The consumed-income tax

Writing in the Wall Street Journal on Thursday, American Enterprise Institute executive and former American Express CEO Harvey Golub mediated at length on the concept of “fairness” in taxation.

Noting that our famously class-warfare-obsessed President is “simply wrong if he believes our highest earners are not paying their fair share,” Golub notes that our steeply progressive tax structure is even more redistributionist than it appears, because some forms of income and benefits are not counted as taxable income, while others (such as corporate earnings and the estates of the deceased) are taxed more than once.

Many of these tax preferences are invisible to the public, or operate in a manner contrary to the average American’s expectations.  For example, municipal bond interest is not taxed, but that actually benefits the entities issuing the bonds, not the people who hold them.  “If interest from municipal bonds were taxable,” Golub points out, “their rates would be higher and taxed.  After-tax income would be the same, but reported tax rates would be higher.”

Golub’s proposed solution is a “consumed-income tax,” in which income from all sources is added together.  Money for investments and retirement savings would then be deducted.  The resulting figure would be the amount of income the taxpayer received and spent during the year, and this would be subjected to taxation.  Golub says he would prefer a flat tax, but the concept could still work with progressive tax levels.

The important result would be the elimination of our gigantic tax code.  All of those incredibly complex deductions, exemptions, and alternative minimum penalties would be swept away, as would double taxes on corporate income.  Since investment and savings would not be taxed, there would be a strong and completely equitable incentive for all Americans to engage in such activities.  When profits were realized, collected, and spent, they would be taxed the same as all other income.  A great deal of money currently spent on compliance with the tax code would be freed up for more productive pursuits.

Golub offers an exceptionally penetrating insight when explaining the need for eliminating tax code favoritism and subsidies: “If we still want to subsidize certain behaviors, pay for them through a legislative appropriations process, making them transparent to the public.”

It is that very lack of transparency that breeds so much public cynicism about the tax code.  Of course, such obfuscation is extremely useful to politicians, which why few of them would race to support Golub’s consumed-income tax proposal.

Nobody really knows what they’re paying in taxes.  Much of the average person’s tax burden is hidden two or three levels away from their direct observation… and that would become much more pronounced if the Left ever gets its value-added tax.  We all pay corporate taxes, but we don’t see them.  We all pay for the tax preferences and subsidies granted to others, but the process has been made painless, because we don’t think of ourselves as “penalized” by subsidies we don’t receive.

We have even less understanding of what other people are paying in taxes, in both directions on the income scale.  We are often told that higher taxation on the rich is morally justified because they enjoy greater benefit from public resources, but no logical correlation exists between what they’re paying, and the benefits they supposedly receive.  We don’t dwell upon the way wealth is transferred between different age groups by the tax code.

To put it simply, we have been programmed to believe “fairness” means whatever a ruling political coalition says it means.  The term is infinitely flexible.  It applies to the anticipated results of policy, not the rules actually applied against individuals in the present.  The modern politicized concept of fairness is antithetical to justice, because justice forms the road beneath our feet, while fairness is a far-off destination, whose location and character we are expected to take on faith.

Americans deserve a government that can survive upon the income generated by truly extending fair and equal treatment to each and every citizen.  Golub thinks his tax proposal would generate both superior government revenue and greater wealth for the populace.  Socialists would expect the contrary, warning of swift government insolvency and general poverty for all except the “fat cats.”  That is the difference between those who place their faith in the people, and those who believe only in the State.