Tax and taxation is not the first topic that comes to mind when most people think about sustainability, yet I think the tax system is one of the most important topics when discussing sustainability. There are two key aspects to whether or not a tax system is sustainable:
- Is the tax revenue itself sustainable?
- Does the tax system as a whole facilitate or hinder sustainability in society?
I will argue that the tax structure in the United States of America is unsustainable in both senses, that the revenue stream is unsustainable, and also that the tax system is one of the largest barriers to achieving sustainability, including energy independence, environmental sustainability, and sustained economic health.
I also will explain how making certain simple changes to the tax system provides one of the easiest ways to quickly and thoroughly achieve sustainability in both the environmental and economic sense.
Is the tax revenue itself sustainable?
There are two ways in which the revenue stream from taxes can be unsustainable: tax avoidance, and economic dysfunction:
People and businesses do not like paying tax, and if the tax is big enough, inconvenient enough, or perceived as unfair or unjust, they will go to great lengths to avoid it. If you tax a specific activity or practice, one that can be easily changed, people will generally change their behavior over time in order to minimize their tax. This will cause tax revenues to fall off over time.
Tax avoidance can take both legal and illegal forms; when it is illegal it is called tax evasion. But the legal form of tax avoidance, which can involve shifting your life and business decisions to minimize your tax liability, can be just as problematic, if not more so, as there is no way to prevent it without changing the law. Tax avoidance can involve complex schemes that utilize loopholes in the law, but it can just as easily involve simple business decisions--i.e. choosing non-taxed alternatives to some good, service, or activity that is taxed.
There is a second, more sinister way in which tax revenue can fall off. Furthermore, this effect can happen even when people and businesses are fully honest about paying taxes. All tax relies in some form or another on economic activity. If taxes harm the health of an economy, or contribute to dysfunction within the economy, all tax revenues will fall off as the economy stagnates or collapses. This is a worse scenario than the simple avoidance of taxes in an otherwise healthy economy, as there is now less economic activity from which to draw tax revenue.
I believe that the United States is currently in a state of economic dysfunction, caused in part by its tax system, although there are other factors as well. I think the biggest negative factor in the tax system of the U.S. is the payroll tax.
How to achieve a sustainable tax revenue stream:
I find the analogy of hunting and fishing to be a good way of explaining how to tax sustainably. If you hunt or fish a population too much, and the population is being taken by humans at a higher rate than it is regenerating, it will eventually dwindle, and you will eventually reach the point where you can no longer hunt or fish to support yourself. If, instead, you have a large, healthy reservoir population of fish or game animals, protected from hunting during certain seasons or in certain areas, then you can hunt as much as you want within certain limits, and support yourself indefinitely.
This phenomenon is why hunters have agreed upon and generally respect certain limits on hunting. For example, there are hunting and fishing seasons, bag limits (the number of animals you can take), and restrictions on the types of animals (male, female, age, species, etc.) that you can take. There are also typically some nature preserves, including those supported primarily by hunters and fishers, which do not allow hunting or fishing in certain areas.
In hunting and fishing, the principle can be summed up as follows:
Take only moderate amounts from thriving populations; do not take from vulnerable populations.
The best type of hunting or harvesting, from an ecological perspective, is that which takes an overpopulated species and turns it into a resource. For example, deer or canada geese on the east coast, smelt in the great lakes, or kudzu (an invasive plant species) used as food for goats.
This analogy brings us to the following principles for creating a sustainable tax revenue stream. The same principle, in the world of taxation, becomes:
Tax only the economically thriving, and tax them in moderation; do not tax the vulnerable.
How to implement this principle of taxation:
- Create a reservoir, a protected segment of the economy that is not taxed at all, that generates economic activity. My proposal is to define this segment is as follows:
- People who are earning only enough to support themselves while living very minimally, or people earning only slightly more than this threshold, would owe no tax.
- Communities which are living in economic isolation, receiving no or barely any services or flow of money from the government, would owe no tax.
- Small, start-up businesses with no profits would owe no tax.
- Tax only the extra capacity of the economy, beyond this protected reservoir. For example, if using income tax, tax peoples' income only to the degree it goes above that needed to support themselves minimally.
- Provide overall policies which create a strong sense of fairness and trust in the government. I think the practice of not taxing anyone who is not earning enough to support themselves will go a long way to creating a sense of fairness. I also think that a simple, transparent tax code, and small, minimal government can help a great deal. But the details of how the tax code is designed are more important than the simplicity of the tax system: a simple system is neither guaranteed to be fair nor sustainable.
The idea of this protected, non-taxed segment of the economy, is that it is the part of the economy (the people, businesses, etc) most vulnerable to economic dysfunction. A person struggling to make ends meet can be driven to desperation (and crime) if taxes place additional financial burdens on them. Rather than implementing social welfare programs to "help" these people, without addressing the root problem that they are taxed when they do not have the money to afford being taxed, I propose eliminating the tax on these people, and also eliminating a corresponding amount of welfare programs.
Similarly, new businesses without profits are the ones most likely to fail: as a society we want to make it easy for these businesses to succeed; ensuring that they pay no tax until they are profitable (and thus self-sustaining) can help cultivate a healthy economy. Lastly, isolated communities which exist in a state closer to self-sufficiency, are also vulnerable: if the region is receiving few services (and little money) from the government, taxing it in any way will siphon money out of it and drive it into economic ruin.
Most people do not want to be constantly struggling to make ends meet, most communities want to receive some benefits and payments from the government, and most businesses strive to become and stay profitable. So...there is a natural incentive to get out of this segment, and into the segment where they can be taxed without causing as much hardship. This tax scheme will be more sustainable, as it will not drive people, communities, or businesses into economic ruin--once they fall below the threshold of taxation.
Yes, but what to tax and what not to tax?
Above I outlined a protected segment of society, one not to tax. But how to actually raise revenue through taxes? I propose a few principles that can guide how to create the most sustainable revenue stream:
- Tax the more fundamental action or commodity rather than more specific actions or goods that have substitutes or alternatives. For example, if you tax gasoline but not diesel, people will eventually shift to diesel-burning vehicles. Or, if you are in a small state, or a city, and tax gasoline at a much higher rate than surrounding areas, people will go out of their way to tank their cars up elsewhere where they do not have to pay the tax.
- For activities that you do not wish to discourage, tax only when there is a strong, natural driving force behind the activity, and make your tax small enough that its effect on people's behaviors is small relative to this force.
- When taxing at a high enough rate to discourage behavior, only target behaviors you generally want to discourage. For example, a high gasoline tax could be beneficial as they could reduce car use, reducing congestion, pollution, and fossil fuel use. However, a high income tax, or worse, a high payroll tax could discourage employment and working.
For example, I would support reducing or eliminating income tax, especially taxes earned through wages or salaries. Taxing wages and salaries essentially taxes work, which discourages work (and thus discourages wealth creation, as work generally is necessary to create wealth in an economy). Sales taxes and value-added-taxes also tax wealth creation, as they tax the sale of newly created goods, or wealth (value) added to improved goods.
Instead, I propose a shift towards taxes on consumption, especially consumption related to government expenditures. For example, taxes on gasoline, energy, water use, fossil fuel use, or any kind of resource use. Gasoline and water is particularly important because government typically pays for road and water infrastructure. Waste disposal taxes or fees are also desirable from this perspective, although they can become problematic if they are too high, as they can promote littering and illegal dumping as a way of evading the tax. Use fees, such as toll roads, and taxes on non-essential services (such as some telecommunication taxes) can also be preferable. I also think that a small tax on cash deposits, especially those held by corporations, is a desirable form of tax, as it discourages hoarding of cash, and has the effect of stimulating business, much in the same way a small, stable rate of inflation has the same effect, but without the rising prices, although care must be taken to not create undesired incentives through how such a tax is implemented.
For a specific suggestion of how to implement these principles, read my proposed tax plan. I have a "short plan" and a "long plan"...the long-run ideal is to eliminate all income tax, but the simpler plan proposes for an elimination of payroll tax, for the reasons given on this page as well as other reasons I explain more there.
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