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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 10, 2012

Johnston: It's Time to Junk the Income Tax

Reuters, Time to Junk Income Taxes?, by David Cay Johnston:

This is America’s 100th year for [the] individual income tax, a system as out of touch with our era as digital music is with the hand-cranked Victrola music players of 1912. It is also the 26th year of the Reagan-era reform for both personal and corporate tax, a grand design now buried under special-interest favors.

With U.S. elections in November, and the George W. Bush tax cuts due to expire at the end of 2012, it’s time for a debate that goes beyond ginning up anger over taxes and the superficial issue of tax rates.

It’s time to consider whether to get rid of income taxes, personal and corporate. What are the strengths and weaknesses of our current system? Should we tax individual and corporate income — or something else? ... Tax systems must change with them or else their lubricating effect turns to sand, wearing down the gears of commerce.

Just as the Industrial Revolution transformed a nation of farmers and mechanics into a land of factory hands and office workers, so too the digital revolution and globalization are fundamentally remaking society.

We need for our tax system to serve our 21st century civilization and its needs, including the costs of aging infrastructure and an aging population, costs that will be borne one way or another.

Five ancient principles that have survived the test of time and are, therefore, profoundly conservative, should guide us.

The first is the moral principle of progressive taxation. ... The second is horizontal equity. ... Simplicity, transparency and ease of payment should be the last three of the five guiding principles, as Adam Smith taught more than two centuries ago.

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David - I agree with you however how will policy makers account for ALL taxation - both explicit (income taxes, ad valorem taxes, excise taxes) and implicit taxes (transference of health care costs from employer to employee, reduction in entitlements) in order to come up with a truly fair, progressive, and most importantly ALL IN tax system when there are so many jurisdictions to cover. Equally important - maintaining local control of the tax system seems to have a great benefit for local communities as the local community can decide what they need.

Posted by: Adam Boatsman | Jan 10, 2012 8:32:42 AM

Mr. Johnston joins the current administration and several of the Republican presidential candidates in a major error: failure to appreciate the economic damage resulting from grandiose plans for Hope and Change. When the laws, both taxes and regulation, are stable, businesses thrive and grow. When these laws are absent or under threat of major change, businesses are paralyzed.

The country already faces the threat of fiscal collapse due to unsustainable policies. Adding another threat, a major overhaul of the tax system, is foolish while the economy is weak. As part of a comprehensive plan which actually eliminates the fiscal gap, tax reform would be pro-growth. In the absence of a complete solution, tax reform is yet another pro-uncertainty, anti-growth program.

I am convinced that the voters will not support elimination of the fiscal gap until the bond market crashes. The necessary steps will become more painful over time. Therefore the best case scenario is an early crash of the bond market forcing alignment of taxes and spending now. Ideally this would occur in an election year so that the voters can fully express their preferences, whether they be for more taxes or less spending. A durable fiscal overhaul with proven voter support would be the best possible stimulus measure.

Posted by: AMTbuff | Jan 10, 2012 9:51:33 AM