A Letter to Herman Cain

Herman Cain currently stands out as the best candidate for the Republican presidential contender in 2012. Unfortunately, he's been bamboozled by the FairTax group. So, I wrote the following letter to Herman Cain to consider an alternative approach to tax reform.

Dear Mr. Cain,

The FairTax is a bad idea.

Making the retailer the tax collector will essentially destroy all of the small independent retailers in the nation leaving only mega-marts and chain stores. Even worse, the "prebate" is an entitlement. To pay this entitlement, one must collect more taxes than needed.

A better solution is to create a personalized consumption tax. My tax proposal is as follows.

All income goes into a savings account.

People pay taxes when they transfer money from their savings account to their spending account for consumption.

This design makes banks the tax collector. People pay their taxes when they plan to spend money. As such, it encourages people to develop a budget and better spending habits.

The tax rate would be progressive depending on the taxpayer's net worth and yearly income. The progressive tax rate will take into account prior income, current assets and current income.

The system creates a consumption tax without burdening retailers. For that matter, it removes the tax collecting burden from employers.

Tax collection would take place at the bank.

This change does not create an onerous burden for banks because banks already handle all of the transactions related to taxes.

The tax collection process is extremely efficient. Taxes would be calculated and collected when people transfer money from savings to spending. People would realize the full effect of their taxes when they prepare to spend money and would not need to file a tax return.

People only touch taxes once at the moment when they budget money for consumption.

This is much more deliberative than the FairTax.

Imagine that your paycheck was $1000 and your tax rate was 20%. Your employer would deposit $1000 in your account. The account would show only $800 available for spending. Let's say you decided to spend half of your money. You would withdraw $500.00 from the account. $100.00 would go to taxes, and you would have $400.00 for spending.

The Fair Tax, the Income Tax and Flat Tax have people revisiting their tax decisions multiple times during the year. My proposal has people realizing the impact of tax related decisions at the moment that they make the decision.

I called my program the "Object Oriented Tax." The system taxes an abstract object between income and consumption. I chose this strange name because I am a computer programmer and programmers use strange terminology because we are all a bunch of geeks.

Geeky terminology aside, the idea of taxing an abstract object between income and consumption allows us to combine the best of a progressive income tax with the best of a consumption tax.

The abstract design lets us apply taxes to assets other than bank accounts. Essentially, all assets have a tax attribute set to either pre-tax or post-tax. One pays taxes to change the attribute. This structure lets us replace all the complex deductions in the current tax code by assigning a tax attributes to purchases. For example, a small business could invest in new equipment with pretax dollars. The equipment would have a pretax attribute. The business would pay a tax to transfer the equipment to personal use. (No more complex depreciation schedules).

The OOT eliminates capital gains tax. Investors could buy and sell investments without considering tax implications. They would pay taxes when they transfer money to a spending account for consumption.

NOTE: The progressive tax rate considers both income and net worth. If a person had millions in investments, he would pay taxes at the highest rate regardless of reported income. Warren Buffet would pay a higher tax rate than his secretary even though Mr. Buffet chose to live modestly.

Inheritance tax becomes very interesting. Heirs would inherit the tax status of assets along with the asset.

For example, the family farm might be a pre-tax asset. The heirs would inherit the farm as a pre-tax asset. If the heirs sold the farm, the money from the sale would go into pre-tax accounts. They would pay taxes when they squandered their inheritance.

The heirs would inherit post tax assets as post tax assets. This eliminates double taxation.

NOTE: Some post tax assets, such as antiques, increase in value. If the heirs chose to sell post tax assets, they would need to pay a tax on the increased value of the assets. A person could inherit the family Rembrandt. They could keep the painting at no cost as an heirloom. However, they would have to deposit the gains from selling the painting into a pre-tax account.

The OOT allows heirs to inherit the family fortune intact. They would end up paying taxes if they sold the assets to consume other things.

The idea of taxing an abstract object between income and consumption allows us to create a sophisticated tax code that is fair and easy to implement.

The design allows people to pay their taxes when they make financial decisions.

The abstract design allows us to build a robust system that follows each step in our decision making process.

I can inherit the family farm intact. When I choose to sell the family farm, the proceeds go into a pre-tax account. When I choose to squander the money on billiards, I pay the tax.

I am a system engineer. I designed the OOT to encapsulate and extend the current tax code. This allows us to transition from an income tax to a consumption tax with minimal disruption. Businesses set up to collect their employees taxes can continue to do so. Employees would get their paycheck as post tax money.

Employees would still file tax returns to help reconcile differences between withholdings and what they actually owe.

Because the OOT encapsulates the income tax system, people can gradually transition to it over several years. This abstract design process gives people to move to the new system at their leisure.

Both the Flat Tax and Fair Tax create a sudden and major disruption in the way people handle their expenses.

Proponents of the FairTax are correct in wanting to transition from an income to a consumption tax. The OOT would create a smooth transition from an income tax to a consumption tax with a minimal disruption.

Using modern object oriented design techniques would allow us to create a more robust tax system in which taxes were collected at the bank when we make our spending decisions.

I am happy to see new faces on the political scene. Washington needs new thinking. Your decision to replace the income tax with a consumption tax is the type of leadership we need in Washington. However, I hope you take time to consider alternative methods of accomplishing this goal than the FairTax.