Tag Archives: Tax theory

Current tax theories and policies are wrong

A Harvard Working Knowledge paper identifies “eight general lessons suggested by optimal tax theory as it has developed in recent decades:

1)Optimal marginal tax rate schedules depend on the distribution of ability;
2) The optimal marginal tax schedule could decline at high incomes;
3) A flat tax, with a universal lump-sum transfer, could be close to optimal;
4) The optimal extent of redistribution rises with wage inequality;
5) Taxes should depend on personal characteristics as well as income;
6) Only final goods ought to be taxed, and typically they ought to be taxed uniformly;
7) capital income ought to be untaxed, at least in expectation; and
8) In stochastic, dynamic economies, optimal tax policy requires increased sophistication.”

Does your head hurt? So does mine!

Taxes are justified and legitimized by one principle only: the life, the work, and revenues produced by any given individual could not have happened without the resources pooled together by a given society.

A legitimate tax is then:
1. A price paid in recognition of common resources consumed (the why)
2. A price paid to ensure the continuation of a world in which common resources make possible individual achievement (the what for)

A less legitimate, but defensible purpose for tax collection would be to ensure the survival of those not fit to provide for themselves. When taxes are collected in excess of the minimum necessary to ensure survival, the excess portion is illegitimate!

Given the above, there is only one principle on the tax amount due by any revenue producing individual (as a percentage of the total needed to sustain the system, the calculation of which is often questionable): as the fairest reflection possible of what common resources were consumed to produce the individual’s revenue.

It is absolutely wrong to tax based on income brackets. A million $ produced by the mind of an innovator that has consumed air, sunshine, and stale bread locked in his room to dream up a new business model should not be taxed in the same way as a million $ produced by a public notary for distributing rubber stamps. One gives much and takes little from the system, the other takes much and gives little in return. In fact, the later does not give anything because he does not create anything; he merely functions as a cog in a well oiled machine.

Ok. That is all I had to say about this for now.

Ah, one more thing: in all fairness, I have not read what the authors of this working paper have to say. I merely reacted to these eight principles of “optimal” tax policy identified in their research. For all I know, they may have continued by making wonderful points and bringing valuable contributions to this field of inquiry.– This page has been viewed by 695 members –