THE NATIONAL CONSTITUTION PROTOTYPE PROJECT

Taxation

I. Taxes on Wages

Ideally, the tax rate on wages for the vast majority of wage earners should be the same. Any graduation of tax rates should occur only for those at the most extreme end of the wage curve (e.g., the top 2 percent of wages). The tax rate for the vast majority of wage earners should be fixed over the long term.

A flat tax on wages is ideal because of its impact on job formation. That is because steeply graduated taxes bias an economy to create low-wage, low-productivity jobs rather than higher paying, higher productivity jobs. Note that, when viewed from an employer's perspective, one gets more "bang for the buck" when the government takes a smaller share of the money one has to spend on wages.

For the above reasons, taxes on wages should be implemented as two separate taxes:

• a Wage Tax (a flat tax on all wages collected by the employer), and

• a Graduated Income Tax, which would apply to wages that exceed a specified exemption amount.

Note that the exemption amount for wages should be adjusted each year based on wage data collected in the prior year. The wage exemption should apply to the wages earned by each wage earner and not be based on combined wages, such as for a household or married couple. 

II. Taxation of Nonwage Income

The Graduated Income Tax mentioned in Section I above should also apply to all nonwage income and capital gains excluding those retained in retirement accounts or rolled over from one qualifying residential property into another qualifying residential property.

Note that, while progressive taxes may not make sense for the vast majority of wage earners, a graduated tax on nonwage income (e.g., interest income, earnings distributions) and capital gains makes perfect sense. Such taxes can be seen as a fairer distribution of the tax burden and could help to flatten the wealth curve. 

III. Taxation of Real Property

A flat tax (the Real Property Tax) should be levied on real property. The tax should be based on acreage. Such tax should exclude:

• small, family-owned and occupied farms, and

• single-family residential properties less than 1/2 acre.

Along with the Wage Tax and the Graduated Income Tax, the Real Property Tax should be a primary source of government revenue. It should be adjusted each year based on the nation's financial goals. However, a cap should be placed on the annual change in the per-acre tax amount (e.g., the change in the tax might be restricted to no more than 10% of the prior year's tax amount). Ideally, the annual changes would be forecasted for a five-year or ten-year period, with only minor changes made each year to the forecasted changes.

Unlike taxes on wages and other income, which tend to be cyclical (i.e., rising and falling with the business cycle), the Real Property Tax would be countercyclical. Consequently, such tax would tend to stabilize tax receipts, the value of the currency, and the business cycle.

IV. Taxation of Imports

All financial transactions between domestic entities (persons real or fictional) and foreign entities should go through an authorized independent foreign transactions agent. The foreign transactions agent should be responsible for documenting foreign financial transactions, collecting any taxes owed on any such transactions, and issuing importation certificates associated with such transactions.

Either the domestic or foreign entity associated with a cross-border financial transaction should be able to register with a foreign transaction agent and pay any tax due related to such transaction.

A domestic entity should pay a net value tax (the Foreign Transactions Tax) on the net value of their annual financial transactions with foreign entities. Such transaction would include but not be limited to those involving the purchase of goods, services, foreign currencies, and financial instruments (stock, bonds, options, etc.). The tax should also apply to deposits and withdrawals from foreign financial institutions as well as interest payments.

An effective "tax credit" should arise whenever money received by a domestic entity from foreign entities exceeds money transferred by the domestic entity to foreign entities. In such cases, the tax credit should be able to be rolled over into the next fiscal year, sold, or lent. 

The tax rate should generally equal the tax rate on wages (the Wage Tax). However, some tweaking of the rate might be beneficial. 

The purpose of the Foreign Transaction Tax would be to mitigate any trade imbalances potentially arising from differences in wage taxation rates. The Foreign Transaction Tax would not be imposed as a means to generate revenue for the government.

A Foreign Transaction Tax would be superior to imposing tariffs on imported goods. The collection of tariffs, particularly when different rates apply to different goods from different countries, is a labor-intensive activity. Many loopholes typically exist, particularly in relation to

• intracompany transfers,

• the classification of goods, and

• the identification of the country of origin.

Such loopholes often lead to unnecessary and sometimes detrimental distortions in trade activity. Tariffs also do not apply to financial transactions, where money flowing across borders directly impacts trade balances.