Four Types of Taxes that DON'T Involve Income

Joel Anderson  |

Taxation hasn’t really changed all that much in a very long time. Sure, rates have changed pretty radically over the course of the 20th century, but at a core level, the United States has stuck to taxing income. Sometimes that’s via income taxes, sometimes it’s payroll taxes, sometimes it’s corporate income rather than individual, but it’s always rooted in the same idea: you take some percentage of the money coming in.

And that makes sense. The nice thing about income is that, no matter what some dimwitted conservative pundits might suggest, people won’t stop pursuing it just because it’s taxed. Making more money is making more money, taxing it more doesn’t really create much disincentive in the way that a tariff or levy on a certain kind of good might.

That said, I can understand where some conservatives are coming from in the way they rail against income taxes. On a certain level, income taxes are punitive towards success. What’s more, they don’t really differentiate between someone who may only briefly exist in a certain bracket. A one-time windfall of $1 million gets taxed at the same rate as someone earning that sum annually, which doesn’t quite seem fair. Not to mention, one power of taxation, aside from raising revenue, is disincentivizing certain behaviors. Taxing income doesn’t really leverage that.

Does that mean we should shake things up? Maybe, maybe not, but it’s at least worth investigating a few different methods of taxation not focused on individual or business income, and why they might (and might not) work.

Value Added Tax (VAT)

What is it?

A value-added tax is a consumption tax. Essentially, it’s the same thing as a sales tax, paid as a percentage of every transaction, except that it only taxes the difference between the seller-purchased price and the final sale price. It’s paid as a full sales tax, but sellers can then collect refunds for the cost they paid.

What would the benefits be?

Well, for starters, taxing consumption means that you’re taxing money people spend, not earn. As such, you’re taxing consumption. If someone is saving or investing their money, you can avoid this tax entirely. What’s more, the people hit hardest by this tax would hypothetically be the wealthiest people living the most opulent lives, as they’re the ones who would be spending the most money. Those people putting their earnings into saving would be spared.

Not to mention, a VAT would be a pretty significant driver of revenue. A VAT is also quite common around the globe, with 160 countries, including every OECD nation other than the United States, having some type of aVAT. Across the OECD, consumption taxes account for about a third of government revenues.

What sort of downsides would it have?

A few big ones. For starters, it’s a more regressive tax. Sure, people spending more pay more, but anyone spending anything pays something. A wide swath of low earners don’t pay any income tax, but they would still wind up feeling the pinch of a VAT. And for the super rich, if you’re only spending a small portion of your enormous earnings, you’re going to wind up paying a much lower portion of your income as compared to someone with a lower income who has to spend nearly all of their paycheck. What’s more, it effectively disincentives consumption, which will slow economic activity and likely the economy in turn.

Wealth Tax

What is it?

Rather than taxing income, which is essentially the new money people are collecting, a wealth tax would just tax all money. A tax on assets is one that targets wealth rather than income.

What would the benefits be?

A wealth tax targets inequality in a much more direct fashion. As French economist Thomas Piketty observes in his best-seller Capital in the Twenty-First Century, the rate of return on capital exceeds that of economic growth. The result is that investing money will always make more money, so wealth inequality becomes inevitable as a result.

As such, a wealth tax would target that more specifically. If you charge a small tax on assets over a high bar (say 1% on assets over $1 million), your tax will only affect the the rich. What’s more, it will strike at the root causes of inequality. Someone with a large fortune consisting largely of stocks may see their wealth grow by millions year after year as the value of those stocks increase, but their actual income might be minimal. A wealth tax would address the fact that for people with a lot of assets, they’re already earning a lot on those, even if those earnings don’t actually show up as taxable income. Given that investment returns usually average 5-10%, paying 1-2.5% in taxes is hardly putting the squeeze on the super rich.

Like an income tax, the disincentive here is basically on having money, so it’s unlikely to have much effect on behavior. It’s also going to target the rich more specifically. Take Denmark, for instance. While Denmark has some of the lowest levels of income inequality in the entire world, its levels of wealth inequality are actually higher than they are in the United States.

What sort of downsides would it have?

Unfortunately, if you’re looking for an inequality silver bullet, the wealth tax doesn’t appear to be it. In the examples that are currently in place already, most notably in France and Spain, the effects aren’t all they’re cracked up to be. Capital flight is the most notable risk, particularly in the era of global finance and the Panama Papers. Most rich people will just move their money overseas before they’ll pay a wealth tax, something that hurts the economy and probably costs a country tax revenue in the long run. That’s why Piketty insists that an effective wealth tax would have to be global.

There’s also the issue of how much to charge. For assets held in stocks or bonds, assessing fair market value is pretty simple. Once you move beyond that, it starts to get a lot trickier. How much would a family mansion that hasn’t been on the market for decades go for? How about those family heirlooms? And what tax is paid on a stock whose value fluctuates over the course of a year? It’s not entirely clear, and developing a system to fairly assess that would be complicated.

On the whole, one estimate of the French system (which charges fees of 0.5-1.5% on assets in excess of €800,000) found that it raised only $2.6 billion in revenue each year while causing more than $125 billion in capital flight in its first decade in existence.

Land Value Tax (LVT)

What is it?

A land value tax would be a tax on the unimproved value of a land. So, unlike property taxes, it would ignore the value of any structures and focus on the acreage itself.

What would the benefits be?

The supply of land is fixed, so a land value tax wouldn’t have any effect there. Unlike taxes on things like income, labor, or consumption, an LVT couldn’t alter the basics of supply. Unlike a property tax, property owners wouldn’t be penalized for building improvements, so it wouldn’t impede economic activity in that sense. If anything, it would behoove people to build on their land to create value if they owned property in expensive locations. It’s also a form of asset that couldn’t be moved offshore to avoid taxes. If you own land, you own land, and if you live in the United States you either need to pay taxes on land you own or pay rent to someone who is.

What’s more, the value of land tends to increase based on public works. The locations with the priciest per-acre valuations, say Manhattan or Washington D.C., were made that way due in no small part to the transportation infrastructure surrounding them. What’s more, they would all have significant improvements built on them, making the portion charged relatively marginal in comparison to their total value and the income they create. It’s also a progressive tax as owning large amounts of land is a situation pretty exclusive to the wealthiest people.

The basics of a LVT have attracted a series of prominent economists to its side over the years, most notably Adam Smith and tax theorist Henry George. In fact, it was an adherent of George’s who created the game Monopoly to highlight the way land ownership can create economic imbalance.

What sort of downsides would it have?

As far as theoretical downsides, there aren’t a lot. It would certainly come down especially hard on places that take up a lot of space in expensive locations. Read urban car lots or golf courses. I don’t imagine there would be a lot of tears shed for the golf courses and car lots of the world, but there would also be a fair number of people with land that’s been in their family for a long time who would be forced to sell by the new tax burden.

The biggest concern is likely just how untested the idea is. Despite being around for centuries, there isn’t a clear example of how it might work on the large scale like we have for the wealth tax and VAT. That makes it harder to gauge exactly what sort of effects it would have, and a bigger risk to implement.

Carbon Tax

What is it?

A tax on carbon emissions, plain and simple.

What would the benefits be?

This would be a tax where the whole point would be punitive. Carbon emissions are wrecking our environment and creating a potential humanitarian and economic disaster in the future. A tax on carbon would essentially be pricing those costs into our current economy. So, a coal plant would get hit hard by a carbon tax, but a solar plant would escape scot-free.

This would essentially have the goal of redirecting the economy. Rather than trying to use regulations or picking winners and losers, the government could simply tax the thing causing the problem in the first place. This would unleash the free market on the problem of global warming, creating clear economic executives for reducing one’s carbon footprint at all levels of the economy and hitting polluters where it will hurt them most: their bottom line. The result would likely be a huge uptick in investment for clean technologies. Even at the consumer level, using renewable energy would lower people’s electric bills in a noticeable fashion and make driving more fuel-efficient cars an even big cost-saver.

What’s more, you could make it revenue neutral. Boosting carbon taxes would be offset by reducing income and corporate taxes, so the total capital flow available would remain consistent. Not only would the economy be incentivized to make the changes it needs to, but it would have the money to do so.

What sort of downsides would it have?

This would also be a regressive tax in many ways. Anyone who can avoid emitting carbon would be able to avoid taxes, but people with money would have an easier time with that. Getting a new hybrid car or weatherizing your home costs money, and people living in poverty are going to have the hardest time transitioning to newer technologies. What’s more, consumers at all levels would get hit by this, not unlike the VAT. So shifting the tax burden to carbon from income would inevitably wind up seeing some taxpayers currently shouldering no portion of income taxes paying for a carbon tax.

Further still, it would create winners and losers in industry as well. Sectors like oil and gas currently employ a lot of people, and they would be taking this one right on the nose. The long-term benefits are pretty clear, but the short-term pain for the working class is hard to ignore.

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