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Nathan Lewis Contributor


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Economics & Finance 42,690 views


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Thus, it seems to me that the way forward would be to combine each of these systems: a flat tax of about 16% with a basic exemption that leaves the lowest incomes tax-free; no separate payroll taxes; and a national sales tax or VAT of perhaps 10%, which would work out to more like 20% when you include state-level sales taxes. Yes, you would have some danger of rising tax rates over time, but every tax system has that danger.

Personally, I would go with a national energy tax instead of a national sales tax: something in the realm of $1 per gallon of gasoline, or the equivalent on natural gas, coal and so forth. I calculate that this would produce about $1,035 billion of revenue per year at today’s rate of usage, or about 6.9% of GDP. If we add that to Hong Kong’s 13% revenue/GDP from its 16% flat tax, we get 19.9% of GDP, which is pretty close to our 18.5% bogey. (In practice, higher taxes on energy would result in less usage, so revenue would probably be a little lower.)

Yes, I know this is Al Gore’s idea. So?

One nice thing about an energy tax is that it would reduce our reliance on foreign oil and environmentally-destructive energy practices. The other nice thing is that it is easy to avoid – just use less energy. Those with the lowest incomes can find a way to avoid much of it, by turning down their thermostat and commuting by bicycle, while those with higher incomes can keep their heated swimming pools, Range Rovers and private yachts if they want to. Thus, I think it would have a natural progressivity, to counteract the regressivity inherent in a sales tax.

When you consider that people with lower incomes would no longer be paying payroll taxes, would be partially exempt from income taxes, and would be able to easily avoid the energy tax, we can see that their overall tax burden could be significantly reduced.

Another question is whether tax revenue of 26.9% of GDP (federal, state and local) in the U.S. is really what we want.  Singapore gets by on 14.2% of GDP, but still manages to provide all the services common to developed countries everywhere, including a universal health care system for all citizens.

After experimenting with minimalist government in the 19th century, and big government in the 20th, I think we will ideally migrate toward a solution that combines the best of both. In simple numbers, it would mean tax revenues of about 15%-20% of GDP. Let’s just take a midpoint number of 18%.

Out of this 18%, about 6% would cover state and local governments (police, fire, schools, roads), and 12% would go to the federal government. The federal budget would look something like this: 3% universal healthcare (the amount spent by Hong Kong and Singapore on their universal healthcare systems), 3% senior income insurance (replacement of Social Security), 2% defense, and 4% everything else.

As the need to raise tax revenue diminishes, the tax systems and tax rates themselves can become simpler and less burdensome.

Already Herman Cain is moving somewhat in this direction with his “999 Plan,” which he says is a combination of both “flat tax” and “fair tax” ideas. I think it is still a rather rough proposal, but it is enough to start a discussion. Voters realize that, by the time it went through Congress, some of the more problematic elements would be tweaked and fixed. The important thing is that he would be getting the process started. Maybe that’s why the pizza guy is rising in the polls?

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