April 12, 2006
JK's Consumption Tax Plan
We have a small flame alight around here on consumption taxes. I pointed out that I really like the idea of a National Retail Sales Tax or "the fair tax." You can discuss the merits of different plans to compensate for the lack of regressivity or foreign sales, imports, foreign visitors -- there are a lot of details to nail down, yet any plan would offer big pragmatic benefits.
The biggest hurdle after getting legislators to reduce their own power is that pesky little Sixteenth Amendment. Without repealing that, we'll end up with income taxes and sales taxes and that will not help the economy at all.
I offer, therefore, my plan for moving to consumption taxes without repealing the 16th Amendment. Democratic leaders always say "jk talks a lot, but where’s his plan?" Here it is.
The model is the Federal Withholding bank accounts for employers and self employed. You open an account at the bank of your choice, but the withholdings deposited are controlled by the Government. You open an account for Uncle Sam. In my plan, every worker opens one of these accounts and the money belongs to the worker.
All of the worker's income is deposited into this account, withholdings and all: the Gross Pay figure on your check. The withholding amount is "internally escrowed." It is in your account, but you cannot withdraw it until your taxes for that year are paid. The money in this escrow can be borrowed by the government, so its cash flow is not changed. Since it is your money, the government is going to pay you at a six month T-bill rate. It's your money, you're loaning it to the feds.
All non-escrowed funds can be paid out. If you pay them to yourself, they will be taxed as income. If you pay them into an approved retirement account, Health Savings Account, Education fund, or approved deductible expenses they will not be taxed. Leave funds in the account at T-bill rates to defer income from year to year. You can now choose when you get paid and how much.
Your tax refund? File a return on the income you have removed from the account, and if your escrow has been overpaid, you write yourself a check for your refund -- or leave it in there at T-bill rates. We still have an "income" tax -- and many of its disadvantages -- but the worker now controls the timing and amount of taxable payments and is able to save or defer the rest.