Actually, there is a “no tax” option: consumption taxes.

The beauty of a consumption tax is that it removes all incentive distortions from the production side of the equation, and moves the tax to the consumption side. You don’t get taxed when you make stuff, only when you buy it.

The best, most researched consumption tax plan out there is the FairTax (disclosure: my father is the Founder and Chairman of Americans for Fair Taxation). It’s not some hair-brained scheme; it’s a real, comprehensive alternative to the ridiculous system we have today:

http://www.fairtax.org/

If you consider Mankiw’s example, your kids would have $28, and they’d spend that and pay a 23% inclusive sales tax. This would give them $21.56 of pre-tax money to spend. Way more than the $4.81 of McCain’s plan, or the $1.85 from Obama.

The tax is also includes a “prebate” that effectively returns all of the tax on essential goods and services. Low consumers (aka the poor) pay little or no tax, while high consumers (aka rich, G5-flying, Hamptons-party-throwing, Hollywood celebs) pay a lot more tax.

Anyway, just thought I’d mention that there is another way…

L3