Reasoning about Taxes


I try to present facts and logic and solutions rather than just opinions.

Please send any reasoned
disagreements to me.
If your facts and logic
are convincing, I'll
change my mind !
      





The USA should get rid of personal income taxes and replace them with retail sales/consumption taxes, to change incentives.

The USA should enact a wealth (assets) tax, to address wealth inequality.





The anti-tax debate is confusing, because some people in it hate certain taxes, some people hate all taxes, some people hate the government, some people hate the IRS.

Why we need taxes and IRS (each of these builds on the steps before it):
  1. We need a government (otherwise we'd have anarchy/chaos, no law-enforcement, no national defense, no border controls).


  2. Government needs money (otherwise it wouldn't be able to do anything).


  3. Government should be funded by the citizens (as opposed to, say, the state running profit-making businesses itself, as the Chinese and Egyptian militaries do).


  4. The sums are so large that legal mandates (taxes) are necessary (as opposed to, say, voluntary donations).


  5. The legal mandates (taxes) have to be enforced by some agency (the IRS, courts and police), or else no one would pay.


  6. Tax structure is a powerful way to create incentives for behaviors we want to encourage (employment and productivity, home ownership, education, charity, savings for emergencies and retirement, moderate consumption). Every tax affects behavior, whether or not it is intended to do so.


  7. The only remaining issue is: what kind of taxes should we have ?


From "Don't Think Of An Elephant !" by George Lakoff 2004 (on Amazon):

What is taxation ? Taxation is what you pay to live in a civilized country - what you pay to have democracy and opportunity, and what you pay to use the infrastructure paid for by previous taxpayers: the highway system, the Internet, the entire scientific establishment, the medical establishment, the communications system, the airline system. All are paid for by taxpayers.

You can think of it metaphorically in at least two ways. First, as an investment. ... Taxes are wise investments in the future.

Or take another metaphor:

Taxation is paying your dues, paying your membership fee in America. If you join a country club or a community center, you pay fees. Why ? You did not build the swimming pool. You have to maintain it. You did not build the basketball court. Someone has to clean it. You may not use the squash court, but you still have to pay your dues. Otherwise it won't be maintained and will fall apart. People who avoid taxes, like corporations that move to Bermuda, are not paying their dues to their country. It is patriotic to be a taxpayer. It is traitorous to desert our country and not pay your dues.

Perhaps Bill Gates Sr. said it best. In arguing to keep the inheritance tax, he pointed out that he and Bill Jr. did not invent the Internet. They just used it - to make billions. There is no such thing as a self-made man. Every businessman has used the vast American infrastructure, which the taxpayers paid for, to make his money. ...

My response to a "Hey government, stay out of my purse" image posting:
What, you don't want police and fire and ambulance services, water and sewage service, electrical, garbage collection, roads ? Prisons to keep the worst criminals away ? Military to defend the country ? Coast Guard and Customs and Immigration to control the borders ? FAA to regulate air traffic ? CDC to watch out for epidemics ?

"Taxation is theft":
Whistling In The Wind's "Why Taxation Is Not Theft"






Individual income taxes are bad because:



Retail sales/consumption taxes are better because:



Retail sales/consumption taxes can be progressive (tax the rich more than the poor) and be engineered to accomplish policy goals; they don't have to be "flat" and anti-poor-people:
Services could be taxed just as well as goods could be taxed. Consumption of luxury services (first-class plane travel, cosmetic surgery, high-rate legal services, etc) could be taxed at higher rates than basic services.

Utilities (electricity, water, garbage removal) could be taxed progressively; "normal" levels could be tax-free, and "excess" levels taxed at various rates.




Objections to retail sales/consumption tax:



Web page that matches my proposal:
BalancedPolitics.org's "Should the U.S. Institute a National Sales Tax to Replace the Income Tax?"



Good article:
Helen Huntley's "A national consumption tax: How would it change things?"






"FairTax" is different from my proposal. FairTax is a flat 23% national retail sales tax, plus universal monthly rebate depending on household size. It's flat, not progressive.
(Hmmm, FairTax.org says it's progressive, but the rates are not progressive, only the resulting percent paid is. That's not the usual definition of "progressive", I think. Still seems like a flat tax to me.)
Thumbnail sketch of the FairTax
FairTax FAQ's

Heard on a radio show 10/2011: most countries which have a flat income tax today are Russia and eastern European countries, because they had trouble getting income tax systems started at all. Keeping it simple made things easier, and keeping rates low on rich people made compliance more likely.



Herman Cain's "9-9-9" tax proposal would keep the federal individual income tax (cutting the rate to 9%) add a 9% national retail sales tax (on top of state sales tax, I think), and do something unclear (but 9%) with corporate taxes. It still requires individual income tax returns filed to IRS. The sales tax part is flat, not progressive, with no exemptions for necessities, so it would hit poor people hard. I think my proposal is better.



From Jeff Spross's "Marco Rubio wants to make your taxes simpler. Here's a better way to do that.":
A flatter tax system is one of those perennial Republican quests. But it's a solution that doesn't match up terribly well with the problems Rubio, Lee, and their co-travelers say they're concerned with.

The basic idea behind the progressivity of the current system is it protects the least well-off. If you're a single individual making $9,000 a year, every cent you earn is going to food, shelter, clothing, etc. If you make $38,000, that first $9,000 is still really crucial, but the next $29,000 slightly less so, and so on. Which is why each one of those batches of money is taxed at a progressively higher rate: the money you need the most gets taxed the least.

And while Rubio and Lee's plan [two income tax brackets instead of the current seven brackets] benefits the richest the most, it basically amounts to a tax cut for everyone. So if all you're concerned with is the tax burden of middle-to-low earners, it's not a bad deal. The problems are elsewhere.

One, Rubio pitches the plan as a blow in favor of simplicity, which makes no sense. The current setup of seven brackets may seem complex. But once you know what your taxable income is, it takes a page or two of forms and a few minutes of simple arithmetic to figure out your tax liability.

The complexity, rather, comes in figuring out your taxable income. There are a host of deductions and exemptions in the tax code, all of which remove some of your income from the "taxable" bucket. And afterwards, when you've determined how much you owe, there are various credits that reduce that number, too.

A flat tax (just one tax bracket with one rate for everybody) would still be an income tax, and thus defining "taxable income" would still be necessary. Politicians could add just as many deductions and exemptions and credits as we have now.

A consumption tax (i.e. a national sales tax of some sort) presents a similar problem, in that you can still introduce all sorts of carve-outs. Its big advantage over a flat tax is there's no tax paperwork for individuals; they just pay the sales tax whenever they buy a good or service, while the business handles the paperwork.

How simple the U.S. tax code is depends on what loopholes you introduce. Every so often, Congress goes through the code and clears out a bunch of loopholes that have built up. But then the natural grind of politics and lobbying and interest groups inevitably reasserts itself, new loopholes are created, and eventually Congress has to go back and clear it out again. It's like scraping the barnacles off a ship's hull. It's never actually done, and whether you have one tax bracket or 50 doesn't change the process.

A "flat" tax system is a giveaway to the rich. A "fair" tax system would have the rich doing more to help the poor.
Hamilton Nolan's "A 'Flat Tax' Is Just a Giveaway to the Rich"



Our system of judicial fines is "flat" and thus regressive (hits poorer people harder). We could change that:
Joe Pinsker's "Finland, Home of the $103,000 Speeding Ticket"



From article by Peter Singer in the 12/17/2006 issue of "The New York Times Magazine":

... people can earn large amounts only when they live under favorable social circumstances, and they don't create those circumstances by themselves. Warren Buffett acknowledges that society is responsible for much of his wealth. "If you stick me down in the middle of Bangladesh or Peru," he said, "you'll find out how much this talent is going to produce in the wrong kind of soil." The Nobel Prize-winning economist and social scientist Herbert Simon estimated that "social capital" is responsible for at least 90 percent of what people earn in wealthy societies like those of the United States or northwestern Europe. By social capital Simon meant not only natural resources but, more important, the technology and organizational skills in the community and the presence of good government. These are the foundation on which the rich can begin their work. ... his estimate undermines the argument that the rich are entitled to keep their wealth because it is all a result of their hard work. If Simon is right, that is true of at most 10 percent of it.

...

Thomas Pogge ... argues that at least some of our affluence comes at the expense of the poor. He bases this claim not only on the usual critique of [trade barriers], but also on less familiar aspects of our trade with developing countries. For example, he points out that international corporations are willing to buy natural resources from any government, no matter how it has come to power. This provides a huge financial incentive for groups to try to overthrow the existing government. Successful rebels are rewarded by being able to sell off the nation's oil, minerals or timber.

In their dealings with corrupt dictators in developing countries, Pogge asserts, international corporations are morally no better than someone who knowingly buys stolen goods. ... The situation is, of course, beneficial for the industrial nations, because it enables us to obtain the raw materials we need to maintain our prosperity, but it is a disaster for resource-rich developing countries, turning the wealth that should benefit them into a curse that leads to a cycle of coups, civil wars and corruption and is of little benefit to the people as a whole.
Elizabeth Warren on taxing the rich



Steven Hill's "Europe Tax Model Delivers Much More"
Alexander Arapoglou and Jerri-Lynn Scofield's "Ten Ways the Wealthy Dodge Taxes"
CTJ's "The U.S. Is One of the Least Taxed of the Developed Countries"
Wikipedia's "List of countries by tax revenue as percentage of GDP"



Corporate taxes:

From article by Pat Garofalo 5/2011:

At the moment, corporate tax revenue has plunged to historic lows. In 1960, the corporate income tax provided more than 23 percent of federal revenue; the Office of Management and Budget estimates that it will provide less than 10 percent this year.

During the 1960s, the United States consistently raised nearly 4 percent of GDP in corporate revenue. During the 1970s, the total was still above 2.5 percent of GDP. Now, the U.S. raises less than 1.5 percent of GDP from the corporate income tax. As the Congressional Research Service put it, "Despite concerns expressed about the size of the corporate tax rate, current corporate taxes are extremely low by historical standards."

The United States effective corporate tax rate is also low by international standards (though the 35 percent statutory rate is the second highest in the world). There are plenty of reasons for this drop, but chief among them is the proliferation of loopholes and credits clogging up the corporate tax code (alongside the growing use of offshore tax havens and the ability of corporations to defer taxes on offshore profits indefinitely).

Should we keep the corporate income tax ? I think VAT is more complicated to calculate (not sure). VAT penalizes adding value, which is bad policy. Maybe corporations too should pay a "consumption tax", not an income tax.

Corporations are evading US income tax by shifting their income to overseas subsidiaries where tax rates are far lower. Maybe we need an Alternative Minimum Tax for corporations, similar to AMT for individuals. Maybe USA corporate AMT should be based not just on income, but also on number of employees, amount of sales, book value of assets worldwide, and stock market book value. [Turns out there is a corporate AMT, but it's based on corporation's declared income, so if they hide income overseas, AMT comes to zero also.]
Dave Johnson's "5 companies ripping off America (and the simple tax change that could make them pay up)"

It seems everyone agrees that the problem is tax avoidance using "loopholes": exemptions, deductions, credits.
Loopholes that should be removed:
  1. Agricultural subsidies (which mostly go to big corporations, not "family farms").


  2. Mineral subsidies (which go to oil companies, mining companies, logging companies).


  3. Deductions for excessive business expenses: luxury treats for employees and customers, such as expensive trips and tickets and meals and gifts. Also corporate jet travel. Impose some fairly low per-person annual limit on deductibility of these expenditures.


  4. Court-imposed fines (civil or criminal) against a company are tax-deductible as a business expense; this shouldn't be.


  5. Offshore tax havens. I don't quite understand this one: apparently corporations aren't taxed on income earned in another country, or by a subsidiary in another country, or earned through patents they own in another country ? As an individual USA citizen, I pay USA federal income tax on my worldwide income. Corporations should too.


  6. Nuclear power and fossil-fuel power subsidies. We should be encouraging renewable energy, and discouraging pollution. Nuclear power plants would not be economically viable without government subsidies. Coal-powered plants might not be economically viable if they had to pay for their pollution.


  7. Hiding assets inside trusts or other vehicles.


  8. more ...




From Revenge Is blog:
"The corporate tax loopholes President Obama most often refers to are deductions for corporate jets, the carried interest rule, oil company special deductions, the ethanol credit and the LIFO method of accounting for inventory."

"10 Giant Loopholes That Businesses Use To Dodge Taxes" by Sarah Stodola
Al Jazeera's "The US tax trick"




Heard on a radio show: VAT is similar to a retail sales tax, but VAT is collected in stages as the materials and products flow from producers to consumer. One advantage: if the final transaction (sale to consumer) is done in a black market to avoid taxes, most of the VAT has been collected already and only the last bit is avoided, so tax avoidance is a little harder.



We allow deduction of mortgage interest paid, to encourage home ownership. But that deduction really rewards home-related debt. The deduction should be based on the owner's equity in the home (capped at some level such as $500K), instead of the size of the interest payments on the debt. If we stay with the income tax, at least we should make this change.
(Apparently there is a similar issue in business taxation: Matthew Yglesias' "The Large Benefits Of Reducing The Tax Bias For Debt")



We could make filing an individual income tax return much easier and more accurate: have the IRS generate the first draft of your tax return, online, and then you modify it (or not) and file it.
Matthew Yglesias' "The IRS Should File Your Taxes for You" (and the comments are full of people from other countries who do it and like it)






Perhaps there should be an individual assets (wealth) tax, set at some very high level ($5 million or more). If you own that much in assets, you have to file an individual assets statement each year, and pay 1% tax on that. (Unfortunately, that removes some of the privacy gain we would get by changing from individual income tax to retail consumption tax.)

"How to fix income/wealth inequality" section of my "US Policy" page






I have to tell my "IRS" story:

I was about 24 years old, had moved out to an apartment, but still had a lot of mail going to the parent's house. One day, Dad called me at my office at Bell Labs. Said he'd gotten an audit notice from IRS. He consulted his accountant, had to gather up all his stuff and go down to IRS office, got there for the appointment, was nervous. Started the audit, and the auditor said "Okay, let's just confirm, you're William A. Dietrich, Jr, right ?" And Dad said "No ! That's my son ! Go get him !" And Dad's laughing as he tells me this on the phone.

But I had the last laugh: it was for the tax year I had been at school on Bell Lab's nickel. I'd screwed up my return (actually, AT&T gave us 20-page printouts about our pay that no one, including the IRS auditor, could figure out). Anyway, at the end of the audit, the guy said "okay, we can't figure out what AT&T reported, YOU go argue with them, but we're accepting their numbers and so you got this and this wrong. BUT, we've recently ruled that pay for you guys when Bell Labs was sending you to school was not income, but a SCHOLARSHIP, thus non-taxable, so here's a big refund !"

And I immediately got on the internet (circa 1983; not like it is today), and told the other 400 people who'd been on the same "scholarship" deal about this, and they got refunds too. I was a hero ! (IRS changed its mind back a few years later, but didn't come back to get the money back.)



Obama and top income tax rates









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