|The purpose of taxes is to provide revenue for the government. The government uses this revenue to fund itself and pay for the services it provides as agreed to and documented in the national budget. These services can be public services provided to everyone without distinction, or can be entitlements provided only to a select group based on some eligibility criteria. Taxes can be set to be the same amount for everyone (fixed fee) or can be rate-based. The rate can be the same for everyone (flat tax/sales tax) or can be different depending on some criteria. The USA’s current tax structure is a progressive tax where the rate is based on income and is progressively higher as income increases. Progressive income tax systems when used by the government to pay for entitlements for which the major criteria is low income are means to redistribute wealth because they require the wealthy to pay for services that are only offered to the poor.|
Wealth redistribution in an economy mainly based on capitalism is essential to keep the inevitable economic gap between the rich and poor from growing so large as to cause both economic and civil instability. In the USA the current progressive income tax system and associated entitlement programs have not been able to stop the widening of this economic gap to what is now an alarming size.
The distribution of net wealth in the United States, 2007. The chart is divided into the top 20% (blue), upper middle 20% (orange), middle 20% (red), and bottom 40% (green). (The net wealth of many people in the lowest 20% is negative because of debt.)
The need for wealth redistribution in the USA could not be clearer and more urgent. Nowhere however do I see any serious efforts to address this. I think we have an opportunity right now as our Congress enters into serious discussions about both the short- and long-term solutions to bringing down our budget deficits to a surplus budget in order to address our growing national debt. There are two main factors driving our budget: spending and revenue. There will certainly be those focusing, perhaps exclusively, on lowering spending. Reducing spending to only necessary services is essential but spending cuts alone will not solve the budget deficit problem. There will also be those who will be looking at revenue and primarily the US Tax Code. This is an excellent opportunity to not only review this code and the plethora of rules, exemptions, exclusions, rates, etc…; but also to consider a fundamental change in the way taxes are calculated and levied.
I am recommending that US taxes be calculated and levied not on yearly income, but each year on accumulated wealth.
Accumulated wealth would be net wealth that could exclude a small amount of basic capital holdings such as a private home, car, personal savings account, and a long-term retirement account. These exclusions would have to be reasonably valued and be limited to a predetermined amount that was close to the national average. The total amount after these exclusions held at the end of the tax year would be Taxable Net Wealth. Very steep, progressive tax rates would then be applied and would begin at some pre-stated minimum amount. There would be no maximum amount above which additional taxes would not apply.
The implications of a system such as this are:
Those with little wealth would pay no or very little tax regardless of the amount of their income. It might seem unfair that those in this category with high income would pay little tax, but if someone had a high income and ended the year with low wealth it would be because they had high expenditures. These could be unexpected emergency expenses like education or health care costs, or could be business or investment losses. This could also be just someone living an expensive lifestyle, but in that case their expenses would mainly be made up of buying products or services which are the source of jobs and income for others. The wealth does not just disappear. It is only transferred from one person to another, to group of people or to a business or corporation. The wealth will still be there somewhere and subject to taxation.
Those with high wealth would pay substantial tax regardless of the amount of their income. It might seem unfair that those in this category with low income would pay substantial tax, but they would be paying that tax because of their accumulated wealth. This would prevent people who in today’s income tax based system receive little or no income per se, but continue to accumulate untaxed wealth because from their investments. It would also prevent or at least curtail people from passing their accumulated wealth along to their heirs, a situation that only tends to exacerbate the widening gap in wealth distribution and perpetuates both wealth and poverty down through successive generations.
The progressive rates of taxation should be based on the estimated total national wealth and the amount of tax revenue required by the national budget, and not the other way around as is done today.
This new approach of matching tax revenue to budget requirements is addressed in a companion article about the US Federal Budget.
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Copyright © 2013 Bill Smart. All rights reserved. Reproductions permitted.