Why do we tax personal incomes rather than simply business outcomes (labor and profit)? The most intractable problems of the tax system seem tied to the choice of taxing income rather than outcome.
Those problems are:
1) Income tax means a tax is taken out of “my money” that “I deserve.”
– Whether it is fair or not to complain, human psychology necessarily places a different value on the money we consider to be our own as opposed to the money we see flowing through a business setting. Why not instead tax the impersonal business machines on the money they pay to ensure workers work, and remove any personalization of whose money is taken? If businesses want to incentivize the outcome that workers work by paying them, tax the business not the worker.
2) Income tax disproportionately affects poor and uneducated laborers.
– Those who don’t know the system well and cannot afford help are not able to take advantage of even the benefits specifically available for them. Those who must work multiple jobs to make ends meet may not have the time to maximize deductions even if they have the knowledge of deductions and skills to do the work. Why not instead tax the business itself so that businesses can hire the best minds to maximize profits and align incentives? There is no benefit to taxing those least equipped to work within the system; doing so is, in practice, a disproportionate tax on those without resources simply because they lack resources.
3) Individual lives are too chaotic and inconsistent to be affected consistently by any tax plan. Business systems are dispassionate and far more stable institutions capable of being guided by directed by policy direction.
– Individuals quickly have to make cost benefit decisions based on rapidly changing factors and without ever knowing when a life changing accident or job change might occur. There is no effective way through tax policy to shape personal decision making regarding the value of the next dollar earned. Business systems don’t make value judgments and necessarily tend toward profit production in a capitalist society. Businesses are capable of long term forecasting and factoring in the multiple competing outcomes of various decisions and at the same time are almost always immune from a single event or decision resulting in an insurmountable obstacle to doing business. If the government desires any role in shaping acceptable long term forms of business, it would be far more effective to incentive businesses through taxes and deductions than to think that there could be any consistent outcome from taxes and deductions applied to individuals. Put differently, the government does little to shape societal outcomes through structuring personal income taxes and deductions, but could be a great deal more effective by applying such a system with regard to business systems.