Zachary Stewart and Alexander Strehl
This paper explores what might be the effects of replacing the current US taxation and entitlement system with a simple system of fees placed on the use of common resources combined with a monthly check paid to every citizen called a prebate. We think the effects of doing this might be beneficial and would like to start a discussion on the topic. Our hope is that such a system would increase domestic wealth and competitiveness, eliminate poverty and tax fraud, reduce unemployment, increase wages, reduce enforcement costs, and encourage the conservation of resources for current and future generations.
Resource and labor based economy
All economic activity involves both labor and resource costs. No matter what the product some fraction of its cost goes to procure resources used to manufacture, grow and/or ship it. Some things such as an airline ticket have a larger dependence on resources, while others such as eating in a restaurant have a larger dependence on labor. It is thus possible to tax an economy simply by taxing the resources it uses. We will explore using this method as an alternative to taxing employment income and profit.
Hypothetical Implementation
Part 1) Replace the government’s constitutional power to tax with the power to charge fees for resources. Such fees would apply to the consumption of oil, coal, natural gas, and uranium; the use of land; the degradation of air, land, or water; and the use of renewable resources like timber or wildlife. Fees would be set as low as possible to fund the government's budget. The resource fees fall into three primary categories:
Consumable resource fees
Resources that are consumed and do not naturally regenerate in 100 years or less. Examples include oil, coal, uranium, and natural gas. A single fee based on the energy content of the resource would be used ( dollars / joule of chemical energy ).
Static resource use fees
Use of these resources precludes others from concurrent use but does not preclude their future use. Examples include use of land, electromagnetic spectrum bandwidth, raw water, and orbital slots.
Renewable resource consumption and environmental damage fees
A fee for the consumption, degradation, or destruction of a resource which takes less than 100 years to regenerate. Examples include lumber consumption, wildlife consumption, mild degradation of air, water, or land quality.
Part 2) Each citizen would have the right to request a monthly prebate check from the government. This prebate check would replace all entitlement programs including welfare, social security, housing assistance, unemployment insurance, etc. Larger prebate checks create larger wealth redistribution from large resource users to small resource users (rich to poor). For the sake of the discussion we’ll use a $1500 per month prebate.
Administration of fees
Resource fees would be collected at bottleneck points to minimize both administrative costs and fraud. For example, crude oil from around the world coming to California is processed in only 21 refineries, these are bottleneck points for oil. For coal, the bottleneck points would be rail shipping points (counting full rail cars full of coal would determine taxes). For natural gas, pipeline flow would be measured. For uranium, shipped quantity of fuel from the refinery would be measured, extra precautions would be taken for this resource.
At each bottleneck multiple fee officials on a randomly rotating schedule would measure the amount of resource processed, each independently submitting numbers to assure against fraud. Irregularities can be quickly spotted and investigated. These resources are bulky and and difficult enough to handle that fraud or smuggling on any significant scale is impractical.
The land fee would be implemented similarly to the current US property tax, with the important difference that the fee is based on the land value only--not on any man-made structures or improvements. The assessed value would be reevaluated on a regular schedule.Border fees
To prevent a trade deficit resulting from domestic high-priced resource-intensive products, tariffs may need to be placed on imports from countries without a similar fee system. Such fees should err toward the low side of a rough estimate of the resources required to build a given product. This is an issue of protectionism and is beyond the scope of this paper.
Some advantages of a root tax over an income tax system:
Cost of tax compliance is virtually eliminated. Since the use fees are only paid at bottlenecks the cost of compliance is nearly eliminated. Public and private effort previously used to collect revenue may now be used to directly generate wealth. US Federal Income tax cost of compliance is estimated to be $265 billion (2.1% of GDP), or 6 billion citizen hours, and amounts to a 22 cent compliance surcharge for every tax dollar received. # If this figure sounds small consider that the American recession of 2009 manifested a GDP recession of 1.6 percent.
More Effective at Leveling Wealth Disparity than Progressive Taxation
Taxing ownership and resource use gives an open market handicap to the ownership class and an advantage to the labor class. With a stronger market for labor wages will naturally rise.
For comparison, consider some shortcomings of a progressive tax system at the same task.
1) Reducing the tax burden on the poor lowers the wage the poor need to survive. Thus economic competition simply lowers the prevailing wage and the poor are no better, and possibly even worse off #.
2) Resource intensive products compete with labor intensive products in the marketplace. If the tax burden is born by the labor intensive products, the price of labor intensive products must rise, creating less demand for labor intensive products and thus lower wages for laborers.
3) If one’s wage is very low, simply paying little tax does not lift one out of poverty. Our view is that a more robust way to lift one out of poverty is to create conditions in which that person earns more money. Those conditions are an economy with a strong demand for labor.
More jobs and higher pay:
More jobs through consumer focus shift
The resource fee increases the cost of resource-intensive products, driving the consumer market to alternatives: labor-intensive products. For example, airlines are resource-intensive and restaurants are labor intensive. If an airline ticket costs $1000 and a fine dinner is $100 a couple may choose to take a weekend vacation over 10 fine dinners. However if an airline ticket is $3000 and the price of a fine dinner is $100 a couple may opt for 30 fine dinners over the vacation. Remember of course that the couple has more money to pay these higher costs since they are no longer paying federal tax and are receiving the prebate. Labor thus comes into demand causing employment and wages to rise. Note that as this shift happens the government must either reduce it’s budget or increase resource fees, thus reinforcing the cycle until an equilibrium is reached.
Increased employment through reduced barriers to new & small business
Starting a business and hiring employees is made easier through elimination of paperwork. This means that a baker can start a bakery without having to learn accounting and tax law. With a lower barrier to entry more businesses would be formed. Demand and thus pay for employees would rise.
Less pressure on employment results in more employment
Just as a cigarette tax reduces demand for cigarettes; a tax on employment, in the form of income and/or payroll tax, reduces demand for employment. Removing that tax and the accompanying cost of compliance would make employing people more attractive and thus allow demand for employment to grow.
Fraud is virtually eliminated
The bottleneck points in the supply chain cannot be circumvented on a significant scale. Because the fees are administered only at the relatively few bottleneck points it is practical to closely audit their activity. Consider attempting to smuggle an oil tanker or a train full of coal, or set up an illicit refinery. It can’t be done on a large scale or for any significant duration without attracting regulatory attention. Fines would exist for the unlawful use of resources such as logging or mining without a license or transporting resources into the country without paying the appropriate fee.
In the 2010 the average honest tax payer paid an extra $2200 to make up for tax evaders, roughly $305 billion in total.# Under this fraud free system the honest taxpayer carries no such additional burden.
Both poverty and the “incentive to stay poor” are virtually eliminated
The prebate would furnish enough money for basic accommodation, food and energy. Thus, desperate poverty & homelessness are essentially ended for any legal citizen who applies for the prebate. Families or friends living together may reap increasing standard of living in proportion to how efficiently they spend their funds. Perhaps even more powerful is the removal of the economic “notch” which provides an incentive to remain unemployed or incapable, or to feign such conditions. Since no benefits are taken away when a person earns money, a person may work without fear of reducing their quality of life or ending their ability to receive future benefits. It would become socially understood that offering value increases one’s standard of living, not knowing how to “play the system”. We believe this would bring about a gentle but powerful transformation in the national culture.
An unavoidable barrier to illegal immigration is raised
Because the system is basically unavoidable inside a country, all people in the country effectively pay the fees though their purchases. However, only legal citizens are eligible for the “prebate”. Therefore an illegal alien contributes proportionally more to the government than a legal citizen since their purchases are not offset by the prebate. This is in contrast to a self reporting income tax system under which illegal aliens get an inadvertent exemption from income taxation simply by not complying. A nation which uses this system becomes expensive to live in for illegal aliens.
Pro-growth
Increased cost of non-renewable resources could drive a move toward sustainable energy production which eventually offers nearly boundless energy consumption. Sustainable power generation is just that, each plant increases energy production, indefinitely. This is in contrast to depending on fossil fuels which lead to shrinking energy consumption as supplies are depleted.
Pro-Energy Independence
Renewable energy will be created inside a nation’s boarders, creating indepence from energy exporting nations. Money formerly used to militarily secure resources overseas can be used to generate wealth at home. Fewer compromising deals must be struck with unfriendly nations.
Cleaner and Greener Environment
The increased fee on non-renewable energy resources and on harmful pollutants would reduce the amount of pollution. The reduced demand for oil would result in less aggressive drilling and resulting oil spills. As the price of resource intensive energy rises the financial incentive for alternative renewable and clean energy source would rise.
Positive Health and Cultural Effects
The resource fees would nudge collective behavior resulting in a marketplace and culture that is highly sustainable, resource conservative, and environmentally considerate. For instance, the higher price of energy would result in less driving, reducing traffic accidents, congestion, air and noise pollution. The increase in cost of energy-rich materials and corresponding decrease in labor costs would shift what is bought and sold. Locally-made products would be given a natural advantage due to cheaper shipping costs; products requiring craftsmanship would benefit from the elimination of labor taxes.
Principled Taxation
Only actions that place a definable burden on society are taxed under this plan. Taxing this way allows the nation to relieve taxes from socially desirable actions, labor and the generation of wealth. Thus, the tax system favors endeavors that create large amounts of wealth but cause relatively little social burden.
Summary
To summarize, we want to start a discussion on replacing all federal taxes with federal resource fees, and replacing all government entitlement programs with a single monthly prebate check available to any legal citizen. We believe this could be implemented with less effort than the ongoing implementation of our current tax and entitlement system. We believe that these changes would increase national wealth, reduced income disparity, eliminate poverty, eliminate tax evasion, and build a true pro-growth society for ourselves and future generations.
Q/A
1. How would this affect me?
Assuming that consumption of unsustainable energy and government expenditures stay constant. The average citizen would pay about $6000 yearly in increased costs after the prebate; no check would ever be sent to the federal government, no average citizen would be required to fill out forms nor could they ever owe a debt to the federal government, and they would likely see their wages rise. If you consume only 80% of the average consumer then your prebate of $1500 would more than balance out the increases in costs you’d see; thus you’d be paying no federal tax at all.
Of course, things get more expensive as gas prices would rise about $9 per gallon. An average dinner of beef, rice, greenhouse tomatoes, and wine totaling 620 dietary calories would cost $1.28 more and a calorie-equivalent dinner of chicken, potatoes, carrots, cooking oil, and tap water would cost 48 cents more#. We think if you do the math you’ll see that the $6000 total federal tax is about what an average citizen would end up paying through their purchases.
2. It sounds a lot like the “Fair Tax”. How does it compare?
The Fair Tax served as inspiration for some of the resource tax’s methods. However, the Fair Tax still requires widespread record keeping and invites possibility of fraud, is still a complex code and requires more costly enforcement measures. Although the Fair Tax does reduce the tax system’s complexity it is not as efficient or as aligned toward the well being our society and future generations.
3. It sounds too good to be true. Is it?
Everyone alive today has lived under an inefficient revenue collection and economic system that favors ownership over labor. By comparison, an efficient system which favors an individual’s labor might seem too good to be true. The benefits come from mobilizing American hands and minds and more efficient resource allocation, it shouldn’t be hard to believe that this has wildly positive effects.
5. Current prices of gas, electricity, and other forms of energy are going up as the worldwide demand goes up and supply goes down. The market is already working and will continue to do so. By artificially inflating the price of energy you are disrupting the market. Will we not likely suffer from the resulting consequences?
It is true that prices of resources have gone up recently and would continue to do so in the near future, especially given the limited supply of easily obtainable energy, combined with the increase in world population. However, it does not mean that we do not benefit from changing the cost structure for those who use energy.
In economic terms, the consumption of energy is a ‘tragedy of the commons’ situation (http://en.wikipedia.org/wiki/Tragedy_of_the_commons). In such situations each individual acts according to their best interests but the collective behavior is detrimental for society. For example, consider the fishing industry. Under no regulations, fishermen would quickly overfish and kill off the entire population of fish, as is currently happening to bluefin tuna and atlantic salmon. Once the fish population is destroyed not only are there no more fish to eat but ironically the corresponding fishing industry goes out of business. If properly regulated, say by a cap-and-trade system, the fish population is stabilised and the fishing industry as well as general public benefits. The situation with respect to energy is similar to that of fish except that while fish reproduce relative quickly, gas, coal, and other natural resources take a much longer time to form.
6. If we tax gas and oil, won’t we lose competitiveness in a global economy? For example won’t all of our businesses that make heavy use of energy simply move overseas?
Our view is that the new structure would make us more competitive; here’s our thinking.
Under the proposal, the government still collects a large amount of money and redistributes a large amount of wealth, but absent are the income tax and welfare system, which is wastefully costly and directly discourages productive work. With the savings from lower tax compliance costs, businesses would invest and hire more, increasing the wealth produced and generally improving the economy. Under our new system these businesses would still be taxed but only proportional to their use of resources, not based on how much income they bring in.
The US imports nearly ⅔ of its oil. It’s the single largest trade deficit item reducing this number thus has a positive effect on our economy.
Certain industries that make heavy use of energy may need to adapt. To encourage adaption and discourage relocation overseas, we propose implementation of a tariff on all imported goods from foreign nations that don’t adopt our proposal. The tariff for a good would be set in direct proportion to the amount of energy used to produce that good. This simple and sound foreign policy would encourage other nations to adopt our proposal and becomes unnecessary once they do so.
In addition, it is in our best interest to invest in sustainable forms of energy now, before our unsustainable forms run out. By artificially inflating the price of unsustainable forms of energy we incentivize the production of sustainable forms of energy. As we move from running an energy deficit to surplus, we’ll gain a huge competitive advantage in the world market economy. In fact, we expect most countries to follow our lead once they realize the great economic benefits it provides.
7. Won’t this proposal hurt people with low income jobs or of low economic status?
No. The proposal is designed to improve the health of the economy in many ways. A healthier economy would benefit the poor and rich alike. To see this, consider the effect our proposal would have on wages. In general, high unemployment raises the supply of available workers which allows for low wages. The current system of taxing employment discourages employment just as placing a tariff on foreign goods discourages imports. With the new system there would be more employment, which would naturally lead to higher wages for employees.
More abstractly, when we implement the proposal we would change the way that the government redistributes wealth. Certain individuals would become more or less wealthy under the new system than the old. Although difficult to precisely quantify, compared to our current tax system, people and businesses that use relatively more/less resources and create more/less pollution would be taxed relatively more/less in the new system. Compared to our current economic system, people and businesses that produce more wealth per unit resource would profit the most. For example, some corporations, typically large and wealthy, profit by hiring expensive tax lawyers and accountants to exploit loopholes in the currently complicated tax code. Under the new system these companies would lose this competitive advantage and would need to produce wealth to make a profit.
As a theoretical exercise we can calculate how adoption of the proposal would affect certain populations regarding wealth redistribution. However, once the change happens these projections become inaccurate as people adapt to the new economy. For instance, people would buy more efficient vehicles, drive less, and live closer to work. Many would switch careers from those industries that consume huge amounts of energy to those that provide valuable services with less energy or to those that develop sustainable forms of energy.
8. The government uses the income tax structure to encourage certain social policies. For example, we provide tax deductions to various select individuals. If we eliminate the income tax won’t we lose this important and user power?
The government would no longer be able to use income tax deductions and other tax loop-holes to encourage certain types of ‘good behavior’, such as having children, buying a house, purchasing medical insurance through your employer, growing corn, etc... However, in return it gains the ability to economically discourage people from wasting precious resources and pollute the earth that we all must share. We also benefit from a simpler, more streamlined, and less costly wealth redistribution system. Finally, history has proven that wielding of the power you reference has backfired in many cases, here are two:
- Government provides heath insurance tax break to businesses, which causes health costs to increase uncontrollably and become less accessible to individuals who aren’t covered by their employers.
- Government provides tax deduction for home mortgages, which contributes to the housing bubble and subsequent economic crises.
The problem is that the good intentions of the government often backfire in difficult-to-predict ways. What is needed is a simpler and easier-to-understand system.
9. Under the new welfare system, wouldn’t everyone just opt-in and collect the prebate check? Wouldn’t this create inflation?
Even if all citizens opt to receive the check, there is no currency created nor value destroyed so there is no widespread inflation of the currency. The government is required to balance the budget. The payout simply redistributes funds from heavy to light users of resources.
Some people may choose not to collect the check especially if they are wealthy. In this case, not opting in to receive the prebate is equivalent to donating to the government. The payout is a form of income redistribution from the rich to the poor.
10. Are there other benefits to your proposal that weren’t mentioned?
Yes. A non-exhaustive list follows and we would welcome any additions you might suggest:
10a. Encourages saving for the future. The federal monetary policy discourages saving by first creating inflation and then charging tax on the interest earned by investments. 401K plans are meant to encourage saving but due to poor design apply primarily to those with relatively high income.
10b. Elimination of market distortions. All subsidies and tax incentives, which attempt to influence behavior indirectly, are eliminated. In their place, comes the power of the government to protect resources deemed valuable for society by applying fees to their use. If society believes clean air is a priority, it can apply a tax to polluting the air. This method leverages all market forces to solve the problem including innovation, behavior modification, and adoption of new technology. People are free to pollute but are punished in direct proportion to the degree that they do. Tax incentives and subsidies, even when well intentioned, often have the effect of moving unsustainable energy resources around rather than reducing them.
10c. Inclusion of formerly untaxed illicit or “grey” business in revenue generation. Ironically, illicit businesses function with tax advantages similar to non-profit businesses and churches, simply by not complying with tax law. However, there is no practical way for even an illicit business to avoid paying for its energy and raw materials; in doing so that business generates revenue for the government.
10d. Increased wealth creation through better human capital allocation. Currently the United States population spends roughly the same number of man hours preparing taxes as building automobiles. By eliminating the individual and corporate cost of tax compliance those individuals may spend their hours creating wealth; thus contributing to a wealthier economy.
10e. Less military resources devoted to protecting the overseas production and transportation of foreign oil Let me ask you, do you think we would have had a war in Iraq if we were not dependent on their oil?
11. What about less responsible citizens who spend their money early in the month and don’t have enough left for the rest of the month?
Payday loans step in. Since each citizen is guaranteed a prebate check, the loan company can make favorable loans to the borrower. Eventually the borrower strikes a responsible balance between consumption and paying interest to loan companies.
Related Work:
The fair tax: http://www.fairtax.org has similar mechanisms such as the prebate check and a flat taxation placed on goods sold. This is somewhat similar to a flat fee on resources used, but has a number of drawbacks when compared to our proposal#.
James Hansen of Columbia university has proposed a similar system called ‘fee and dividend’ that involves taxing resources such as oil, gas, and coal that create greenhouse gases and distributing the tax revenue to the public uniformly (see http://www.nytimes.com/2009/12/07/opinion/07hansen.html and http://www.climatelobby.com/fee-and-dividend/). Hansen’s approach is in parallel with income tax. In contrast, we propose replacing current taxes with the energy fee. In addition, we purpose a slightly more complex system of taxing both the resource used for energy production and then the pollution created separately, as we believe these are two separate externalities. We tax a resource proportional to the amount of energy it has the potential to produce including nuclear energy, while Hansen exempts nuclear and proposes taxing a resource by the amount of carbon it releases when converted to energy.
The idea of providing a check to all citizens that covers basic needs is called ‘Basic Income’ (http://en.wikipedia.org/wiki/Basic_income)
Al Gore has suggested replacing the income tax with a tax on energy similar to the one we suggest (see http://www.issues2000.org/celeb/Al_Gore_Energy_+_Oil.htm).
ACKNOWLEDGEMENTS:
Thanks to Daniel Reeves for many helpful discussions.
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