Prevent sequestration with innovation, not partisanship

Kevin JensenLike some sort of horrendous C-SPAN Groundhog Day, sequestration is here once again.

We need more tax revenues! We need to cut government spending! There are no new ideas or innovative thinking being proposed by our representatives, just the same tired talking points, fighting over the details of a tax system that is unreadable, full of loopholes and obviously broken.

It’s times like these that idealistic Jiminy Cricket-esque voice in my head won’t stop chirping, “Why not change our tax system altogether?”

Our government is strapped for cash. A lot of the reason is that there truly are a lot of people that aren’t paying their fair share.

The U.S. Government Accountability Office found more than $373 billion in unpaid federal taxes from business and individuals for fiscal year 2011, with $258 billion of that coming from individual debt — more than enough to cover the impending $85 billion in spending cuts set for Friday.

How does this affect us personally? A new study by Colorado Public Interest Research Group revealed that Colorado’s state budget lost $504 million due to offshore tax dodging in 2012, enough to pay salaries for an additional 10,200 school teachers or pay for a third of the estimated $1.5 billion needed every year to maintain Colorado’s infrastructure.

One way we could solve our financial troubles is to make it virtually impossible to avoid paying taxes by implementing a national retail sales tax similar to the proposed Fair Tax Act (FTA).

A federal retail sales tax, a consumption tax, abolishes all other federal taxes and replaces them with one simple, visible, federal retail sales tax that would be collected at the final point of purchase of new goods and services for personal consumption. You no longer have to file taxes or deal with the IRS. Any increase in government expenditures would correlate directly to a percentage increase of the retail sales tax.

The FTA, however, eliminates the corporate income tax and doesn’t tax business to business purchases, predicated on the notion that businesses don’t pay any taxes and instead simply pass on the cost of taxes to consumers and stockholders, double taxing people in the name of taxing businesses.

Giant corporations not paying any taxes may be hard to swallow, but really it’s not that different from today, as major companies like Google, Wells Fargo, Microsoft and Facebook have paid almost zero federal income taxes in the past couple years despite massive profits.

But if you just can’t come to terms with the concept of corporations paying no taxes, how about implementing a value added tax (VAT) instead, as Forbes’ Tim Worstall suggests, which is a consumption tax placed on goods whenever value is added and at the final sale of the product.

Each step of the production chain is taxed on how much value it added to the product, with consumer taxpayers paying the cost of the product minus any of the costs of materials used to create the product that’ve already been taxed.

But a VAT is still a consumption tax, like the FTA, which means that it is ultimately a regressive tax, taxing low earners more than higher earners as they spend a disproportionately greater percentage of their income on consumable goods.

The FTA’s solution for consumption taxes being regressive comes in the form of a prebate, a rebate of taxes on spending up to the poverty level, paid in advance on a monthly basis to everybody, whether rich or poor.

The FTA is premised on equality: everybody pays the same consumption tax rate and everybody receives the same prebate.

Where the FTA deviates the most from being equitable, though, is its elimination of the capital gains tax, a tax levied on the profits investors receive when they sell the capital asset for a price higher than it was originally purchased.

If we were going to implement a national retail sales tax or VAT, I see no reason why investments that accumulate value should be free from taxation. Why not, then, tax a percentage of the value added to the investment between the time it was bought and sold?

This entails a financial transaction tax, or “Robin Hood Tax,” which may have some unintended negative consequences, but it might have some real positive effects too, like encouraging long-term rather than short-term investments and making risky investing behavior extremely unprofitable, potentially doing a great deal to stabilize our volatile markets.

So you take the FTA, add a cup of VAT, a teaspoon of the Robin Hood Tax, douse the whole thing with a healthy dose of idealism, and what do you get? It could solve our monetary woes or it may not work at all, but at least they’re innovative ideas, and they may do more to avail our troubles than partisan diatribes, which never get at the crux of the issue and just keep kicking the can down the road.

See you next sequestration!