As I write this in July of 2021, Amazon founder and billionaire Jeff Bezos has just returned from his 11-minute joy ride to the edge of space, just nine days after fellow billionaire Richard Branson did the same on his VSS Unity. (The stickler in me wants to point out that by one common definition of "space," Bezos is still the first and only billionaire to accomplish this feat, since Branson only went up about 80 kilometers, while Bezos hit 100.)
I have always been a space enthusiast. Attending the Space Symposium in 2012 was one of the biggest thrills of my life. And full disclosure: if I had $20-$30 million lying around the house, I wouldn't hesitate to spend it on a trip to space. I would go in a heartbeat.
So I don't begrudge these men their trips, and I salute the courage it took to complete them.
And, generally speaking, I am a free-market capitalist, and believe that your money is yours to do with as you please.
But therein lies the rub: much of these billionaires' money isn't rightfully theirs.
And that's how billionaires in space got me thinking about our tax system.
In my system of ethics, your money is yours to do with as you please only after you have paid your debt to the society that enabled your wealth to begin with, and by debt I mean taxes, the "price...for civilized society," as Oliver Wendell Holmes called them.
In the United States, the average worker pays an effective net average tax rate of 22.4% according to the OECD. According to Forbes, meanwhile, Bezos pays a net effective rate of 0.98%. So Bezos has not paid his fair share to a country that has given him everything. To paraphrase Barack Obama, "Jeff didn't build this:" his company employs workers educated on our dime in our public schools; his trucks deliver goods that drive on roads built and maintained by the American taxpayer; he is protected by law enforcement funded by those drivers' taxes; his business enjoys a stable regulatory structure and transparent business environment thanks to the laws and protections of a system to which he contributes such a small share of his wealth.
This is normally where people on the Left start chanting slogans like “Tax the Rich!” and as a liberal, I agree with the sentiment.
But the underlying problem here is not merely one of tax rates. The problem is the entire structure of our tax system and what we choose to tax: in short, we're taxing all the wrong things, because we’re stuck in a 19th-century mindset while struggling to compete in a globalized, 21st-century economy in which wealth can be shifted and hidden and protected from taxes all over the world.
I don't want to turn this into a history lesson on taxation, but the bottom line is this: we have inherited a federal tax system that primarily focuses on two things, labor and capital. Classic 19th-century thinking: labor v. the means of production. And this isn't just theoretical: because of this mindset, we make artificial distinctions between different types of income (income from labor v income from investments, etc.), and these distinctions lead to bad policy.
And the challenges of our century are not those our ancestors faced two centuries ago: climate change, increasing inequality*, accelerating automation and artificial intelligence, the 'gig economy,' and a highly globalized marketplace with relatively few restrictions on the movement of capital, mean that we need to rethink how we tax and redistribute wealth.
Uh oh! There's the R word our conservative friends hate so much: redistribution. But it is far from being anti-capitalist; in fact, redistribution is essential to functional capitalism. When too much wealth gets too concentrated into too few hands, bubbles burst and catastrophe ensues for all. The last two peaks of such hoarded wealth coincided with disastrous economic collapses.
Think of wealth as the lubricant that keeps the machinery of the economy moving: if it pools in one place and fails to reach others, sooner or later the whole machine grinds to a halt.
So how do we keep the gears moving in this new world? By focusing not on labor and capital but on negative externalities, and by choosing taxation that cannot be evaded by shifting and hiding resources all over the the globe.
For those who slept through their econ 101 class in college, a reminder: externalities are essentially the unintended byproducts of production, be they good or bad, that do not directly benefit or hurt the producer of the good or service associated with its production.
Negative externalities are very common in the modern economy: the car manufacturer isn't in the business of producing or selling pollution, but that is a negative externality associated with their product, and it is one all of society must pay for. Yet in the production of that smog machine, we tax the labor of the worker who built it and the profit of the manufacturer. (Well, we try to tax the profit of the manufacturer, but we often fail. See above: capital is easily moved and concealed these days.)
What if we took an entirely different approach? What if we told the worker that her hours of labor are all tax-free and the manufacturer that they are free to keep every penny of profit, assuming all parties cover the cost of the negative impact their work and product have on the rest of us? And what if we did so in a way that the manufacturer could not avoid taxation, because the taxes were collected in the process of creating the end product?
And instead of taxing the return on capital for the shareholders, what if we instead imposed a simple yearly wealth tax on the net worth in excess of $4,400,000 per member per household (a threshold automatically increased by the lagging yearly CPI, to avoid having to revisit the cut-off periodically as inflation devalues that amount)?
Two simple forms of taxes for everyone: 1) pay a portion of your accumulated wealth to help fund the society that made your wealth possible and 2) pay the cost to cover your harm to society.
The first is straightforward enough, but current proposals do not go far enough to prevent the pooling and stagnation of wealth. If we exempted the first $4,400,000 per household member of net worth for all households, an annual wealth tax of 14.84% would raise about $4 trillion dollars per annum from the top 1% of households. More importantly, it would prevent so much wealth from sitting idly on the sidelines and pump it back through the economy. It would not raise a dime from anyone under the top 1% of households, and more than enough wealth would be exempted per household to prevent it from even knocking a household out of the top 1%.
The second comes down to just two areas of negative externalities associated with consumption: we stop taxing all labor (work is supposed to be GOOD, right, so why punish it?) and focus on consumption's principal negative externalities:
1) Pollution and water waste. $3 trillion a year could be raised from simply making all of us pay for the pollution we create and the water we use. Two trillion dollars is the estimated current cost of climate change to our economy, and we are also depleting our supply of freshwater sources at an unsustainable rate.
So let's just agree that if you pollute and use water (both of which we all do), you pay. And keep it simple and impossible to evade: 1) $4.83 a gallon tax on all diesel, ethanol, kerosene, and gasoline production; 2) a $0.468 federal tax on every kilowatt hour of electricity produced by non-renewable means (set to automatically increase to account for declining use of non-renewables); and 3) a federal tax of $.00825 on every gallon of water used (by both residents and industry).
Now, if you know anything about power and water consumption in the US, you might be losing your mind right now. And if you don't, let me help set your hair on fire: an average household would spend over a thousand dollars a month on energy, fuel, and water, not including the indirect cost of higher prices of goods and services tied to higher fuel prices, about a threefold increase. But households can control their energy and water use and thus their tax rate, and keep in mind that in this world, there is no income tax at all, because we aren't taxing labor anymore.
Still, poorer households would struggle, so I would propose a straightforward energy/fuel/water subsidy averaging** $462 per member per household per month to the lowest quintile of earners, $303 for the second-lowest, $145 for the middle quintile, and $70 for the top two quintiles (all amounts adjusted by the CPI every year automatically). This means a net (after subsidy) of about $1.28 trillion would be collected. And since recipients could spend this money on anything, they could keep more of it by conserving energy, so there is a strong incentive for everyone to think about energy consumption.
2) Preventable healthcare costs. Most of the money we spend on healthcare is a reaction to illnesses caused by the use of substances that destroy our health. If you cut through all the noise and outliers, these substances are primarily saturated fat, sugar, tobacco, and alcohol. I am not suggesting we outlaw any of these. I believe in freedom of choice. But I am suggesting that we should all pay our fair share if we contribute to higher healthcare costs by using them.
Isn't taking responsibility for our actions supposed to be a trait all Americans embrace? Every cigarette consumed in the US generates an annual cost of about $1.20 in healthcare costs. Should non-smokers pay for all that? Every dollar spent on alcohol generates about $0.704 in healthcare and other costs associated with drinking. Should non-drinkers pay for all that? Obesity and diabetes cost us trillions. Should healthy eaters pay for all that? A federal tax of $12.00 per pack of cigarettes produced, a $38.38 federal tax per equivalent of one liter of pure alcohol production, and a $8.28 federal tax on every kilogram of ingredients classified as 'added sugars' or 'saturated fat' by the FDA would shift more of the burden to those who choose to use these products.
It's not about controlling people's choices, but about making sure we all accept responsibility for our choices and compensate society for the damage our choices inflict.
In short, it's all about personal responsibility.
After using the same formula above to create a food subsidy to offset higher grocery costs ($462 per member per household per month for the lowest quintile of households by earnings, $303 for the second, $145 for the middle, and $70 for the top two quintiles), these taxes would net approximately $560 billion a year for the federal government. And households would determine their own tax rates through their eating and other consumption habits.
Annual wealth tax, energy/water tax, and consumption tax. With just three sources of federal tax collection (not including usage, application, leasing and other fees the government charges us for particular services), we have eliminated all income tax and completely ended the game of cat and mouse we constantly play to get corporations to pay their fair share.
And just think about how much more transparent and simple this system is: no deductions, no tax havens, no tax credits, no shady accounting. The vast majority of corporations would not even have to file taxes! Why? Because in order to capture the tax revenue in a way that neither corporations nor consumers can avoid taxes, we would choose only a few strategic points in the supply chain to collect it.
For all the pollution taxes, we would charge those only to the energy companies who produce the fuels and electricity supply. For any fuels/energy imported, we would collect the tax from the US importers or distributors. They in turn just pass along the costs through the rest of the supply chain. The Treasury has no need to track it from that point because the tax has been paid and we don't want to double tax. And water taxes are simple, since the tax would be applied to all metered water usage in the US, making the tax easy to calculate and collect.
For the food, alcohol, and tobacco taxes, the taxes would be collected from the distributors. Why not the manufacturers? Simple: all these products can and often are manufactured overseas, and one of the major goals of this system is to stop having to chase money all over the globe. But regardless of where, say, a bottle of wine is produced, it needs a distributor in the US to get it to our consumers. So we collect the tax there. Manufacturers would only be charged in cases where they themselves handle distribution for their products.
Suddenly, offshoring corporations and setting up foreign tax shelters and all the other dodges lose all value overnight. Why? Because we aren't taxing profits anymore.
And did you notice something else that happened in those numbers above? We completely eliminated all welfare and food assistance programs in our federal budget in favor of direct transfers and a modified system of universal basic income. No more food stamps, no more unemployment benefits (since your monthly payment isn't tied to your employment anyway), no other transfers of any kind. Which makes the whole system easier and more transparent. And since it involves payments to all households, no one can say they're being left out.*** The only other government-run income program would be Social Security, which would remain in place as-is (and become sustainable by removing the contribution cap).
What else got simplified? Regulation. For example, wasting energy is no longer economically practical at these levels, so who needs greenhouse gas regulations? All manufacturers will be tripping over themselves in a desperate dash to become as energy-efficient as humanly possible in order to remain competitive. We wouldn't need tax credits for solar panels or rules about emissions for cars: a marketplace operating in this tax environment would immediately create all the incentives we need to solve these problems.
We have also created enough federal revenue for offering Medicare to all uninsured Americans and universal TK/K education and two years of free community college or trade school for all Americans. By adding in that elimination of the Social Security contribution cut-off, we also guarantee our retirement system's solvency for decades to come.
Of course, all these NETs (Negative Externality Taxes) would immediately start changing patterns of consumption**** throughout the economy, so the rates would have to be revisited frequently until the system stabilized.
Better yet, we could implement a system of DTRs (Dynamic Tax Rates) that automatically reset tax rates every year based on new trailing year data. For example, we could set a target of four trillion 2021 dollars, automatically adjusted by the CPI every year, as our goal to collect from top 1% of households by net worth, automatically adjusting exemptions and thresholds to meet that goal. And pollution, water, and consumption taxes should be automatically recalculated each year based on the updated cost estimates of the associated negative externalities, total usage, revenue goals, etc., as long as transparent formulas are used to arrive at the numbers.
Imagine a world in which, 30 years from now, we have to explain to college students what 'tax shelters' and 'tax loopholes' and 'tax deductions' were, because they are no longer used to avoid responsibility.
Imagine a world where corporations are powerless to hide their wealth from the society that makes them rich, and they actually thank us for that, because we've simplified their tax structure to such a degree that most do not even file returns, and they save billions of dollars in accounting and administrative costs.
This is the tax structure for the 21st century. It's time to create an economy that works for every American and that prepares us for the challenges of a new reality. So let's stop punishing people for working and stop playing an endless game of global cat-and-mouse with billionaires and create a simple, effective tax system that moves us forward into a brighter and more sustainable future.
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Footnotes:
*Obviously the 19th and 20th centuries were also marked by extreme inequality, but the trend was towards greater wealth being accumulated by the working classes, even in the face of extraordinary personal fortunes starting in the Gilded Age. That trend ended two generations ago and the working classes have stagnated ever since.
**I say "averaging" in these cases for each quintile, because you want a smooth progression at a much more granular level than quintiles to avoid steep cut-offs that can create disincentives to work. We don't want scenarios where, for example, someone turns down a job because it would mean a steep and sudden reduction in her monthly subsidy. And to ensure no one lives in abject poverty, the lowest 1% of income earners would get a total combined monthly subsidy of $1073.33 per month (in 2021 dollars).
***This is a lesson I learned when studying Scandinavian politics as an undergrad: by giving at least some level of almost all benefits to all classes, regardless of their need, you co-opt class resentment and division.
****Not to mention wealth management. We would need to clearly define what constitutes taxable net worth. As one of the few countries on Earth to tax its citizens based on their citizenship versus place of residency, inevitably more citizens will choose to renounce their citizenship if they are sufficiently adamant about evading taxation. We cannot stop that and shouldn't try. Let them leave....and deny them entry visas/green cards.
