The (nearly) unimaginable future of the American tax code

Let me begin this essay by stating I am in no measure an economist and have no real credentials for advocating the economic viability of what I'm about to propose. I come at this as someone trained in both narrative and sociology, which is to say this is how I expect the political story of American federal taxation to eventually end.

And it will end, at some point in my lifetime, with the demise of the income tax and the rise of the federally guaranteed basic income. Put another way, the federal government will stop taxing your personal income and will instead underwrite it, for everyone.

What I predict is an almost unimaginable (to some) confluence of socialism and free-market economics, but one which both the political left and the political right are barreling towards, perhaps unknowingly, with startling speed. Let's start on the right, whose demands and desires are perhaps more openly in the media spotlight of late.

Set aside the visceral hatred for the Affordable Care Act (Obamacare) and perhaps NSA surveillance of private American citizens and the primary concern of both the Tea Party faction of the Republican party and its more conventional constituents is taxation, and the federal government's perceived overreach in this area. The American federal tax code is viewed by the right as both excessively greedy and excessively complex. Simply google the phrase "tax reform" or, perhaps more tellingly, "repeal the 16th amendment" and you'll find plenty of fodder to bolster an argument against the federal income tax.

Most of the prescribed, mainstream remedies the right proposes to address federal taxation involve a general lowering of rates combined with a general elimination of tax exemptions and deduction that conservative economists (which is to say most economists) argue would lessen government-imposed market distortions, increase efficiency and be an overall boon to the entire economy.

The left has issue with this plan largely because the greatest beneficiaries of income tax deductions are private, middle-class citizens, not corporations. The exemption of Social Security benefits and the mortgage interest deduction are but two of the largest single tax "expenditures" incurred by deductions and exemptions, and repealing those would hit many of the most vulnerable citizens where they can least withstand it: the pocket book. Killing those deductions (or other similar benefits, like the childcare tax credit) would be a non-starter for the left, which means any "grand" tax reform would not be so grand after all, in that it would not tackle some of the greatest sources of untaxed income.

This leaves many clamoring for a more radical tax reform: substitution of a federal income tax for a federal sales tax or consumption tax. The right argues that taxing spending, rather than income, is a more stable and "fair" method of generating federal revenue, as spending stays constant for most individuals even as income fluctuates. (You still buy relatively the same amount of food and spend the same amount on housing and transportation -- the bulk of your personal expenses -- even if laid off or underemployed.)

The left argues that, precisely because spending doesn't tend to fluctuate with income, that sales taxes are more regressive than income taxes, again preying upon the poor and working classes who are largely untaxed under the current income tax structure.

The right's most cogent counter to the (largely legitimate) charge of regressive taxation from the left is something like the Fair Tax, which would effectively pre-refund all American families the estimated standard amount of sales-taxed income, such that those who are not taxed on income now likely won't pay more under a sales tax scheme.

And that, ladies and gentlemen, is where we wander unexpectedly into far left socialist territory.

There is, at present, a growing movement on the far left for a guaranteed income for all citizens, separate from employment. A Dutch political party was founded on precisely this principle, and there is growing argument for it from (oddly enough) the hacker community, who view a basic, baseline income as a safety net that would free them to experiment with new start-up business ventures. (Similar arguments have been made in favor of single-payer health insurance.)

The left is also concerned that automation and increases in productivity have made it impossible for continued employment growth -- we simply don't need as many workers as we did to provide basic services and goods for everyone alive today. (The right has their own dour take on this same scenario, as heralded by Tyler Cowen.) This plays into the income inequality issue, which is based not just on the extremely high concentration of wealth among elites, but rather that the economy needs fewer but much more highly skilled (and thus highly paid) workers to function and there is relatively little demand for low-skill or general-skill labor.

Put another way, when robots build cars, we need a few engineers to build and plan robots rather than several dozen assembly-line workers. Multiply that across the entire economy and you see a breakdown in the possibility of broad employment, as comparatively fewer people could ever become engineers, should they even want to.

In an of itself, the confluence of the far-right Fair Tax and the far-left guaranteed basic income seems unlikely in the short term. But there is a third, accelerating factor that may bring these two camps closer together than either likely realizes at present: Charity.

The single biggest trend in charitable outreach today is the Unconditional Cash Transfer (UCT), which is a euphemism for handing out cash to the poor. Simply giving poor people money with no strings attached is not only more efficient than current charitable bureaucracies, but has proven more effective at lifting families out of poverty. Better than building roads. Better than church missions. Better than anything else.

Conditional Cash Transfers (CCTs) -- wherein a charity might give a poor Kenyan mother a stipend for every month her child attends a free school, or makes regular free clinic visits -- are the second-most effective overall, and most directly effective when the poor in question are suffering from multiple causes of poverty (illness, lack of education, lack of employment).

UCTs and CCTs meet left and right on common ground. The left believes strongly in charitable intervention. The right believes strongly in free market forces serving all persons better than any bureaucracy ever could. No-strings-attached cash is both: A specific charitable redistribution of capital to those without means or property, but one which uses the bare minimum oversight and maximum personal empowerment and choice.

What is the pre-refund of the Fair Tax but a no-strings-attached cash transfer to everyone: poor, middle-class, or otherwise?

Take the above and consider the almost universal disdain for the IRS and its status as unmitigated arbiter of how much of your income is actually yours, and you see that some future confluence of the federal sales tax and federal guaranteed income is nearly inevitable.

The right wants sales taxes rather than income taxes because they are far less restraining on personal and corporate profits, which they argue would benefit the entire economy by supporting broader production.

The left wants a guaranteed income to protect those who cannot muster the skills or the capital to participate in top-end profit-making, which they argue would benefit the entire economy by supporting broader consumption.

Something not unlike the Fair Tax addresses both desires and, as such, is inevitable. All that remains is to agree on the tax rate and the "citizen stipend" we'll all receive. Strange as it sounds, a fundamental reworking of the US economy is more likely than not.

POSTSCRIPT:

If you ask me whether the Fair Tax is a good idea, my answer is two more questions: How much do you like expansion of the police system, and how much do you enjoy inflation? 

First, any time you have an onerous taxation scheme -- and a 30% federal surcharge on top of any state-level sales tax is pretty damn onerous -- you'll get a black market set up for bootlegging. And it is much harder to track black market purchases than it is to track income. Unless you want to hand organized crime the opportunity to expand from drugs, gambling, and prostitution into groceries, gasoline, and home goods, you'll need to massively step up police investigation and interdiction funding. Anybody out there happy about the prospect of having to "present your papers" at a police checkpoint, but those papers being a Costco receipt? (And don't get me started about how this goes off the rails with civil asset forfeiture, too.) Dismantling the IRS just pushes the primary state revenue enforcement mechanism from accountants to armed street agents. That's not an improvement.

Second, the Fair Tax is basically tailor-made to detonate an inflation bomb on the US economy. Lest we forget, inflation means price inflation, which in turn means your dollar has less buying power. The same gallon of milk you got for $5 last month now costs $6.50, which means today's dollar is only worth $0.77 what it was yesterday. Inflation tends to happen when borrowing is too cheap, so you finance a lot of goods on credit and now that you've got all this borrowed money lying around, you overpay, effectively lowering the value of your dollar. An oversupply of funds leads to inflation, which is why increasing interest rates is the primary means of fighting inflation. If it's expensive to borrow money, you won't borrow too much and overpay.

But what, exactly, do you think will happen when everyone gets their entire, untaxed paycheck -- more cash in their pocket -- and at the same time the price of everything rises 30 percent or more? That is literally the definition of inflation.

So not only is the Fair Tax regressive, it devalues everyone's savings and retirement at the same time.

The whole thing only works if the "pre-bate" is pretty generous, and that still compounds the short-term inflationary problems.

Which is to say, while I think it will eventually happen, I don't actually think a UBI+Fair Tax combo is a good idea.

[UPDATE 11/27/2013: Reason magazine, bulwark of the libertarian right, has come out in favor of a guaranteed basic income as a replacement for the US welfare state]

[UPDATE 2/26/2014: The argument for Basic Income as a feminist cause.]

[UPDATE 4/25/2016: FiveThirtyEight weighs in on the growing appeal of UBI.]

[UPDATE: 7/13/2017: The Wall Street Journal throws cold water on the UBI math.]

[UPDATE: 1/23/2023: House Republicans are once again demanding a Fair Tax.]