A couple of weeks ago I posed what I thought was a simple A|B question regarding taxes on my facebook page. The responses I got surprised me. Instead of picking A or B, the first respondent put in her own answer indicating that she wanted to see a system the was fair and without undue influence from special interests. Her answer received several more votes by other respondents. Another respondent indicated that they leaned towards answer B, but with a couple of modifications to ensure a fairer system of taxation.
The implied sentiment was that the current system wasn’t fair and that whatever new system was to be adopted, it would have to pass a fairness test. In retrospect, shouldn’t have been surprised, we Americans, have a strong sense of fairness with respect to taxation that goes back to the founding of our country. But what is a fair tax system?
In the early years of this country’s history, tariffs were the major source of revenue for the federal government. The modern system of income taxes was instituted in 1913 and grew to be the major source of revenue as the importance of tariffs declined later in the century. The original income tax, as originally envisioned, was very modest, affecting only the richest 2% of the population, and only grew to include the vast majority of Americans as a response to the needs of a greatly expanded federal government, after 2 world wars, and a couple of decades of massive infrastructure building. The complexity of the system is a result of the decision to use the tax code as a tool of public policy, to encourage/reward some behaviors and discourage/punish others. It is only human, in this context, that some would want to benefit themselves for certain “good” behaviors while some might want to punish others for their “bad” behaviors.
Alternative proposals such as a flat income tax or a national sales tax, or even a value added tax, are offered as simple and fairer approaches, but would they, could they, stay that way? What would prevent them from becoming corrupted in the name of public policyin a manner similar to today’s current system? Critics of both the flat income tax and the national consumption tax complain that both systems are unfair to low income families. In response to these criticisms, proponents offer exemptions, exclusions and credits for low income families to make the proposals more fair. Sound familiar?
No matter what tax system you come up with, there will be winners and losers. The losers will perceive the system to be unfair and agitate for redress to make the system fair again. Attempts to increase fairness will lead to complicated systems. Complicated systems are subject to interpretation, hard (costly) to enforce, prone to errors and present opportunities for the less-than-scrupulous to take advantage of in the form of evasion. Eventually, enough people will be unhappy enough with the existing system that they will want to scrap it in favor of another, simpler, fairer system.
What do you think would be a fair tax system and why?