Funding President Joe Biden‘s agenda will require substantial tax increases for corporations and the wealthiest Americans. In a tightly divided Congress, manipulating the horribly complex tax code is even more difficult and would create unintended consequences. For example, it could encourage more corporate investment, and reinstating state and local tax deductions would primarily help well-off taxpayers. It may be time to scrap income tax in favor of an entirely new approach to funding our government: a value-added tax, or VAT.
“A VAT would make it more transparent how much new government programs cost and allow voters to decide whether the rate hike is worth it. ”
Many earlier itemizers keep the same records and enter the same information into tax software that determines whether it is better to itemize or take the standard deduction of $ 12,400 for individuals or $ 24,800 for married couples. Compiling and providing so much detail about our activities and expenses to the federal government and tax professionals is an inordinate intrusion on privacy. And the system has been abused under various presidents for political purposes. The whole system favors wealthy individuals and businesses, who can afford expensive K Street accountants, lawyers and lobbyists, to work through the crazy details of the tax code and get special treatment during the complex processes of perpetually rewriting the tax law and translating it. in IRS rules. Companies make decisions for tax avoidance reasons, not for sound economic reasons. Democrats in Congress and left-wing think tanks say American businesses enjoy too many tax incentives to move abroad How VAT works The most effective reform would simply be to replace the $ 2.2 trillion the Treasury collects annually through income taxes for a VAT on all purchases and private payments. Businesses and institutions would pay a fixed tax rate on receipts minus their outlays on materials, software and equipment, rent, etc. This theft would avoid double taxation of intermediate goods and services used to make other products as they move through the supply chain to end users. By taxing goods and services instead of individual income, an IVA would forever end the requirement that ordinary citizens, even those with investment income, keep tedious records and file income tax returns. For businesses, it would eliminate headaches with inventory valuation, depreciation of buildings and machines, and qualification for special breaks, and save billions in accounting costs and legal fees. Taxing goods and services at the point of sale would eliminate the problem of finding ways to tax the activities that US companies park abroad to avoid US taxes. In general, companies and institutions would file much simpler tax returns. What rate would be required? To replace the income currently generated by individual and corporate taxes, the VAT rate could be set at around 10%, but two problems remain. An VAT would tax rich and poor consumers at roughly the same rate. The elderly, who generally depend on savings, already paid taxes on the income that those savings generated during their working years and would be taxed again. An effective response would be to increase the rate to 13% and provide $ 4,000 to parents for each child under 19 years of age and to people over 65 years of age. A single working mother with two children, earning just $ 7.25 an hour, would have a family income above the poverty line. Under World Trade Organization rules, VAT would be applied to imports, providing additional resources to reduce inequality. Going one step further, Social Security and Medicare taxes could be eliminated by raising the rate to 19%. Such a sales tax may seem high, but businesses and individuals would no longer pay a 15.3% payroll tax on most wages plus income taxes. And companies would no longer go through corporate taxes on the prices they charge. Biden is proposing about $ 430 billion in new revenue to pay for his political agenda, which would raise the proposed VAT rate to about 22%. You would have a chance to explain why your priorities are worth such a visible tax increase. An IVA would make it more transparent how much new government programs cost and allow voters to decide whether the rate hike is worth it. Peter Morici is an economist and professor emeritus of business at the University of Maryland, and a national columnist.More Insights from Peter Morici Guaranteed income for children could define midterm elections The only thing Biden misses with his semiconductor war with China How Congressional Deficit Spending Could Help Republicans