The holiday season is upon us. We don’t want to be killjoys, but when Christmas gift-giving and New Year’s revelries are over, we’ll soon be getting all those IRS forms reminding us income-tax season has begun.
Which got us to thinking, just what is a “good” tax? Well—least bad, anyway.
The father of economics, Adam Smith, had an answer that has stood the test of time. He listed four principles of taxation: equality, certainty, convenience and economy of collection. Equally situated taxpayers should be treated equally. A taxpayer should know whether a given action will or won’t generate a tax liability, and how much. A taxpayer should not be unduly inconvenienced in obeying tax laws. And the government should not have to spend a fortune collecting it.
It’s pretty clear the current federal income tax flunks Smith’s four tests.
Equality? Two outwardly identical taxpayers—say, two families of identical size and incomes—can have vastly different tax liabilities depending on home ownership, charitable giving and all the other myriad ways available to reduce the tax.
Certainty? Give four different accountants identical facts and you’ll likely get four different estimates of what income tax is owed. The IRS itself is notorious for giving out bad tax advice; IRS staff doesn’t understand it, either.
Convenience? Ask those hardy souls who still do their own income taxes just how convenient the federal income tax is. Keep the spouse, kids and dog out of kicking distance.
Economy of collection? Just the time cost to the taxpayer runs into the hundreds of billions, not to mention the cash outlay by those who hire a tax preparer. Then there is the sprawling IRS bureaucracy. All those civil servants don’t come cheap.
On Smith’s principles, the federal income tax grades F, F, F and F.
If we’re going to tax income, is there a better alternative? (We won’t enter the thicket of whether there should be any income tax). Indiana’s adjusted gross income tax wouldn’t be a bad choice. When it began in 1963, it literally could have been on a postcard. Multiply federal adjusted gross income (the bottom line on the front page of Form 1040) by 2 percent and send it in. The rate has since risen to 3.4 percent and the base has been cluttered up a bit with some credits and deductions, but nothing like the federal monster.
A good tax? No, but less bad.•
Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to firstname.lastname@example.org.