In the previous posting on this subject, we noted that by and large the tax systems in place throughout the world are employed as means of social control and justifying Keynesian economics instead of their sole justified use as the sole legitimate source of revenue for government. Interestingly, both Adam Smith and Pope Leo XIII — usually assumed to be at odds on everything — agreed that for taxation to be just, it must adhere to what Smith called the four canons of taxation:
Adam Smith
· Efficiency. The tax system should ordinarily generate sufficient funds for the government to meet legitimate expenditures.
· Understandability. An adult of ordinary intelligence should be able to understand the tax code.
· Equity. People should be taxed on their ability to pay.
· Benefit. People should be taxed in accordance with the benefits they receive.
So, given these principles, what would be the elements of a just tax system? What are its essential features? Some key reforms would simplify today’s overly complex and unfair tax global systems by substituting a single-rate tax on non-exempt personal incomes from all sources, while:
· paying from general revenues all entitlements and other government spending at present levels,
· eliminating the payroll tax on workers and employers,
· making dividend payouts deductible to corporations, and
· balancing the budget.
The proposal known as the Economic Democracy Act (EDA) would rewrite and radically simplify the existing global tax systems to balance budgets automatically. Its tax reforms would keep more money in the pockets of taxpayers from their initial earnings to cover their own health, education, housing and other basic household living expenses. EDA tax reforms would make government more directly accountable and responsive to all taxpayers.
While encouraging corporations to issue new shares to finance their growth and pay out all dividends on their shares, the Economic Democracy Act would eliminate all tax provisions, personal deductions, tax credits, and exemptions (except for the front-end exemptions for adults and dependents) that unjustly discriminate against or discourage property accumulations and investment incomes for poor and non-rich families.
A single tax rate on all sources of labor or capital income over exemptions would be automatically set to meet all Federal entitlement and other programs, and to pay down past deficits. To meet personal living costs the basic incomes of all taxpayers up to the equivalent of U.S. $30,000 per adult and U.S. $20,000 per dependent (or U.S. $100,000 for a family of four) would be free from taxation. To increase taxable income incomes for all citizens, corporations could escape from the multiple tax on corporate incomes by deducting dividend payouts from taxable income.
For example, using the situation in the United States, under the reforms proposed here, a “typical” family of two adults and two children would pay no tax of any kind until aggregate income exceeded $100,000 ($30,000 of exempt incomes per adult and $20,000 per dependent). This family would pay a single rate of approximately 48% on any income over its $100,000 exemption. The 48% rate on incomes above exemption levels would apply to all forms of income — whether from wages, dividends, capital gains, etc. This is less than what dividend and capital gains income would be taxed currently under the “double (sometimes triple) tax” of up to 50% (35% corporate tax rate plus 15% on dividends and capital gains).
In contrast to the present system, a single tax covering incomes from dividends, interest, rents, and inflation-indexed capital gains would enable overburdened social welfare systems to be funded out of general revenues. The single tax rate would drop significantly with a broadening of the tax base, as all citizens begin to receive substantial dividend incomes from capital ownership and as social welfare payments can be radically reduced after keeping all current entitlement promises.
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