In a post titled Taxes and Economics Arnold Kling writes:

Politicians frame the issue as taxing certain types of people. Economists look at what activities are being taxed.

Blinder argues that taxing capital gains differently from other forms of income creates distortions. You try to change other forms of income into capital gains.

In my view, the tax system will always be taxing the wrong activity as long as it taxes income. Instead, the tax should be on consumption.

When you earn income, you can either spend it on consumption, save it, or give it to charity. The latter two should not generate taxes.

I'd go even further than Kling, by suggesting that first taxes should be placed on externalities, such as carbon taxes. Secondly, governments should not charge artificially low rates for use of water and electricity, as they have in my home province of Ontario for most of our history. (How do we know they're artificially low? Two reasons - One, the government run electricity company historically has lost money. Two, during periods of peak usage or drought government officials send messages to the media for users to reduce consumption, rather than raising prices).

Corporate income taxes are among the most damaging to the economy (a study discussed here suggests in Canada, for every $1.00 collected in taxes, $1.55 worth of damage is done to the economy). If we tax companies on what they use and the damage they do to the environment rather than taxing their productivity, we can both enhance economic growth and improve the environment. Imagine how well Canada could do if the corporate income tax were significantly reduced, if not eliminated entirely.

I've said it before and I'll say it again - while I disagree with the details of the FairTax Proposal, I think the proponents of it have the right basic idea.