An alumnus entrepreneur of our MBA program, Kevin Pelissier, recently brought up an interesting idea about how taxation could be improved. Given that it’s April 15, it seems appropriate to briefly share two big themes that emerged from the conversation. These are offered as alternatives to current approaches of taxing income:

         (1) a consumption tax scaled in proportion to the environmental footprints of goods and services. This is a variation on the idea of a sales tax. It is inspired by the same broadly supported concept that legal (but non-essential) activities that create large negative side effects are most appropriate for taxing. Taxes are sometimes seen as either discouraging certain behavior, and/or attempting to connect a purchase decision to costs imposed on everyone else as a consequence of a selfish choice (as a cigarette tax theoretically does). Why not focus more, therefore, on non-essential consumption choices with the worst side effects?

       (2) an aggregated corporate contribution. This was Kevin’s big idea, with the words slightly tweaked during the course of the conversation (although come to think of it collected corporate contribution makes for the best alliteration). We think this might be the more fresh and innovative of the two suggestions. What would be the impact of corporations being allowed to count (for federal tax purposes) the taxes paid by their employees working within the United States toward an “aggregated (or collected) contribution” to the public coffers? Effectively this would amount to companies getting a deduction for (a) keeping or creating jobs within the jurisdiction collecting the tax, and (b) sharing more of their profits with the people “doing the work.”

       A few details would need to be ironed-out, such as what would qualify as an “employee working within the United States” – but what if the definitions and details were adjusted to create an incentive in favor of re-localization of production and service-providing? Further, wouldn’t it provide some incentive for paying employees more? If large companies almost inevitably exploit the details of a tax code to minimize their tax payments, shouldn’t the fundamentals of the code allow for paying less when more prosperity is shared with people working in the jurisdiction that collects those taxes to pay for infrastructure and public services? This second idea might also be easier to implement because it would be fundamentally less disruptive of structures that (for better or worse) are oriented on taxing individual and corporate income.

       We don’t imagine that these ideas would be an easy sell – obviously there are many vested interests that would guard the status quo – but we hope that tax day gives us all a moment’s reason to meditate on how much more pragmatic and efficient our taxation system could become. Perhaps at a city or state or other sub-national level or in another country some society has tried something similar to one of these ideas? If you know of such an example, please let us know by commenting, thanks!