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Archive for Tuesday, July 24, 2001

A natural resource tax?

July 24, 2001

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— An overhaul of the nation's tax code, including the possibility of scrapping it altogether, is now being considered by the Bush administration, according to the president's chief economic adviser, Lawrence B. Lindsey.

The last time anything of substance was attempted was in 1986, when the number of brackets was reduced, as was the number of deductions. But that reform gave way to increased brackets, increased deductions, pork-barrel spending, and new complexities that have brought us to where we are today: America now has the highest taxes as a percentage of GDP in the nation's history, and Secretary of the Treasury Paul H. O'Neill describes the tax code as "9,500 pages of gibberish."

We have been saying this for more than a decade. We have been amazed that a free people could inflict such a system on themselves. It doesn't work. It can't be fixed. It needs to be scrapped.

The question and the debate continue to be, however, about what we put in its place. House Majority Leader Richard Armey, R-Tex., has long been an advocate of a flat tax. The drawback is that it would still be an income tax, which means there would still be a tax code for Congress to tinker with, and there would still be an IRS.

Others favor a value-added tax, which is a sales tax at every level of production and distribution. Popular in Europe, it imposes a substantial bureaucracy just to monitor and collect it, not to mention a substantial burden on industry, not to mention the inherent difficulty in determining "value" at the production level. What distinction is made between products and services, for example, especially where the two intermingle, as with software manufacturers?

A national sales tax has been considered. As a consumption tax, it would mean consumers would pay as they go, and it is already present in most states as a state sales tax. The downside is that together with state taxes, it could reach a level of 30 percent, a fact that could encourage an underground economy.

What is missing from all of these schemes is the concept of a progressive tax. Interestingly, progressivity is also missing in our current system, thanks primarily to payroll taxes. The myth is perpetuated, though, that the current system is progressive a fact that causes many in Congress to fear for its replacement, believing they will be punished at the polls.

There is another solution: a natural resource tax. We have previously recommended this, and perhaps now its time has come. The advantages are numerous:

1. It would be taxed at the extraction or import rung of the economic ladder, which would free Americans from the onerous tax-accounting burden that devours so much of their time each year.

2. It would encourage conservation. Oil, for example, could be taxed at a rate of $3 per gallon. True, the price at the pump could then reach $5 or so, but absent an income or sales tax, it would hardly be considered excessive.

3. Not all resources would be taxed at the same rate. Congress could establish priorities to promote conservation.

4. Those who consume the most would pay the most, which would create some semblance of progressivity.

5. It would not create a trade war because imports such as oil would be taxed at the same level as domestic resources. Trade wars are created by protectionism when imports are taxed at higher levels than domestic resources.

6. Because the number of companies and people involved in extraction and importation is so small, the tax would be easy to administer and collect. The IRS would probably be able to reduce its staff and budget by 95 percent or more.

7. Social Security and Medicare would be paid out of general revenues, rather than from employee incomes.

8. The natural resource tax would actually result in lower taxes for all Americans because so much would be saved through administration, collection and accounting.

It is better than the alternatives, and it is clearly better than the current system.

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