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politics, economy, tax

Last updated: Jun 19th, 2013


Taxes are a necessary nuisance, almost universal in any modern human society that has a government and currency system, as referenced by the phrase "Death and Taxes". But tax systems are not created equal; some work better than others, and most tax systems work better for some people than others.

In my opinion, the best tax system has the following attributes:

As I will explain below, there is no perfect tax system. These goals described above are a "holy grail" of tax systems, but it is not possible to achieve them fully. Often, these goals will be in conflict with each other to a degree.

A good solution, as I see it, is one that avoids the worst problems or incentives/disincentives and balances simplicity against other goals. I would favor a system much simpler than the current federal income tax system in the U.S.

Taxes Create Incentives and Disincentives:

Any tax system sets up incentives and disincentives. Because people generally do not like paying taxes, taxing an activity usually provides a disincentive to engage in that activity. The higher the tax, the stronger the disincentive.

Taxes can also set up positive incentives, by creating incentives to engage activities which avoid or reduce the tax. For example, taxing the holding of money provides an incentive to spending cash, or taxing energy use provides incentives for conservation.

I have heard the argument from some conservatives and libertarians that it is not good, proper, or ideal to think about incentives when designing a tax system, and instead that tax systems should be based on some notion of "fairness". I see two problems with this argument: (1) the notion of "fairness", while important, is subject to a great deal of disagreement, and (2) all tax systems create incentives, and these incentives result in real changes in the structure of society, so any tax system that does not adequately take into account incentives is likely to have unintended negative consequences on society as a whole.


Simplicity is one of the key ideals of tax code that most people wish to achieve. A simpler tax code has numerous advantages:

If simplicity of a tax system has so many advantages, then why is our tax code complex? Part of the problem is due to ineffective and short-sighted political decisions, which often make patchwork changes to the tax system to achieve various political goals. In some cases, the complexity is due to outright corruption, as money fuels outright bad tax policy which favors certain corporations or groups of individuals. But there are also a few more sincere motivations that create pressure for tax codes to become more complex.

There is, unfortunately, a tradeoff between simplicity and fairness of the tax code. The world is a complex place, and there will always be ways in which the tax code is somehow unfair. For example, it seems unfair to tax income at the same rate, when they are living in areas with a different cost of living, as a person with a certain income might be living very modestly in one area and yet still struggling to make ends meet, whereas the same income in another area might result in the person being able to live a rather luxurious lifestyle. But adjusting taxes for cost of living would not only make the tax code much more complex, but would greatly increase the possibilities for tax fraud and tax evasion.


People rarely talk or think about a tax system being robust, but the concept is simple. Some forms of revenue are more robust in the face of change, whereas others are not. For example, income tax and sales tax revenues fluctuate greatly as a function of how well an economy is doing, as both income and purchases of new goods are higher when the economy is booming. Accordingly, these are not very robust sources of tax as they tend to fall off when the economy takes a downturn. Property tax can be more or less robust, depending on whether or not property values are changing.

In general I think the best way to have a robust tax system is to tax in such a way that stabilizes, rather than destabilizes the economy. It is difficult to find taxes that are not dependent to a degree on economic activity, but it is certainly possible to find ones that change more or less. This is part of my argument for sustainable taxation, whereby a tax system only raises revenue from economically healthy, thriving businesses and individuals, and does not touch those who are merely starting out or who are struggling.

My Ideal Tax System:

I would support a radical restructuring of the tax code in the United States, leading to a complete elimination of all income tax and payroll tax. I support elimination of both individual and corporate income tax. Why?

Income tax disincentivizes work, a productive activity which creates wealth in society. I believe that, rather than tax productive activities, it would create better incentives to tax only destructive activities. Here are some ideas of types of taxes I would support:

These proposed taxes are a radical departure from the current tax system. Are there smaller changes that could be made immediately that would still have a substantial positive effect? Yes!

A less radical proposal:

I propose to begin tax reform by the following changes:

This change to the tax system could be implemented without making any changes to the payouts of social security and medicare. I understand and agree with the need to reform the social security and medicare systems, but I also believe in tackling problems one step at a time. This single step could be a revenue-neutral reform to the tax system that would carry several benefits:

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