Having read your article on replacing income tax totally with consumption tax was very interesting.
However empirical evidence suggests that eliminating (reducing) income tax does not dramatically increase incentive to work and thus production.
What it does do is to dramatically reduce the incentive for rich individuals who in western nations happen to pay very high marginal rates of tax (47% in Australia)to partake in schemes which make use of loopholes and tax deductions to reduce their tax bill. This is done with an armada of lawyers and accountants and the final result is that these rich individuals end up paying roughly the same rate of tax as the poor while driving a large amount of unproductive behavior in the economy. (Your article on the vandal breaking the glass window is apt, the lawyers and accountants are the vandals from societies view as a whole.)
Removing income tax removes the unproductive behavior of the lawyers and accountants, removes the unproductive behavior of the IRS in collecting tax from these smart lawyers and accountants while modestly boosting production. The IRS is engaged in unproductive behavior because its job is analogous to cleaning the pollution caused by a polluting factory. It reduces the cost of collecting taxes which is not insignificant in the U.S.A. ($100 billion).
So do I support the abolishing of the income tax and the introduction of the sales tax? Absolutely not.
The reason is that a better and more equitable solution can be found. Firstly to reduce the cost of collecting tax ($100 billion) can be done by completely removing the different rate of tax for different incomes. That is creating one tax bracket and eliminating all tax deductions and loopholes. Yes that’s right, completely removing tax deductions for charitable organizations which is really more costly than the benefits it creates. By eliminating tax deductions and loopholes the rate of tax can be lowered and it is imperative that it is low enough to reduce incentive for individuals to avoid tax. By removing different tax brackets there is no disincentive for people to earn more because they will be taxed at the same rate.
This income tax must be supplemented by a tax on consumption. No, not the sales tax but a value added tax. This will remove the incentive for people to claim their expenses as business expenses. This is similar to the taxation system of Australia but Aust. missed a historic opportunity by creating so many exceptions to the tax for things such as healthcare, education, cold food(that’s right!) that any benefits of the value added tax is whittled away by the high cost of compliance.
There is one hole in my argument. By creating a value added tax with no exceptions for items which the poor spend a greater proportion on such as healthcare and cold food, the poor will be disproportionately disadvantaged. This can be overcome by creating a direct transfer of funds to poor people (means tested).
Therefore a low rate income tax with a high threshold with no loopholes and tax deductions combined with a low rate value added tax with no exceptions will reduce the cost of collecting tax ($100 billion)and could possibly increase tax collected (Russia), boost production and most importantly increase savings in America which is dangerously low (a consumption tax increases savings much more than a revaluation of the Yuan). The negative impact on the poor can be alleviated by a direct transfer of funds not tax credits which will only benefit poor individuals paying income tax which is perverse since poor people should not be paying income tax at all.
Therefore virtue in this circumstance is in moderation. That is keeping income tax while introducing value added tax.
