The Schafer Tax Plan

January 22, 2012 · 5 comments

in Ideas

Reading Fred Wilson’s post about tax rates made me want to share my (incomplete) thoughts on taxation.

I’d like to see a Flat Tax on income with only a few tweaks to remove some of the inherent unfairness in that approach. I’m not sure if this is a model already proposed by someone else so I’ll immodestly call it the Schafer Tax Plan until I’m (inevitably) told this is not an original idea.

My goal here is to increase transparency, simplicity, compliance and fairness. I’d love to hear thoughts on ways those goals are not met with these proposals as well as suggestions on increasing them beyond what I’m proposing here.

Of course this is a “Clean Slate” approach to taxation. Other than starting a new country and applying these concepts I have no idea how this would implemented without financial chaos ensuing during the transition. Would a “big bang” approach (“everything changes January 1 2015”) be possible?

The Schafer Tax Plan

1. No corporate taxes.

Corporations aren’t people. Tax the companies’ shareholders as they earn income from their investments.

2. No sales, consumption or usage taxes.

These are all mechanisms of double taxation that obscure the taxation rate by hiding it in purchases of goods and services. This process also adds massive complexity to commerce and tax collection.

3. No welfare, child tax credits or old age security.

Don’t worry, I’ll deal with this in point nine below.

4. You are an individual if you are alive during a year.

Yes I’m radically suggesting that babies and old people are individuals for tax purposes. I’m not sure how to deal with cross-border income or transnational individuals.

5. A flat income tax of x percent on all individual’s income without regard to source or amount.

This becomes the only tax the government can collect.

I have no idea what “x” might be. Ideally we’d equal current tax the government collects less the savings from shuttering almost all of the income tax collection function of the government.

6. Income tax is deducted at source.

Income seems to be the easiest thing to tax other than consumption which I feel is regressive, complex and has compliance issues.

7. There are huge financial penalties for incorrect source deductions.

Compliance could be a big issue once taxes are collected through a single channel so a “big stick” is needed.

8. Individuals are not required to file tax returns.

The government already has your money. There is no need to report anything.

9. Individuals with annual income below y dollars may apply for a Cost of Living Credit if they wish.

This becomes the only means of redistribution of income to the needy.

I have no ideas what “y” would be. It would be nice if we could bring every individual above the poverty line with this credit. Not sure that is a good or reasonable idea. I’m also not sure how to deal with the credit coming after people need it (assuming you’d apply for the credit annually you’d only start getting the credits after your year of hardship).

Babies and old people can apply for this too. That ideally gets rid of the need for child tax credits or social security.

One potential downside is that this might make having babies economically advantageous. I tried to avoid having any concept of “family” in this approach. Maybe individuals under 18 get a different type of cost of living credit. This also means the kids of rich parents would get the Cost of Living Credit which doesn’t seem quite right.

  • Love the simplicity of it. Too bad, we rarely (ie ever) get the opportunity to implement a plan using a greenfield approach.

    Other thoughts: 

    #2: I kind of like the idea of the government taking money for cigarettes. I’m healthier because I don’t smoke. If the government doesn’t receive money from cigarettes, liquor, etc., then wouldn’t taxes for ‘healthier’ people be higher?

    #8: the government may not always have your money. There are other sources of income an individual might receive, for example compensation form work on the side, gains and losses from investments. So I guess in *some* cases, reporting income, or filing taxes would be needed (but it would be an exception, not the norm).
    I also wonder that without welfare, what the heck would all the out of work tax planners and lawyers do under the Schafer system?

  • I just realized something about #2. If we let the government charge taxes on unhealthy products, they in turn become addicted to bad income and will have less incentive to outlaw things that are bad for us. I retract it.

  • Thanks for the comment!

    I was intentionally taking a libertarian approach that the government shouldn’t be using taxes to “nudge” behaviour towards or away from anything in particular. Note that there is no charitable deduction and no incentive to save for retirement either.

    The government would always have your money. If you earn income from “work on the side” there would be a sizeable financial penalty to the person who paid you if they didn’t withhold and submit the taxable portion of your income. Yes there would be an underground economy but that seems easier to fight and more transparently wrong then what we do now.

  • Two things that hit me as I read…

    – In point #9, you are assuming there’s currently no huge incentive for having babies.  I submit that there IS a huge advantage if you are a
    professional welfare family.  (a family that does nothing but collect welfare as income)  I hate to say it, but I have seen it.

    – I wonder about not charging any taxes (hidden or otherwise) on goods…could people from the US, jump the border to get a better deal
    on products here because there are no added-on taxes?  Not sure what the impact of those kinds of things would be.  (Retail, industrial, etc)

    One thing a tax system like this would eliminate are these “green” taxes that are popping up everywhere.  It’s not that I don’t want to help the environment, it’s really that I doubt the money collected on these are going to the right place, and the fact that they are easily introduced because anyone who speaks out against them is attacked and labelled as right-wing/conservative, blah blah blah

  • Thanks Danny. I struggle a bit with “no other taxation methods” because taxes ARE in fact used to change behaviour – moving people towards the good (eco-friendly products) and away from the bad (gas consumption, cigarettes). I think we need another way to do that, but I’m not sure what it is.  Then again, what those taxes really do is nudge the economically disadvantaged rather than everyone. The poor have to worry about higher taxes on non-eco-friendly products and cigarettes and alcohol and gas and what have you, but the rich aren’t really impacted by those taxes as they’re so easy for them to pay. So the “nudge taxes” are regressive as well.

    Interesting discussion.

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