In light of Seattle’s upcoming court case on income tax, and the national fights over increasingly arcane components of income tax policy it’s time for a a hot take! (*Pending replacement with a cool new term I can make my own*)
Income tax is bad tax policy regardless of your political beliefs.
Conservative Philosophically it’s bad – its a tax on the fruits of own labors and those working to contribute more to soceity end up paying more
Liberal Philosophically it’s bad – income is primarily associated with the lower classes and not the owning classes that have much more ability to pay (buffet paying way less tax than a middle class income earner as an example)
And in practicality it just creates a whole mess of trying to reclassify things as income or not income. This shrinking tax base ends up putting the burden on those who don’t have good lobbyists or good accountants. It creates a huge waste of resources on tax return preparation by companies and citizens and tax code enforcement by the government. It practically demands loopholes exist.
Some examples of the way using income tax as our primary tax system can warp economics.
- Because we tax income it’s easy to argue against more progressive forms of taxation like corporate tax, capital gains tax, and estate tax as double taxation.
- Double taxation on savings and capital discourages capital creation and encourages consumption — not creating capital flattens economic growth and leaves the economic power in the hands of those who already have capital
- Because we exempt healthcare from income status we built a large system of employer sponsored healthcare instead of either a robust private market or a dependable universal option.
- The above means the government subsidizes runaway health insurance costs more heavily for high wage workers (40%) than for low wage workers (0%)
- It also serves to shield these workers from how expensive individual insurance is if not on an employer plan making the political capital needed to fix the problem harder to obtain.
- It also makes it harder for people to be takes risks and be innovated because they can’t afford health insurance without the employer+tax code subsidized version they get by selling their life and dreams to corporations
- Because we shield retirement accounts from income taxation status we encourage peoples primary or only savings to be in accounts they can’t easily access on a rainy day.
- The above encourages predatory lending
- It can also encourage underemployment over reeducation because if they can last another 10 years they have retirement money, but they have no savings easily accessible to gain new useful skills
- Because we shield more money in 401ks than IRA’s we inherently require small employers to get expensive managed 401k products over self managed retirement accounts or pay significantly higher salaries just to be able to offer similar total benefits as large companies.
- Because debt forgiveness has to count as income to prevent lending money and then forgiving the debt to get around income tax law. We can end up throwing people who just got a new lease on life back under the bus when they discover they now owe the IRS a third of that still anyways.
- Because we tax incomes more heavily than capital gains and we treat dividends and interest as income we encourage speculation over income producing investments with slow and steady growth. Speculation drives bubbles and doesn’t free one from the need to sell one’s labor time and energy to meet needs.
- Same problem with dividends but from an company point of view – tax code discourages corporations from profit sharing because it’s taxed higher than increases in shareholder value.
- Combining the two – corporations have reduced incentive to consider long term sustainable profitability because long term profit sharing relationships are discouraged in favor of short term speculative shareholders. Whose needs are met more by increasing immediate profits, thereby driving immediate value, so they can sell and move on.
Let’s replace it, consumer only sales taxes, corporate income taxes, tariffs, and all other taxes with a single tax that hard to avoid, easy to enforce, universal in rate, low in deterring beneficial transactions, and contains a generous prebate/basic income to avoid regressive consequences. VAT generally meet most of these requirements and are recognized as causing low market distortions. Even better would be land value taxation. The historical difficulties in pricing the value of the real estate separate from the improvements are essentially solved with machine learning techniques. Both of these should be acceptable under WA state law and are generally approved by libertarian economists. VAT appeal to republicans, and regressive aspects can be smoothed away with a prebate. LVT is highly progressive and a favorite of so many political viewpoints it would make everyone except current landowners happy.