TAX POLICY To find ‘best idea,’ let states boldly experiment

come up with the money.

States would respond in different ways. Some might simply raise their income-tax rates to include the amount of the federal levies. Others, however, might collect the entire amount owed to the federal government through property tax, so that homeowners confronted only one bill, albeit a screamingly high one, every year. Some states might increase sales taxes to capture the amount equivalent to its previous income-tax payments. Yet others might tax only the wealthy. The penalty for a system that fails would be tough, since most states have laws requiring them to balance their budgets.

Some states might find that lower rates draw people and companies. That, in turn, would broaden those states’ tax base dramatically. A state might keep taxes high and provide sterling services, and find they draw population or business. In any case, the rumble of state tax competition we are experiencing today would become a roar. There will be objections, of course. The first is that states’ collecting the money isn’t our tradition. It is, actually. Under the Articles of Confederation, the states, not individuals, owed payments to the federal government. The modern income tax, where citizens pay the federal government, came into being only a century ago.

The second objection is that some states with low rates happen to be the greatest beneficiaries of federal programs. While politicians of Republican-dominated states lecture on the need for more freedom, their constituents collect Medicaid, school aid, and so on. But this is already true. If more Americans move to low-tax states, the federal government may not have the funds to subsidize states. This would force citizens, including supporters of the tea party, to confront their own inconsistency. That has to be a good idea. So is forcing states to be tax collectors. Replacing the IRS means taxpayers can no longer blame the IRS.

The third objection is that a state won’t be able to collect the taxes, even though an individual’s tax bill might be identical to the amount paid in the past when people added up state and local obligations. In a property-taxbased regime, families would get one big bill, a property tax, often in the six figures, which would be a shock. This concern is legitimate. But not everyone will run away. Some will start to think about themselves, their taxes and governments. They will wake up. The plan lifts the veil of what the Italian economist Amilcare Puviani called “fiscal illusion.” He taught that governments work hard to conceal from citizens how much tax they pay. Because they believe they are paying less than they actually are, people go along with government outlays. The details can be laid out later, but a plan along these lines is worth contemplating. No one really knows what the “best idea” is for America’s fiscal future. Until we do, long live experiments.