TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy experts like to talk about broadening bases and lowering rates. In general, this conventional wisdom is great. If some economic activity is going untaxed, better to add that to the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. so you can lower rates on everyone else.
However, properly broadening the base is harder than it looks! You can think of it almost like wrapping a present. You want to cover the entire surface area once, but you don’t want to double-cover spots. For example, you don’t want to assess sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on gift cards because that would cover the same area twice. If you did, it’s almost as if you have a narrow tax base again. There’s the broad base of the sales tax on all items, but then the smaller, narrow tax on things purchased with gift cards.
The tax treatment of rented housing (and, in fact, most types of investment) is another example of double coverage. If I rent out my property to you, I pay taxes income used to buy the property, and I pay taxes on the rental income derived from it. In contrast, if I lived in the property myself, I would not have to pay the additional layer of taxes.
It’s the same house either way, but because people are eager to “broaden” the base, they end up taxing it twice in some circumstances, and only once in others.
A true “broad” base is a tax on personal expenditures – one that ultimately falls on the people who actually consume. The system described here would be one example of a completely broadened tax base that would allow us to maximize the wisdom of “broad base, low rates.”
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