Spend less! Yes, my best proposal for improving taxation is to spend less and thus need less money from taxation.
Assuming we can agree that some government is better than none, we must somehow fund the government.
A long time ago, in a distant galaxy… okay, well, about 250 years ago the USA gained it’s independence but had a dysfunctional government (the federal government had to beg the states for funding). So the Constitutional Convention was held in Philadelphia in 1787 and drafted up a new national government.
Many people seem to think that taxation is unconstitutional. But Article I, Section 8 says “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States” which to me does grant the federal government the power of taxation.
Article I, Section 2 says “direct Taxes shall be apportioned among the several States” this seems to imply the states would collect taxes from citizens and the federal government would collect taxes from the states. A far more practical approach in those times where travel was slow and the federal government was very remote!
This was amended in 1913 with the 16th Amendment “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
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If we look at our history, we see that to fund the Civil war, we had an income tax of 3% to 5% (which was repealed in 1872). In 1894 a new income tax was created of 2% for incomes over $4,000. In 1895 the Supreme Court ruled this unconstitutional. There was no federal income tax from 1895 to 1912. With the 16th Amendment we once again had a federal income tax in 1914, ranging from 7% to 77% depending on income.
In 1939 there were less than seven million tax returns filed, generating less than $1 billion in tax revenue. This amounted to less than four percent of income. World War II skyrocketed government spending from $9 billion in 1940 to $92 billion in 1945. In 1945 there were 50 million individual tax returns generating over $19 billion dollars in taxes.
Grow, grow, grow... the theme of the US Government!
The above has been my long winded, way of saying that our taxes have gone from the wealthy paying 2% to 7% or so, to now the common person paying nearly 40% of their income in taxes!
If we don’t think of taxation as thievery, but rather as funding for the government we are left to ponder what method is the best method for this funding?
Income tax? Property tax? Sales tax? Excise tax? (in my opinion an excise tax is the same as a sales tax, just paid by the producer rather than the consumer)
Income taxes can be progressive by having a higher rate for higher incomes, but our system is completely broken because of all the deductions and credits. Basically the wealthy pay less in tax because they have the financial resources to hire accountants and exploit the system. Income taxes depend on honest reporting. We might find more honesty in reporting if the tax rate wasn’t so high. In my opinion, income taxes are broken in the USA.
Property taxes have the benefit of avoiding “cheating”. Pretty much you either own land or not, the records are nice and stable. Generally wealthier people own more land so property taxes can be progressive too. In my opinion they would be far better based on acreage rather than “value”. A serious problem for senior citizens (or anyone on a fixed income) is rising property values creating rising taxes. Once again we see the evil of inflation!
Sales / Excise taxes make some sense too as long as you don’t tax essentials like food. In general, wealthier people are going to buy more and thus would pay more taxes. Clothing actually should be taxed (maybe you think your $50 jeans shouldn’t be taxed but think of the wealthy person buying a $10,000 outfit). The problem isn’t the tax, it is the amount of the tax rate.
Sales tax does have a flaw in that it adds an accounting burden to every single transaction and that is inefficient. Thus personally I’d do away with sales taxes.
Inheritance and gift taxes are downright idiotic and should be abolished.
Our tax system certainly could be improved, but the biggest improvement would come from less federal spending and lower overall taxes.