms that divide us:
The first comes from Robert H. Frank, professor of economics at Cornell University. His idea of a progressive consumption tax advocates transitioning away from taxing income and moving increasingly toward taxing consumption. This plan would determine the amount of annual consumption by subtracting what one has saved from what one has earned. Additionally, it would exempt a substantial amount of consumption from being taxed and then taxing higher amounts of consumption at progressively higher marginal rates.
The benefit of this type of taxation is that it only taxes based on what people "voluntarily" purchase. Of course both progressives and libertarians would want the amount of consumption exempted to be very high. I would recommend at least $100K for a family of four. Progressives would want tax progressivity enhanced, not undermined further. I would recommend taxing the second $100K of consumption at 10% and consumption above that up to a million at 20% and increasing the rate by 10 percentage points at each subsequent million dollar margin with a cap of 80% for the highest marginal rate.
This would encourage savings and investments while curtailing inflation inducing consumption. I have one question for Professor Frank, if anyone has his email: What about purchases for business expenses? Perhaps these purchases are exempted completely. I would be fine with that except I can see some clever trust fund kid incorporating himself and claiming all of his purchases as business expenses. Maybe a better method would be to exempt all business expenses up to $100K and half of them above that mark to $10 million and 25% for anything above that.
Some libertarians might still complain that 100% of business expenses should be exempted. I would agree if we could always agree as to what constitutes a business expense. Creative tax dodging is almost impossible to avoid, so I say exempt higher amounts of business expenses at lower rates so as to give big businesses some amount of incentive to keep costs down in order to fund more productive and real business purchases and expenses.
The second idea is my own. But allow me a brief interlude.
Some of the talk on the super committee (and I believe Ron Paul is right in calling this next hop on the road to tyranny as unconstitutional!!!) is about lowering rates while ending loopholes. You can be certain that with every loophole closed, two or more will open and no new revenue will be added unless an absolute cap is established on the total monetary value of all exemptions, deductions, rebates, credits and any other loopholes. A better and transitional deal would be this: Impose an absolute cap of $5 million in loophole value, reduce the number of marginal income tax rates to three (10%, 20% and 30%), and establish a 10% annual consumption tax on annual spending above a million. That is a realistic compromise that the brain frozen, prefabricated policy making and political posturing duopoly has yet to think of.
My idea is to replace all tax deductions, credits, rebates and exemptions with a resident earned income tax credit voucher (REITCV) card. This card would be used for purchasing things like health care, public transportation, houses, education, solar panels, electric cars and whatever else congress deemed worthy of incentives.
How much would each individual have on her card? That amount would be based on her previous year's earned income. Let's look at 2 workers, one making $30K and the other making $90K in the previous year. Worker 1 would have the first $25K matched at 40% and the next $5k matched at 30%, meaning she gets $11500 on her REITCV card. Worker 2 would receive 40% on the first 25k, 30% on the next 50K and 20% on the next 15K, meaning her REITCV card has 28K on it. The margins and rates could be adjusted as negotiated and perhaps increased during recessions, but here are my suggestions:
Earned Income REITCV match
0 to 25K 40%
25+K to 75K 30%
75+K to 200K 20%
200+K to 500K 10%
500+K to 1M 5%
Above 1M 1%
The REITCV would encourage work and savings while giving incentive to socially redemptive behavior and spending. It does so in a progressive way, assuring underpaid workers just compensation for their hard work while giving small businesses a wage cushion to empower them to compete with larger companies. It would, if combined with compassionate and merciful immigration policies, bring workers out of the underground economy, thus further increasing revenues and preventing slave conditions. Finally, combined with Frank's idea, it would move our country towards greater economic justice while encouraging more long term savings and investments. During our ongoing recession/depression, if phased in over 5 or 6 years, the REITCV and the PCT would encourage faster spending among wealthy consumers, thus providing a much needed boost to a depressed economy.
There might be one downside: millions of CPAs, tax attorneys and IRS agents filing for unemployment.
Libertarians will probably balk at the idea of such steep marginal rates favoring the "least productive," but they cannot say these ideas discourage investment. Much the opposite is true, and both would go a long way toward reducing governmental, business and personal debt. If enough spending is exempted at the bottom end, these two elements would be almost totally voluntary forms of revenue collecting. Everyone would still be required to file taxes but with a lot less headache. And this is already required. I do not think most libertarians are going to whine about a 99% increase in tax freedom.
If the top rate of 80% is still emotionally vexing, we might soften the sticker shock by lowering the top bracket(s) and establishing a value added tax while increasing the percentage for and broadening the margins of the REITCV. We might kick it down another notch by tying tariff rates to human rights, labor, environmental and currency standards. Throw in a 60% tariff on Chinese imports, and we might get the top rate down to 50% on spending above 5 million.
We might even replace payroll taxes with the VAT for funding Social Security and Medicare. We might even be able to make that exchange of an opt-out for a public option. Oh... or better still, a hybrid system of Medicare for all supplemented by private catastrophic insurance. OK...I'll save that one for the 2016 campaign. But how about we cooperate now? Come on...sweeten the pot your way if you like. Again...you already know the alternative.