Now it should be noted that whatever your country’s preferred tax scheme is, be it VAT or income or something else, it is without a doubt terrible. Like so many things governments do, they managed to find the worst possible way to do something and then stick with it indefinitely despite the obvious flaws. So while technically you could pay for a GBI just by increasing rates on existing taxes, if we are going to reform the welfare state why not at the same time reform how we pay for it?
What is the problem with existing taxation systems? Well in the case of the income tax it actively discourages saving compared to a consumption tax since since you are taxed on your income and then the appreciation of your investments. Instead, in the U.S. we have very complicated systems designed to allow you to save money tax free for retirement or health costs, etc. It seems simpler to just switch to a consumption tax and drop the exceptions.
A VAT is a consumption tax, but has no progressiveness. Ideally, you would just have people report their income-savings and be taxed at progressive rates on their consumption. However, another goal of tax reform is that we want to reduce the burdens of the tax code and reporting all sources of income and savings is quite burdensome. Thus there are things like the X-tax where you have a VAT and businesses deduct wages which are then taxed progressively. I see two problems. One it basically leaves non-wage income untaxed. This is a boon for rich people who usually earn most of their money from financial investments, but not exactly fair to the average worker. Secondly, it still leaves the enormous burden of assessing VATs around. Since most countries already have an income tax apparatus that requires the same information in place, the ideal tax mentioned earlier seems like a better option.
Similarly, corporate taxes are ubiquitous despite being a dubious source of revenue. This is true for three reasons. One, you have added yet another entity to audit on top of all the individuals you tax. This also causes double taxation as corporate profits are being taxed at the corporate level and then taxed again when distributed to shareholders. Two, the incidence of the tax is ambiguous. That is, are shareholders paying the tax or are the consumers of the corporation’s products? A good tax should be levied on the people/things we want taxed and the incidence of a corporate tax probably varies wildly by industry. Third, at least in the U.S. it is a blatantly unfair tax. Walmart pays almost the full corporate tax rate, whereas G.E. has enough negative tax liability to roll some of it over to the next year. This is an effective subsidy to certain industries that can avoid tax liabilities more deftly and encourages resources to be spent on tax shenanigans (either through better accountants or better lobbyists). In my opinion the corporate tax should be among the first to go.
However, all of these are bad taxes when there are so many low hanging fruit out there. By this I mean, all of the above cause a deadweight loss to the economy whereas there exist taxes that have no associated deadweight loss or even make our economy more efficient.
One such tax that seems to have grown popular in the policy sphere is the land value tax. That is where you tax land based only the value of the land for its best use and not on the improvements built upon the land. The best discussion of this is I think found here or elsewhere on the internet if you do not want to register. What makes the land value tax so appealing is that there is no deadweight loss because the supply of land is essentially inelastic which means the full incidence of the tax is on landowners. Wikipedia has a nice graphic illustrating this.
This is of course the primary benefit of an LVT, but it also brings parcel development forward in time. Since you have to pay the tax no matter what, it behooves you to either develop it or sell it to someone who will. The Lincoln Institute paper claims the tax is time-neutral and it is, in a narrow technical sense, but in terms most people understand, it is not. This also dampens speculation because as the gains from holding onto land in hope of appreciation must be larger than the LVT in order to profit. In the ideal case you would set the LVT at 100% of the land’s value and that would deter all speculation. This pressure to develop land also helps alleviate urban sprawl as land parcels will be developed to maximize the profits of the improvements which in general means denser developments. This is in contrast to a property tax where intense development of land is taxed at a higher amount, thus reducing the benefits of using land for its best use.
The major criticism of an LVT is assessing it, but it is the same challenge we already surmount when assessing property taxes. The hardest part is determining “best use” and the ambiguity here suggests we tax at less than 100% in order to alleviate penalizing owners for overestimating “best use.”
The LVT is great, but people are ignoring that many other things share the key fact that allows an LVT to work so well. That is, the inelasticity of supply of the good being taxed. There are in fact a lot of goods that are like that, foremost among them being natural resources. By this analysis we should tax oil at up to 100% of its value and so on.
This brings up arguments about the justice of taxing someone’s property at such high rates. I counter by saying that land and the natural resources are the wealth of a nation and those that own them are merely extracting rents (rents as in the economic definition of a bad thing). Or to put it another way, the owners are deriving profits without providing any value added. Should a landlord be entitled to a profit for merely owning land? Most of the value of land is created by society, from the other people living there and the infrastructure governments build around it. When a new metro stop is built and the value of the property near the stop goes up, should the landlords in the area be entitled to increased wealth? I would say no and an LVT reclaims the increased land value and gives it back to the State that created it.
As good as taxes on rents are, the best taxes are Pigouvian. Externalities are things created by someone but the value of which is not capture by the creator. The primary example is carbon emissions that contribute to global warming. This is massively costly for the planet, but this cost is not fully born by the entities that produce it. A Pigouvian tax would then tax carbon emissions at a rate such that the marginal emission of carbon dioxide would provide the same benefit to society as the costs to society as a whole from emitting that carbon. That is, if I were deciding whether to make a plastic Barbie doll, I would include the cost of the carbon emissions associated with making it and all the other costs and compare it to the joy imparted on the next youngster to receive a doll. Without a Pigouvian tax, we would make more Barbie dolls than we as a society want since the full costs are not taken into account.
Thus, taxing negative externalities is actually improving the efficiency of our economy. It’s also a great source of revenue as a carbon tax in the U.S. could raise a trillion dollars. On the flip side we should subsidize positive externalities, which is primarily what the government should do. It creates parks under the assumption that parks are great but no private enterprise could capture all of the value of a park as revenue. Same with roads and education and the list goes on. So if we implicitly accept subsidizing positive externalities then we should tax the negative ones.
With Georgian taxes on rents and Pigouvian taxes, we would be well on our way to funding a GBI and building a more efficient economy too.