The Power of Ideas

Why not get rid of taxes altogether?

There has been much discussion over time about the ineffectiveness of the tax collection system.  As noted in a recent report by the IRS, the tax gap (the difference between the taxes Americans owe and what they pay) for the year 2001 alone exceeded $300 Billion.  However, the cost of ensuring that all taxes due and owing are paid is prohibitive.  As Treasury Secretary Paulson noted recently, narrowing this gap significantly would require “draconian” measures.  See Glenn Sommerville, e.g.,

I would like to suggest an alternative approach that would solve this problem in its’ entirety at absolutely no cost to the taxpayer…..I suggest we eliminate taxes altogether.  At first glance this idea may seem crazy, but it is not as far-fetched as you might think.

The most obvious question is “How could the government function?”  In general, the government funds its operations through a combination of taxes and other revenue sources that amount to more than 20% of U.S. GDP.  Gaps in funding needs are met by borrowing.  In lieu of taxing income, I would suggest that the government satisfy its operating needs by simply printing money.

This approach has many benefits.  First, there would no longer be any taxes to avoid.  Nothing draconian about that.  No taxes also means no tax collector.  Think of how much money the government would save by shutting down the IRS and eliminating all attendant tax litigation.  (I have not met many people who would be upset about unemployed IRS agents).

The total amount of unpaid taxes in 2001 amounted to more than 10% of total government revenues.  This cost, of course, was paid by someone, and it wasn’t the tax evader.  A “taxless” approach would level the playing field for those legimately shouldering the national tax burden, including businesses.

In general, one would expect that business decisions should be motivated by legitimate economic expectations.  However, our tax system has created many distortions over time.  In many cases, businesses make decisions for tax reasons that make little real economic sense.  Such distortions can not result in the best allocation of resources over the long term.

In the current system, payroll taxes are born by both the employer and the employee.  If these obligations were removed, corporations would become more profitable immediately, and more competitive globally.  The time and expense of tax accounting would also be eliminated.  In fact, since the true income to a wage-earner is the income net of taxes, corporations could actually lower wages without decreasing the net income to employees.  American business would be in a position to create more jobs.  It would be more profitable and cost-competitive.  It would lower the cost of capital, and it would make the dollar stronger.

The main argument against this approach is that it would it be inflationary.  Perhaps.  However, some of the reasons listed above suggest that there will be offsets: the government will be able to operate more efficiently at lower cost; businesses will make better economic decisions and the major cost to American business, labor, will be reduced without negatively impacting income.  Prices might actually moderate.  Furthermore, the private economy will be in a position to create more private wealth and investment.  Finally, a great deal of the government’s operating budget is financed by debt.  This indebtedness is never repaid (when due it is simply rolled over); and I must admit that I do not see the difference between printing money directly and printing it through the borrowing process.

While not a perfect match, government spending is tied to government revenues.  Deficit risks have tended to have some limiting effect on profligate government spending.  In reality, Congress gets around this problem through creative accounting.  Many people would be appalled to learn that the government’s net deficit on an actuarial basis exceeds $50 Trillion (yes, “T”rillion).  Nevertheless, opening the printing press might make the problem even worse.  Spending limitations, tied to GDP, should be carefully considered.

Finally, our tax system is used as a means of implementing social policy and economic policy.  For example, income differences are normalized by progressive tax rates.  Home ownership is encouraged by allowing mortgage deductibility (although wealthy borrowers can generally shield more income).  Nothing prevents Congress from achieving similar goals in different ways.  For example, a VAT could be imposed on high ticket items.  Similarly, Congress could create direct subsidies to accomplish such goals.

In recent years, many new approaches to taxation have been suggested.  Getting rid of the system in its’ entirety is not one of them.  It’s time for a more creative approach. 


September 12, 2007 - Posted by | Economics, General Interest, Politics

1 Comment »

  1. Though chocking and revolutionary, I think your approach deserves to be considered! I off course thought of inflation as a major counter argument to your theory… and I’m not totally sure it’s been resolved.

    Comment by Jessica Cohen | October 8, 2007

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