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An Optional Income Tax

May 18, 2011 • Economic Debates, Government, Households, Innovation, Macroeconomic Measurement • 219 Views    No Comments

What if you could decide whether to pay an income tax?

Boston University economist Laurence Kotlikoff has a plan that gives us a choice. His basic message, though, is that Congress had better start to think creatively because our current system is “dysfunctional.” With a new approach, we can create better incentives.

Hoping to prove that neither liberal nor conservative ideas will work, he starts by explaining why an income tax and a sales tax are similar. Both affect our purchasing power and purchasing decisions. One just happens beforehand because it limits what we can spend while the other is after because it makes purchases more expensive. You can read his 3 billion steak example (!) here.

He calls his plan the purple tax because it combines a red state philosophy (with revenue primarily coming from a sales tax instead of an income tax) and a blue state approach (dependence on an income tax for most revenue). Red + Blue = Purple. The purple tax plan lets people decide whether they want to pay a sales tax or a “wealth” tax. You can see the details here.

The Economic Lesson

Sometimes, when you look at something different, you can better judge something that is familiar. By considering the purple tax, you can see our current tax system as just an alternative approach.

The most typical tax approaches include revenue coming from individual income, corporate income, and the VAT. Smaller categories are estate taxes, capital gains, sales taxes, and tariffs.

An Economic Question: The proposal for the purple tax plan says that it will “help the economy save, grow, produce jobs, and deliver high wages.” After looking at a summary here or the plan here, decide whether you agree.

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