As the upcoming debate over the looming “fiscal cliff” starts, this may be an opportunity to fundamentally change the tax system in the United States.
One of the biggest mistakes made in regards to the US Tax Code has been the reliance upon income taxes, including capital gains taxes. The income tax code is convoluted, arcane, contradictory, incomprehensible (even to the IRS), and too easy to get around. It's time to do away with the tax code as it exists and replace it with something simpler that also reduces the amount of enforcement required to deal with it.
It's time to switch to a consumption tax.
With few exemptions (necessities like food, clothing, and one or two others) it's a much fairer and level tax structure. The more one spends the more taxes one pays. For the most part, the 'poor' would pay a much smaller percentage of their money towards taxes and the wealthy a much higher percentage. (The wealthy will buy a lot more stuff than the poor and with the 'necessities' exemptions the poor will pay very little.) There will be no tax loopholes, no tax shelters, and the bookkeeping will be quite simple.
Revenues will be a bit more stable than those under income taxes as income levels, particularly among the rich, swing wider than spending. A consumption tax does not differentiate between income types. Whether the income is based upon salaries, dividends, capital gains, those monies spend the same. There's no dodging the consumption tax.
The biggest issue with the consumption tax will be its breadth. That will require a lot of work, but if done properly the need to fill out the annual 1040 forms will be eliminated. (Of course a lot of tax attorneys, accountants, and tax preparers will find themselves out of work, but that's a small price to pay for a better system.)
I have no doubt that any such reasonable rewrite of the tax code will be opposed by all “right-thinking” folk, meaning the special interests. (This includes the aforementioned tax attorneys, accountants, and tax preparers, just to name a few.) There are too many who have a vested interest in keeping the tax code as complicated and incomprehensible as possible as otherwise they will be unable to bury tax breaks, exemptions, and other giveaways in exchange for like kind support in other areas. There are too many out there who want to keep the existing tax code because they see it as a means of providing “social” justice, meaning taxing the rich out of existence and redistributing their wealth to the “more deserving” leaches, layabouts, and looters.
Keeping those factors in mind, I give the chance of such a rewrite of the tax code to be between slim and none. There are too many who benefit from the existing one to ever see it changed to something understandable to all and much fairer in its application.
UPDATE: I almost forgot another reason to support the idea of a national consumption tax: California, New York, Illinois, and a host of other blue states would scream bloody murder because the rich socialists so fond of spending other people's money to assuage their guilt would no longer be able to write off their state taxes as they can under the existing tax code.