A Better Way to Tax
A Progressive Spending Tax could fix the shortcomings of the current taxation system, which allows the extremely wealthy to live tax-free. With a progressive spending tax, rates would increase dependent on what is spent and not what is earned. This would encourage the same beneficial behavior of the current system, like saving for retirement, without turning those exceptions into loopholes for the extremely wealthy. The system could be implemented with two straightforward changes: first, creating unlimited deductions for savings; and second, by taxing debt as it is acquired. (in keeping with deductions for savings, giving a deduction for money that is used to pay back debt, since the tax has already been paid)
The Progressive Spending Tax
All families have basic needs; it seems unfair that these should be taxed more than a small amount, if at all. After their basic needs, most families indulge in some comforts, like new clothes or going to the movies. Some of these families also choose to take further expenses, like a vacation every year. These indulgences tend to grow with standard of living, with the extremely wealthy taking multiple vacations and buying new cars, boats, and homes every year. By increasing rates with brackets, a progressive spending tax will allow everyone to buy their needs tax-free and their smaller indulgences at a low tax rate. It will only be the people who choose to spend significant amounts of money each year who will pay taxes at the highest rates.
The progressive spending tax is a very straightforward idea: the first bracket, spending of $20,000 or so in a year should not pay any tax; the second bracket, which could got to $50,000 or so, would pay 10% tax on their spending. The specific brackets and rates would be determined by Congress to raise enough revenue, but the point is; as the brackets increase, so too would the percentage owed.
The first bracket, from $0-20,000, gives every family $20,000 to spend, tax-free, on their necessities that year. The second bracket covers the expected cost of smaller indulgences they might take. And so on. This system, therefore, would make no judgment on if a family chooses to indulge once per year with a $30,000 vacation or with instead dinner and a movie every weekend, but the family who does both will fall into the third bracket and pay a higher tax on their further indulgences. Under this system, the more central the necessity and frugal the taxpayer, the less they will pay in taxes, independent of the size of their contribution to the economy through their work.
How It Would Be Implemented
The Progressive Spending Tax could be implemented with two straightforward changes (and one bonus shift for increased effectiveness). First, Congress should remove limits to savings that can defer taxes. Second, Congress should tax debt as it is acquired rather than when it is paid back.
Unlimited Tax-Free Savings
Conservatives love this suggestion, and liberals should as well. Removing limits to tax-deferred savings turns the income tax into a spending tax. Recall that all wealth gained (income) is equal to all wealth used, which consists of savings and spending. By taxing wealth but not savings, Congress is not taxing spending.
This is more responsible because it no longer relies on over-taxing people while they work to compensate for under-taxing people in their youth and old age, when they are spending but not working. For anyone who does not live paycheck-to-paycheck for their entire lives, this is much more fair; those who are responsible and support themselves in retirement are rewarded with lower tax bills overall, thereby encouraging responsible behavior in anyone who can afford to save; this is a cause that liberals and conservatives alike should coalesce around.
Tax Debt Upon Acquisition
Currently, Congress does not allow a deduction for paying back a debt, even though it increases wealth and is therefore a type of savings. By taxing debt when it is acquired and allowing deduction for paying it back, Congress is encouraging responsible behavior in early life for the middle class and closing the critical loophole for the upper class.
Taxing debt when it is paid back instead of when it is acquired hurts the middle class. When someone takes out loans for college (or a house or a car), they have to wait until after they have graduated and moved up in tax brackets to pay back their debt with after-tax dollars. If their debt was instead taxed when it was first withdrawn, it would be taxed at a lower rate, because they aren’t hardly making any money! This means that congress uses the income tax to create a hidden tax hike on education. Taxing debt when it is acquired and giving a deductible for repayment (which is savings because it increases wealth) would therefore ultimately help people who are starting out in life.
This would also negate the taxation benefits of the second act of Buy, Borrow, Die. Someone can still borrow money to avoid selling their assets, they will just have to pay taxes on the money they borrow, so it will take away from their taxation incentives to do so but leave other incentives, like investing in a home, intact. By paying tax when money is borrowed, a taxpayer is no longer deferring their unrealized gains until they after death, where they are stepped up.
Get Rid of Capital Gains Rates
Bonus suggestion: By creating an unlimited exception for savings, lower capital gains rates become irrelevant, especially considering that they are wealth gained with the least effort. There is no risk of double taxation, since the money isn’t taxed until it is withdrawn from savings, and lower capital gains rates detracts from a focus on the total amount that is spent, irrespective of its source.
The current capital gains rates are justified because they are taxing an accumulation of gains and because they have to take into account inflation. Accounting for an accumulation of un-taxed gains could justify higher brackets for capital gains, but lower rates do not effectively address this issue. Accounting for inflation during a period of extremely low inflation could really only justify about a 3% difference (the approximate value of inflation) between the rates, which is more than made up for with the absence of payroll taxes.
Who This Helps
This strategy, first and foremost, helps ordinary Americans. This strategy also helps people who save for retirement during their careers, no matter how long or short those careers are. It also helps the extremely wealthy who live responsible and frugal lives. It only hurts the people who could save but instead spend everything or the people who live tax-free through their inherited wealth.
This is the most pro-American tax strategy there is. By taxing all Americans, and not just the working classes, everyone is contributing the necessary programs and support for the country from the government. If the government spends less money, as conservatives desire, then all Americans pay less in taxes. If the government spends more money then all Americans pay more in taxes. With a government consisting of some of the wealthiest members of our nation, it seems reasonable for their own tax burdens to reflect the decisions they make.
People Who Save For Retirement
If money is spent as soon as it is earned, then it would be taxed at the highest rate an American could be taxed at (for these people, there would be no change in the system). If the person instead saves their money and spreads out their spending through their life (which can even be done through debt spending in youth), then they will never have spikes in their spending and will have a lower tax burden overall. This therefore helps the American that saves for retirement, evening out their spending, but hurts the American who spends everything as soon as they earn it.
Millionaires Next Door
In a similar vein, people who are extremely wealthy but choose to save their money instead of spending it are only taxed for what they spend. When the money is finally withdrawn and spent, whether by this millionaire or by their descendants after they inherit it, it will be taxed. This tax strategy will avoid overtaxing the first person who earns the wealth to the absence of any taxes in successive generations; instead, they will be taxed like an inter-generational retirement saver. Saving money also keeps interest rates down and helps everyone out, so this is also good for society.