By Edward J. Dodson / January 2020
As Americans contemplate whether and how to exercise their vote in this year’s elections, they have numerous important issues to consider. One vital issue is what, if any, legislative changes will the newly-elected Federal, State and even Local governments pursue with regard to much- needed public revenue. We may be certain already that Republicans are not likely to reverse their policies on current low rates of taxation. Republican claims that economic growth would yield more public revenue have not proved true. Statista.com forecasts a gross Federal debt of 23.522 trillion dollars by the end of 2020.
Progressive Democrats and proponents of democratic socialism argue that the high concentration of income and wealth among a very few people in the United States is as much a crisis of moral principle as it is the source of economic instability throughout the country. They are correct in their contention that real and progressive tax reform is needed; a reform that would combine simplification of compliance with progressive policy and implementation.
However, Progressives pay very little attention to the distinction between income that is earned versus income that is derived from a passive investment, speculation, or rent-seeking privileges. One of the candidates for President in 2020, Joe Biden, proposes that capital gains be taxed as ordinary income for those earning more than $1 million. Well, this proposal is at least headed in the right direction. But what might real tax reform look like?
Individual Income Tax
A first reform would be: exempt all individual incomes up to some amount (e.g., the Federal median income, and double this amount for households with two adults filing jointly). All other exemptions and deductions would be eliminated. This reform would address the inequity of the current system with regard to income, and in which taxed gains on asset sales are treated more favorably than income earned as wages.
A second reform would be: above the exempt level, impose an increasing rate of taxation on higher ranges of income. The rates and ranges would be set during the budgeting process, with the objective of raising some portion of total revenue required to balance the budget. State Governments would be encouraged to adopt the same basic structure. The amount of revenue raised by the states versus the Federal Government would then play a role in policy decisions about revenue sharing. Potentially, states would no longer depend on Federal revenue to balance their budgets, and, in turn, Federal spending could be adjusted downward.
Inheritance or Estate Tax
Again, the system should be simple and progressive; meaning: exempt some levels of estate value from taxation. The median amount of individual estates is at this time still rather low, particularly when equity in a residential property is not considered. At the beginning of 2019, this median amount was just $97,300.
A suggested exempt level is $3 million, which is high enough to respond to any concerns that family farms would be negatively impacted. Above this exemption level, as with the individual income tax, increasing rates would be imposed on higher levels of inherited assets.
Local Property Taxes
What do communities provide to individuals and private entities? They offer locations for the use of public goods and services. Every parcel or tract of land has some potential annual rental value, a value that has little to do with what an individual owner does or does not do with the location where this land is held. This rental value rightfully belongs to the community as a whole, and this collective value needs to be determined and collected through taxation. However, at the same time, buildings are produced by private individuals or entities.
The annual tax on buildings is equivalent to the imposition of a sales tax like the tax imposed on other goods annually. A building is a depreciating asset, much the same as an automobile or machinery. A building remains useful only because owners perform regular maintenance and replace roofs, heating and air-conditioning equipment, plumbing and other systems as they wear out or break. Taxing the building adds to the cost of the upkeep necessary to prevent its condition from deteriorating or even becoming unusable over time.
From the perspective of the community as a whole, buildings should be exempt from taxation so that owners of locations are encouraged to develop these locations in accordance with their highest and best use. This proposed change in property taxation would yield, to local governments, an increasing amount of public revenue; the rental value of land would increase in response to expanding economic activity, which would increase the population attracted to the area. But, in this case, the increased revenue would stimulate rather than drive away investment in those goods and services which contribute to the overall quality of life.
Business Profits Tax
Over time, the above reforms would make it possible to replace the business profits tax with a low but graduated tax on gross revenue. In addition to greatly reducing the cost of compliance, this tax reform would reward firms that were best at controlling costs (which would, in turn, no longer be expensed to reduce the firm’s tax liability). To encourage small businesses (which employ far more people than large corporate entities), some level of gross revenue would be exempt from taxation (e.g., the median gross revenue generated domestically). Above this exempt level, an increasing rate of taxation would be imposed on higher levels of gross revenue.
Certainly, there are additional ways by which to reform the means by which all levels of government can raise the revenue they need. But the above describes a good starting point from which to develop public policies that will yield a full employment society and a greater degree of economic equality and equality of opportunity.