Happy Tax Day! How consumption taxes would impact employer filing
For more than two decades, we have been proposing a Business Income/Net Business Receipts/Subtraction Value Added Tax. This would be in conjunction with a credit invoice VAT, which would make households conscious of actually paying taxes (and be impossible for the wealthy to evade) and an income surtax (which could be prepaid with bond purchases).
The first tier of the SVAT would be designed as a vehicle for social credits, such as the child tax credit, health insurance exclusions and education credits for ESL through community college. Employers with S-VAT refunds would get a credit on their I-VAT payments, which would cap refunds to I-VAT revenue.
This would not eliminate shelters for the rich. Unless the employing firm provides personal service to higher wage employees, paying them as contractors would be vehicle for the payment of social credits to personal staff – and self-payment would still be subject to second and third tier VAT.
Recently, we added an Asset VAT, which taxes capital income and sales and allows payment through a second and third tier of the subtraction VAT. This would replace capital gains, pass-through, dividend and rental taxation and be paid at point of sale or distribution. Selling and renting back assets would actually be more expensive because the holding company would have to pay the asset VAT, although lease costs would reduce value added for other taxes by the amount paid. If A-VAT and I-VAT rates are the same, doing so would be a wash.
The employer FICA tax would be subsumed in the I-VAT and S-VAT and be credited equally, while employees would pay a separate FICA with a $20,000 floor and a $75,000 ceiling. This ends the need for the EITC (replaced with the floor, a higher minimum wage and the CTC) and gives Social Security payments some degree of variability by income so it is not simply a welfare payment. Under employee-ownership, it could be dispensed with as base wages fall within a tighter band.
The A-VAT would eliminate the tax avoidance inherent in capital gains and wealth taxation. Brokers would collect the tax and submit them to the SEC or state government. The SEC would collect taxes on financial instruments and dividends, while states would collect rental and pass-through taxes. States would also collect I-VAT and S-VAT revenue, as they would likely levy the same taxes, handle disputes and forward information and federal revenue to the IRS electronically.
Conceivably, these reforms would remove everyone from the tax rolls while getting taxes from everyone. Practically, from the employer point of view, it would require the same level of reporting as personal income taxes. The self-employed would file as businesses rather than individuals but would have to file four times a year (the same frequency that estimated taxes must be paid).
The number of tax filers could go way down. Partnerships and individuals with multiple clients would still file, but the vast majority of filing could be accomplished by brand holders whose data collection and filing will mostly be electronic – although via data sticks delivered to each state where they have sales or employees rather than online – limiting opportunities for identity theft.
The only family filing would be to verify the accuracy of child tax credit payments. Employers would report payments to state revenue agencies and to employees each quarter. Revenue departments would send a letter to each employee verifying the information. If it is correct, the employee does nothing.
If there is a dispute, a postcard to the agency would alert it to investigate the discrepancy or trigger a payment change if both working spouses each receive the full credit rather than a half credit per child or payment through only one spouse. Any repayment of double dipping would be arranged by the employer through installments. The state revenue agency and the IRS would electronically verify the correct payment of the child credit.
On the up side, the S-VAT benefit system would be an incentive for franchisers to shift to direct employment (as employee-ownership will end the need to avoid unions) and for firms, generally, to make 1099 employees direct hires, thus ending an endemic abuse. This would eliminate the vast majority of “small businesses.” Most compliance auditing would be part of corporate compliance audits. Essentially, most, if not all, of the IRS would be eliminated. It is much easier to review audit reports for a few thousand companies than processing 147 million individual returns
The first tier of the SVAT would be designed as a vehicle for social credits, such as the child tax credit, health insurance exclusions and education credits for ESL through community college. Employers with S-VAT refunds would get a credit on their I-VAT payments, which would cap refunds to I-VAT revenue.
This would not eliminate shelters for the rich. Unless the employing firm provides personal service to higher wage employees, paying them as contractors would be vehicle for the payment of social credits to personal staff – and self-payment would still be subject to second and third tier VAT.
Recently, we added an Asset VAT, which taxes capital income and sales and allows payment through a second and third tier of the subtraction VAT. This would replace capital gains, pass-through, dividend and rental taxation and be paid at point of sale or distribution. Selling and renting back assets would actually be more expensive because the holding company would have to pay the asset VAT, although lease costs would reduce value added for other taxes by the amount paid. If A-VAT and I-VAT rates are the same, doing so would be a wash.
The employer FICA tax would be subsumed in the I-VAT and S-VAT and be credited equally, while employees would pay a separate FICA with a $20,000 floor and a $75,000 ceiling. This ends the need for the EITC (replaced with the floor, a higher minimum wage and the CTC) and gives Social Security payments some degree of variability by income so it is not simply a welfare payment. Under employee-ownership, it could be dispensed with as base wages fall within a tighter band.
The A-VAT would eliminate the tax avoidance inherent in capital gains and wealth taxation. Brokers would collect the tax and submit them to the SEC or state government. The SEC would collect taxes on financial instruments and dividends, while states would collect rental and pass-through taxes. States would also collect I-VAT and S-VAT revenue, as they would likely levy the same taxes, handle disputes and forward information and federal revenue to the IRS electronically.
Conceivably, these reforms would remove everyone from the tax rolls while getting taxes from everyone. Practically, from the employer point of view, it would require the same level of reporting as personal income taxes. The self-employed would file as businesses rather than individuals but would have to file four times a year (the same frequency that estimated taxes must be paid).
The number of tax filers could go way down. Partnerships and individuals with multiple clients would still file, but the vast majority of filing could be accomplished by brand holders whose data collection and filing will mostly be electronic – although via data sticks delivered to each state where they have sales or employees rather than online – limiting opportunities for identity theft.
The only family filing would be to verify the accuracy of child tax credit payments. Employers would report payments to state revenue agencies and to employees each quarter. Revenue departments would send a letter to each employee verifying the information. If it is correct, the employee does nothing.
If there is a dispute, a postcard to the agency would alert it to investigate the discrepancy or trigger a payment change if both working spouses each receive the full credit rather than a half credit per child or payment through only one spouse. Any repayment of double dipping would be arranged by the employer through installments. The state revenue agency and the IRS would electronically verify the correct payment of the child credit.
On the up side, the S-VAT benefit system would be an incentive for franchisers to shift to direct employment (as employee-ownership will end the need to avoid unions) and for firms, generally, to make 1099 employees direct hires, thus ending an endemic abuse. This would eliminate the vast majority of “small businesses.” Most compliance auditing would be part of corporate compliance audits. Essentially, most, if not all, of the IRS would be eliminated. It is much easier to review audit reports for a few thousand companies than processing 147 million individual returns
posted by Michael Bindner at 4:20 PM
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