Much has been written, and much whining has occurred on the left over corporate “tax inversions” wherein a company buys a foreign subsidiary and then “inverts” itself in order to be headquartered where the tax environment is friendlier than the USA.
Separately, I have been musing for a long time how the Federal government could be funded in a way that puts the states back into the picture, and leads to real tax competition between them. I have this simple, but radical, proposal for funding the enumerated functions of the Federal Government. Let me lay it out, and see what the readers think…
We all agree that the Federal Government does too much, spends too much, taxes too much, borrows too much, and worst of all, uses its ill-gotten funds to coerce the once sovereign states into adopting Federal government programs. The two things we’d need to do first is to eliminate the Federal income tax, and to shut off the printing presses, but then how would the beast be funded?
The objections we hear to a national sales tax, or a “FairTax” (or the 9,9,9 plan) is that some states and their businesses would have to implement a sales tax collection mechanism where none previously existed, in addition to killing the 16th Amendment permanently. So what if we found a simple mechanism to share the load amongst the states that led to tax competition for the most efficient government?
Here’s the basic idea: Let the states continue to tax their citizens and fund their governments any way they choose, and then impose a Federal surcharge as a percentage of the state’s gross operating expenditures (state+counties+towns), or better yet, the 5 year moving average of gross operating expenditures to reduce the effect of short-term gimmicks.
Note carefully that I said “gross operating expenditures”. There is a very good reason for this, as it is the best proxy for the profligacy of state and local governments – makes auditing simple, too – write simple, clear rules for what is, and is not a capital expense, and you leave the states very little wiggle room.
With the current structure of the Federal government, there’d be sticker shock in the states, and a clamoring for devolution of Federal programs to the state level – after all, the Federal government has strayed a long way from Defense, Diplomacy, and regulating commerce amongst the Sovereign States. It would be reasonable to expect that the states would insist upon a more balanced division of programs and expenditures between themselves and the Federal Government.
Now, with many programs devolved, or simply terminated, the states could truly compete for the best economic environment, with the goal being the lowest operating costs per capita, in order to pay the smallest share of the Federal burden. Competition for lower taxes? What a concept!
This stops, intentionally, short of making the states’ payments to the Federal Government voluntary – we all know how well that worked under the Articles of Confederation.
OK – criticism, comments, suggestions for getting from A to B…. Does it need a Con-Con (not something I’m overly fond of, but what about killing the 16th)?
