Mike Brownfield at The Foundry makes a very interesting point in Morning Bell: Tax Gimmicks, Tax Doom1. Referring to Warren Buffett, and by extension to Mitt Romney, he notes that Mr. Buffett is really taxed not at 15%, but at 50%, since he is subject to double taxation. Double taxation happens when a corporation pays at the 35% tax rate, then returns post-tax money to investors, who have to pay an additional 15%. This principle of single taxation leads to a series of proposals.
If I work for a corporation, they pay me a wage. Since they get to deduct my wage from their revenue when calculating their profit, it is fair to say that this is the first level of taxation. If I then pay for a haircut at the barber’s, the barber gets taxed on the money I pay. Mr. Brownfield’s article leads me to promote the idea of single taxation, for which I make two proposals.
The first proposal for single taxation is, I should be able to deduct from my taxable earnings any money I pay for goods and services which are subsequently taxed. This would be roughly equivalent of not taxing a corporation on money it pays out to investors, but making the investors pay the taxes. As a tax payer, I would have to keep track of which of my taxable earnings gets paid out to others, which would be a bit of a paperwork burden, but likely worth it. The government could simplify this by calculating what percentage of earnings people pay out based on the amount of their wages. Since those who earn lower wages pay a greater percentage of their earnings to others, the lower your wage, the lower your tax rate.
The second, competing proposal for single taxation is that those who receive money which is already taxed do not have to pay further taxes on it. Anyone who earns money from individuals, either from services or sale of goods, would be exempt from paying taxes on monies received. Barbers, florists, and dry goods shop owners would generally be exempt altogether from paying taxes.
The advantage of the second proposal is readily evident; if I have to pay taxes on wages received by means of being employed by another, but not on monies received if I am self-employed, it is to my great advantage to be self-employed, and the resulting explosion of entrepreneurship would be a huge boon to the economy.
Single taxation for you, for me, and for Mitt Romney…an idea whose time has come.
1 Morning Bell: Tax Gimmicks, Tax Doom