20 Jun Taxes, Trumpian Taxes and AI Taxes
“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” – Will Rogers
The American government is running a $2 trillion annual deficit. Perfunctory efforts at budget cutting, whether by DOGE or the President or Congress or through Federal job attrition, have been ineffective. Today’s tariff, income, estate and gift taxes (as well as efforts to collect those taxes) have proven inadequate at denting those deficits, yet alone reducing America’s $40 trillion national debt. President Trump has an historic opportunity to cut the deficit and bring down the national debt by reforming America’s tax system, something that admittedly would be a Herculean task…, but one that all Presidents should revel in. Achieving such reform would be historic! Despite efforts by the Trump Administration to address entitlement reduction (America’s “political third rail”) and commentators’ (including TLR‘s) support for entitlement reform, making constructive changes to America’s complex and overlapping social welfare programs has been a bridge too far.
TLR last addressed tax reform in January 2023 by analyzing proposed Republican legislation titled the Fair Tax Act of 2023 (FTA), which would have repealed the Internal Revenue Code (IRC) and abolished the Internal Revenue Service (IRS), replacing America’s income and estate taxes with a tax on consumption, a “Value Added Tax” (VAT) of ~30%. The proposal died a quick Congressional death.
The last time tax reform was seriously considered was >30 years ago when Congress debated replacing the IRC with a simplified flat tax that would have reduced tax preferences and taxed consumption via a VAT. What actually happened was the opposite. The Taxpayer Relief Act of 1997 (another in the series of tax misnomers) added new deductions and tax credits, made taxes more complicated, and raised tax rates. That’s been the Congressional modus operandi for decades – that is, catering to constituencies that oppose change. Change for the better accordingly requires both strong leadership and one-Party control of the Presidency and Congress – and the reality is that the Trump Administration today has both! The IRC is an unworkable vestige of 20th Century policy-making that has been in desperate need of reform for decades…, and now is a time when such reform is fiscally necessary, achievable and consistent with traditional, core Republican values and policies.
The fact is that tax efficiency needs to be at the heart of America’s tax system…, and it isn’t. Efficiency cannot be achieved without simplification that relieves Americans of the tax return filing burdens that cost taxpayers more than $133 billion/year, consume 12 billion hours/year of compliance time, and require intrusive IRS oversight and enforcement. Such efficiency cannot be achieved without a public belief that America’s tax system is fair…, which, despite politicized assertions that the One Big Beautiful Bill helped to level the playing field, it isn’t. The reality is that the OBBB added further complexity to an already unbalanced and complex IRC, while also shrinking the IRS budget at a time when America needs enhanced revenue to pay its debts. Americans underreport their income by an estimated $1.33 trillion/year, in part because the IRS has been understaffed and in part because taxpayers believe that the tax system itself, as well as the audit and tax collection methods used by the IRS, are unreasonable. The essence of the FTA proposals was the elimination of both income taxes and the IRS…, and the President has made no secret of his desire to cut taxes and reduce the Federal bureaucracy. He has had great success with the latter, eliminating 28% of IRS staffing…, the effect of which has been to reduce enforcement…, the consequence being an estimated 10-year revenue loss of $1.9 trillion.
A tax system that would be consistent with President Trump’s goals – and one that could meet America’s 21st Century revenue and simplification needs – would rely on a VAT similar to the one proposed in the FTA…, which, not coincidentally, is the form of tax that is most commonplace among the world’s highly-developed countries…, as well as being the tax system favored by tax reform experts. A model for doing so (previously mooted by TLR) is the Competitive Tax Plan (CTP), a VAT-heavy proposal that would shift the focus of America’s tax system to a consumption tax collected at the source on specified purchases (which could be successfully layered with tariff taxes), thereby reducing taxes on savings and investments and eliminating income tax, tax returns and intrusions by the IRS for >85% of American taxpayers. Eliminating taxes, record-keeping and compliance for those earning less than a large six-figure income would be a major simplification that would benefit both individual Americans and American businesses, reducing costs and the enormous number of special interest tax provisions that riddle the IRC. Notably, it would reduce the size of government by reducing the need for broad-based, intrusive income tax compliance and enforcement, a goal sought by almost every American. The CTP also would enhance the American economic system because decision-making would be based on economic pros and cons without tax-driven overlays and special interest carve-outs. That’s precisely the sort of “America First” disruption sought by President Trump, and precisely what a socially and economically successful democracy requires.
A further potential complement to a VAT-heavy tax system was recently mooted in The Economist in “How to share the AI windfall.” With the assumption that AI is likely to displace a large number of American workers, a tax-frictionless way for the government to support the newly-AI-driven jobless would be to purchase and distribute to all Americans shares in technology companies that most benefit from the AI revolution, creating a form of universal investment-sharing (“Universal Basic Capital,” a complement to UBI). Doing so instead of increasing taxes to pay entitlements to the newly unemployed would minimize tax and bureaucratic inefficiencies by sharing the capital appreciation and dividend benefits of technological innovation (perhaps explaining the Trump Administration’s recent discussions along those lines with AI companies?). Combining the CTP with laddered tariff taxation, limiting income taxation to only the highest X% of income earners, and adding UBC/UBI would achieve a balance notably superior to today’s reliance on the unwieldy and inefficient tax and entitlement systems.
The Lonely Realist now can be found on Substack at https://substack.com/@thelonelyrealist?utm_source=global-search.
Finally (from a good friend)
No Comments