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03/14/2005 Entry:
Tax Simplification - II
Tax simplification is coming up on the Congressional agenda in a few months. I expect to hear proposals that, like a consumption tax, will have the effect of reducing taxes for the rich and for corporations and for increasing taxes for people who work for a living. The key Bush requirement of encouraging growth will, no doubt, be used to support these ideas. This is why a few days ago I suggested a tax on the net worth, rather than on income, of corporations beyond a certain size. A commenter presented a different approach: a 20% tax on the income of corporations and employees, with some help to those earning $50,000 or less.
The commenter, Brian Bonner, had 3 reservations about my idea for tax simplification:
- What happens if a corporation can't pay the asset tax? - I guess the corporation could sell some assets. In this situation, probably some assets are not being used properly
- It would discourage re-investment in the business. - I don't think so. Sure there is an extra cost involved, but the business would do it in anticipation of making more profit. Of course, the corporation would think a little harder about the need for further investment. This, however, will benefit the economy in the long run
- What about small businesses? - In my scheme small businesses, that are not incorporated, would not pay this tax. If it's not a corporation, it is fully liable for all debts incurred. That's tough enough.
Bonner's approach will simplify the tax system by making employees as well as corporations pay a flat rate of 20%, with no deductions, except a standardized deduction for those earning less than $50,000.
This is a pretty good idea. However, I am wondering how simplified the system would be. What is income? Can a sophisticated accountant arrange for a prosperous corporation to declare that it has no income? How about hidden income, the kind that is not normally declared? Just getting rid of the word "income" simplifies the system like nothing else can.
A good deal of our annoyance with the income tax is that each of us must tell the government what we do on a day-to-day basis to earn a living. We are also annoyed by the time and the expense for doing this. To many of us it's an ordeal. Taxing something besides income would do away with this yearly taxing experience. I chose net worth of corporations. Maybe there is another way.
I am also bugged by how the current income tax system favors corporations at the expense of workers. Many huge multinationals pay NOTHING in income taxes. Some use offshore tax havens. Others have specific loopholes written into the tax code. And investors get special reductions for capital gains. There is extremely little in the tax code to favor workers.
It's not fair. The tax system should favor workers, who are increasingly likely to be temporary, part time and without benefits. Businesses have imposed bigger risks on employees, in addition to paying them less in wages. It's time for businesses to pay their fair share - expecially those that incorporate in order to reduce shareholder liability.
What do YOU think? Do you have a good idea for tax simplification?
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