Taxation

[Kulindahr]

Obviously no total foundation-change in the tax system can be done all at once. We took years to get into this mess; it'll take years to get out. But some things are do-able right off:

1. Income: take all that capital gains, interest, and whatever other special categories there are at the moment, and just call it all income, and throw it together in one figure. Exempt only interest on saving accounts, on balances up to the FDIC-insured maximum. (Scholarships, grants, etc. wouldn't be income because they don't result from engaging in economic activity.)

2. The poor: Friedman had the right idea. Welfare is tangled and messy, the minimum wage is sloppy, and all those added assistance programs are clumsy. Replace it all with a (I'm changing the name to distinguish my notion) reverse income tax that would guarantee everyone a minimum amount to live on, plus added amounts for dependents (I'd limit it to three kids). To allow for economic variations within the country, work in a housing allowance that varies by median housing costs. Then tell all those bureaucrats currently warming chairs at the taxpayers' expense to engage in something productive, instead. The money available to "pay all those poor people" would actually be higher than at present with no other change needed, because the system would be simpler and eliminate a lot of $80,000/yr government jobs.

3. Health care. Do a Cato Institute: make premiums a tax credit. I'd throw in the deductible for a full physical annually as well -- a doctor friend of mine told me of a study that concluded that if every American got a full physical annually, it would catch enough health problems early to cut health care costs by on the order of 20% (that seems optimistic to me, but if it was even half that...!).


BTW: ANY tax on corporations makes our good less competitive. If it were up to me, I wouldn't tax any corporations for business done in North America. Why? Because in reality you can't tax a corporation, you can only tax its customers. If a company has customers overseas, tax that income, but don't tax domestic income.

 

[Kulindahr]

A thought which came to me too late to use the edit function:


I hate tax brackets. Smooth functions are nicer. If we're going to have a progressive tax system, replace the silly tables with a simple function that can be punched in on a calculator. It's child's play for a decent mathematician to design an equation for a curve that matches the current structure, and then to adjust it as politicians might wish. We all know (or should!) the standard equation for a line, y = mx + b -- that would give a linear "curve", taxing steadily higher incomes at steadily higher rates (with a slope of zero being a flat tax). Fancier equations would give variations, but the main point is that instead of people sweating whether they're going to jump a tax bracket, the tax rate would change as the income did, smoothly, not in jumps. As for filing taxes, instead of pages of "look it up", there could be a single page with the equation on it, with blanks to fill in from lines in the tax form, then punch it into a calculator and presto! a figure emerges.

Think of the trees to be saved by not having to print millions of sets of 20-page tax tables!
... and the space saved in landfills....

 

[naked gent]

Replace it all with a (I'm changing the name to distinguish my notion) reverse income tax that would guarantee everyone a minimum amount to live on, plus added amounts for dependents (I'd limit it to three kids). To allow for economic variations within the country, work in a housing allowance that varies by median housing costs.

Kul Knowing your views on FDR's policies and their eventual effects and your party affiliation (which I share) I'm surprised by this post. George McGovern allusions aside I give you credit for attempting to come up with a better tax system while being more pragmatic than ideological.

Having read though this thread I just have a couple points to make.

First I just want to say that I have always done my own taxes and I've been self-employed since my second yr out of college. I mention this because it effects how I view the tax system. My effective federal tax rate is 25% plus 15.3% for SS medicare and another 5.3% state tax I pay. That adds up to 46.6%. I don't include any property or sales taxes in this because if that number rises above 50% I might just start to question just how much liberty I have.

I pay taxes with the expectation that goverment won't do much for me and in the hope that they won't do anything to me.

I have no problem with a progressive tax rate because I believe the more money you make the more you benefit from the construction of our economic system and hence should be more willing to support it. Its not written anywhere that free markets are the way it will always be.

I'm against a flat tax and it seems to me those of you who support it do so because it's "fair" and a good tax system should be fair. I think another quality of a good tax system is that it produces a stable society. If my choice is between a fair tax system with an unstable society or a unfair tax system with a more stable society I'm picking the latter.

In the last century capatialism proved itself a far better economic system than communism/socialism. It simply produces far more with the same resources and produces a higher standard of living but saddly it also results of great concentration of wealth. Personally I find it tragic that the economic stratification of a meritocracy looks just like the economic stratification of an aristocracy.

Not only are the rich getting richer in this country but the same thing is happening in countires like China and India which are becoming more capatialist. I think this is a bad occurance and it needs to be addressed for capatialism to be as prevalent at the end of this century as it is at the beginning.

While I don't think this is a problem that goverments can solve either through the tax system or in any other way I do believe that should a flat tax exasperate the gap it should be avoided.

 

[drhladnjak]

I hate tax brackets. Smooth functions are nicer. If we're going to have a progressive tax system, replace the silly tables with a simple function that can be punched in on a calculator. It's child's play for a decent mathematician to design an equation for a curve that matches the current structure, and then to adjust it as politicians might wish. We all know (or should!) the standard equation for a line, y = mx + b -- that would give a linear "curve", taxing steadily higher incomes at steadily higher rates (with a slope of zero being a flat tax). Fancier equations would give variations, but the main point is that instead of people sweating whether they're going to jump a tax bracket, the tax rate would change as the income did, smoothly, not in jumps. As for filing taxes, instead of pages of "look it up", there could be a single page with the equation on it, with blanks to fill in from lines in the tax form, then punch it into a calculator and presto! a figure emerges.

Think of the trees to be saved by not having to print millions of sets of 20-page tax tables!
... and the space saved in landfills....

These functions are actually pretty simple. People just don't understand tax brackets well enough to realize that. Here's what they are (where I is your taxable income):

if I is between $0 to $7,550: 0.1 x I
if I is between $7,551 to $30,650: 755 + 0.15 x (I - 7550)
if I is between $30,651 to $74,200: 4220 + 0.25 x (I - 30650)
if I is between $74,201 to $154,800: 15107.50 + 0.28 x (I - 74200)
if I is between from $154,801 to $336,550: 37565.50 + 0.33 x (I - 154800)
if I is between $336,551 and above: 97524.67 + 0.35 x (I - 336550)

We only print tax tables because a lot of people are really bad at math to the point where they can't even use a calculator.

If you graph these functions over their respective ranges (dollars paid on the y-axis, taxable income on the x-axis), you'll notice that they are C0 continuous. That means that there are no jumps, although the slope of the line does change abruptly at each tax bracket.

It's a common misconception that when you enter a higher tax bracket that you pay a bunch more taxes. Everybody pays 10% on the first $7,550--the student with a part time job and Bill Gates. Say you made $7550 one year and $7560 the next, thereby crossing you from the 10% bracket to the 15% bracket. Your tax does not go from $755 ($7550 x 10%) to $1134 ($7560 x 15%) but rather from $755 to $756.50 ($7550 x 10% + $10 x 15%).

 

[Kulindahr]

Kul Knowing your views on FDR's policies and their eventual effects and your party affiliation (which I share) I'm surprised by this post. George McGovern allusions aside I give you credit for attempting to come up with a better tax system while being more pragmatic than ideological.

Too many Libertarians are revolutionists; they want everything changed overnight. Also too many focus on taxes as the big problem with liberty -- while they are a problem, they are hardly the most significant, and furthermore we don't have a society so structured as to be able to go to a truly libertarian tax system at this point (with one exception, but it's too foreign to most people to even consider).
Americans began losing their liberty in such small steps they didn't notice, or didn't care, if they did. Liberty has to be restored in a similar fashion -- small steps that don't cause chaos.

First I just want to say that I have always done my own taxes and I've been self-employed since my second yr out of college. I mention this because it effects how I view the tax system. My effective federal tax rate is 25% plus 15.3% for SS medicare and another 5.3% state tax I pay. That adds up to 46.6%. I don't include any property or sales taxes in this because if that number rises above 50% I might just start to question just how much liberty I have.

In world history class the definition of serfdom was that the government took a third or more of your income. We passed that a long time ago.
Oh -- don't forget the less visible taxes you pay all the time, like gas tax, motel/hotel tax, etc. Throw them all in, with those you're not including, and the typical self-employed person is past the 50% mark.

I have no problem with a progressive tax rate because I believe the more money you make the more you benefit from the construction of our economic system and hence should be more willing to support it. Its not written anywhere that free markets are the way it will always be.

That principle is not foreign to liberty; the Founding Fathers would have been quite comfortable with it, though likely not with an income tax. When ports wanted forts to protect their harbors, it was the wealthy who were required to contribute, on the principle that those below a certain level of prosperity could just leave in case of an attack, and either relocate or return without significant loss of standard of living, while the wealthy stood to suffer a great deal. That's similar to bridge tolls in the Middle Ages, which attempted to assess the fee by weight, in indirect ways, on the principle that if you're hauling a great deal, the bridge is of more value to you.

In the last century capatialism proved itself a far better economic system than communism/socialism. It simply produces far more with the same resources and produces a higher standard of living but saddly it also results of great concentration of wealth. Personally I find it tragic that the economic stratification of a meritocracy looks just like the economic stratification of an aristocracy.

Capitalism proved itself better because it operates in line with the actual laws of economics. The great concentrations of wealth we've been seeing in the last thirty years or so hasn't been due to capitalism per se, however, but comes from government meddling in the market. Harry Browne put out a good book that shows how every government regulatory board ever established has ended up serving the interests of the very industry it was supposed to regulate, a phenomenon that leads to the concentration of wealth. Hidden government monopolies don't help, either (that's one serious contributor to high medical costs, BTW).

Not only are the rich getting richer in this country but the same thing is happening in countires like China and India which are becoming more capatialist. I think this is a bad occurance and it needs to be addressed for capatialism to be as prevalent at the end of this century as it is at the beginning.

While I don't think this is a problem that goverments can solve either through the tax system or in any other way I do believe that should a flat tax exasperate the gap it should be avoided.

China and India are in a different economic stage than the U.S. is, so the comparison between them lacks soundness. The wealth there is more like that of the U.S.' "robber baron" phase, ours is the result of government meddling. Deeper, they're similar again, though, because in both cases it isn't fair capitalism -- in the "robber baron" stage, government isn't even-handed due to bribery and such; in the more bureaucratic, highly-regulated stage, it's not so blatant.

One way governments can deal with it is to call every unit of currency that comes to someone due to economic activity "income", whether wages, interest, dividends, capital gains, whatever. That's if you're going to use an income tax; there are better ways, but I doubt society would accept them.

 

[Kulindahr]

The problems with the negative income tax, I'm guessing, came from the mesh with the current system, but I'd have to look at it. Lack of incentive to work and such could be gotten around, as could any with the states -- which is where it really ought to be anyway; the federal government's involvement should be at the level of helping with inequities between the states.

As for the health care situation, you just do like with cars: require insurance.
The companies would figure out how to deal with that, just as they did with auto insurance (which wasn't ideal, but it works, sort of).