debate: unions, corporations, & related matters

You're caught up in the world of theory. Everything you want to do sounds great, but it has unintended consequences.

The seemingly simple term "income" has become extraordinarily difficult to define for tax purposes. In the days when most people had only two sources of income--wages or pensions--figuring out how it should be taxedwas easy. But today, million of people have untaxable income inside individual retirement accounts or 401(k)s; they have income that that is exempt from taxation in the form of employer-provided health benefits and interest on municipal bonds; and they have income such as dividends or capital gains that is taxed very differently from wages or business income. And the corporate side of tax code is virtually unadministrable. The tax departments of major corporations such as GE have become profit centers and find more and more creative ways to legally avoid paying any taxes at all. The result, inevitably, is higher federal deficits or higher taxes on individuals less adept at tax avoidance.

Clearly, a key problem with tax code is conceptual, and it has to do with what constitutes the tax base. This is not a problem that can be fixed by redesigning tax forms or providing clearer instructions...it requires a deep rethinking of the nature of taxation. For 100 years, taxation has been based on income.

Today, income is just too slippery a concept to form the basis of taxation. It is too mobile, to hard to locate geographically, to easily redefined into different forms or masked in various financial structures. Instead, taxes inevitably have to fall more heavily on things that are easier to define and locate, and that are unable to escape the tax collector.

The two tax bases that are best suited to the current economic environment are consumption and and real property. The bulk of consumption consists of services that cannot be outsourced or automated; you can't go to China for a haircut. And of course land and buildings can be easily located and taxed.

Moving from an income tax system to one based on consumption and property will be painful, complicated, difficult, politically contentious and time-consuming. It will probably take decades. But unless tax specialists--the theorists and administrators and experrts--make some breakthrough in figuring out how to make the income tax work equitably and raise enough revenue to pay the government's bills, this sort of tax reform appears inevitable.