What is a 'fair' tax system.

Author:Cheney, Glenn Alan

Americans don't agree on much. But they agree about taxes. Unfortunately, the point of agreement is that the tax system is unfair, increasingly unworkable and politically nearly impossible to fix.

What's fair? How close to unworkable is the current system? Ask anybody who's read the 1 6,000 pages of the U.S. tax code and the essential 56,000 pages of Internal Revenue Service rulings on it.

And how likely is Congress to fix it? Imagine the congressional brawl over any significant tweak.

Most disturbing--and dangerous--about this conundrum is that it's happening in the world's predominant economy, even as federal revenues fall far short of spending. Corporations work with a statutory tax far above those of competitors in other countries, while some companies pay effective rates close to zero. And media sources say that half of the population pays nothing, while, according to financing guru Warren Buffet, secretaries pay more than their bosses.

It all adds up to a disaster that isn't waiting to happen. It's here, and the nation must deal with it. And though the political situation isn't encouraging, tax and financial professionals see feasible solutions worth thinking about.

Views Vary on Solutions

Asked how he'd replace the tax code if a clean slate appeared, David Marron, director of the Urban Institute's Tax Policy Center, offers a neat, clean, four-step process:

Step 1: Impose taxes on major economic activities that create significant externalities and can be monitored well enough be taxed, such as carbon emissions and petroleum use.

Step 2: Impose user fees where appropriate, such as for highway use.

Step 3: Impose a progressive consumption tax, sometimes known as an "X tax," with parameters to hit revenue and distribution targets.

Step 4: Decide what social and economic policies should be impacted by tax policy, and adjust Step 3 rates as needed to generate sufficient revenue.

Marron's suggestions touch on some key principles of taxation. One is that taxation can be an effective way to nudge an economy in a different direction and encourage or discourage certain activities.


Ronald Dickel, vice president, Global Tax and Trade, Intel Corp.

Another is the notion that taxes benefit an economy more (or hurt it less) if they fall on consumption rather than on labor and production. Political philosopher Thomas Hobbes figured that out four centuries ago, reasoning that a consumption tax most closely reflects the benefits a person receives from society. Unlike a production tax, such as an income tax, a consumption tax--for example, a sales tax--does not discourage the investment and savings that result in economic...

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