Rethinking tax policy: let’s maximise equality of opportunity

A bit of navel-gazing/brainstorming today.

Articles such as this and this highlight a glaring disparity between what Americans generally believe (e.g. that the US is the best place in the world for a Horatio Alger story, through bootstraps, hard work, etc.) and what is actually the case (e.g. US remains one of the most unequal nations in the world; with stagnant to falling median income; and with one of the lowest proportions of people moving upward through the income deciles over generations).  For a nation that enshrines equality of opportunity as almost a Constitutional right, this inequality of outcomes is head-shaking to say the least.  And while I understand that equality of opportunity is not the same thing as equality of outcome: what, really, is the point of the former without being able to convert it to the latter?

As this is a tremendously complicated issue, here are a few thoughts relating to tax policy to help the situation:

  1. Goals.  I want to create a tax system which achieves (as much as possible) the following:
    1. Equality of opportunity
    2. Incentive for effort/innovation/creativity
    3. Encourage production
    4. Maintain/grow investment
    5. Minimise emigration of wealthy
    6. Simplicity of tax code
  2. Assertions.
    1. Income tax affects 1b-1f through reducing incentives
    2. Consumption tax is regressive, so negatively affects 1a
    3. Inherited wealth remains a large source of today’s wealthy.  This would need a radical reshape to achieve 1a
    4. Corporations’ (and other non-natural legal persons’) legal structure have some great societal benefits (e.g. limited liability), but some unnecessary characteristics which may affect opportunity (e.g. indefinite life, tax loopholes)
  3. Main tenets of a new system.
    1. Abolish income tax altogether, along with capital gains/dividends/interest taxes and associated loopholes (e.g. mortgage interest deduction)
    2. Main revenue source is a consumption tax.  Shares basic ideas with the ‘FairTax’ proposal: income transfers to make this a progressive tax at most income levels.  To be clear, real estate purchase is assessed consumption tax
    3. Secondary revenue source is a modified, draconian inheritance tax.  Say, 100% of all estates valued above median wealth
    4. To avoid wealth ‘hiding’ through some conventional legal structures, a couple changes are needed:
      1. Abolish indefinite lives of corporations/trusts.  Have some reasonable period (say, 50 years) for a lifespan.  Same inheritance rules apply to these structures, so a US Corp would need to ‘depreciate’ its assets each year as they shift from one (old) corporation to another (new) one
      2. Transfers between individuals/corporations/trusts are taxed at consumption rates
      3. Gifts/bequeaths/etc. are assessed tax at or higher than the consumption rate
    5. The ‘Exit tax’ for US citizens becomes the same or higher rate as consumption tax on all wealth above median wealth
  4. Vision for how this would work.
    1. Joe Average receives more take-home pay, with no income tax.  He spends more with the consumption tax.  His savings are not taxed, so he has more incentive to save.  This should increase his savings rate, to help for more spending in future (e.g. kids’ education or retirement consumption)
    2. The poor receive subsidies, which (hopefully) exceed their consumption to allow for saving
    3. The rich get richer, as they save more and more each year tax-free.  When the grim reaper comes, so does the tax man: whatever hasn’t been spent or transferred gets taken by the government.  So the children of the rich benefit from top-quality everything (as their parents buy the best), but cannot rely on a never-ending pot of gold.

I suppose this system is somewhat similar to a consumption tax + wealth tax system (e.g. a 50-yearly tax at a high rate, rather than yearly tax at a low rate).  In my mind the summary is this: to achieve true equality of opportunity, wealth must be transferred on a regular basis, preferably to achieve higher wealth growth in the bottom 90% than the top 10% (which is the case today).  To balance this transfer, the wealthy are given a golden goose – tax-free wealth creation for their (natural) lives, combined with a consumption tax that will certainly improve their lot.

Well, that’s a couple hours thinking.  Let me know what’s obviously wrong with the logic, please.  Let’s just put aside the fact this type of system is completely unpalatable politically – it will be a cold day indeed when Congress comes close to penalising the key groups hurt by a relatively simple and more progressive tax code.

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2 thoughts on “Rethinking tax policy: let’s maximise equality of opportunity

  1. Brian Stevenson says:

    WOW Matt. This is a long way from “Eat the Rich”. I get the view and support Equality of Opportunity. However, I rather look that some (Please read this exactly as Some) folks have to take personal responsibility for caring for themselves and their families. Is the subsidy a means to an end or The End? Give the man a fish or teach him to fish? Once the investment has been made to teach the man to fish, then what??

    Encouraging Production is HUGE. Make Work a better alternative to not working.

    Will folks lose the desire to be personally responsible if they are heavily subsidized?? Interesting question as we Americans have never had that system (hence your article). Has this experiment been tried elsewhere?

    As we have talked and I still stand by my hope that I die spending my last dollar with the Undertaker. But, that really is not realistic, is it?? The main reason is that we never know when the Grim Reaper comes a knocking. I very much like the idea of a consumption tax and letting investments grow. The big “death tax” would certainly change the way American Ag works today, that is for certain.

    Now the real question, in my mind. Can we reasonably hope that our Government will be as efficient as we individually would or should be in distributing our assets?? Case can certainly be made that the wealthy are horribly inefficient at distributing their wealth since they do not do it?? So, any distribution is better than no distribution??

    This is an entirely different way of looking at our American system. Probably not something to be done piece meal??

    Really interesting Son. Wish we were on the Deck with proper libations to debate it along with Ms. U. Keep up the good and interesting work.

    Like

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