Tuesday, April 17, 2012

Taxing Question

I was asked a question about the proposed Object Tax reform.

This reform replaces the current income tax system with direct taxation. With the income tax, your employer pays a withholding tax. You file an annual tax reform.

The Object Tax has your entire paycheck deposited into a tax aware bank account. You pay the tax when you withdraw money from this account.

If my paycheck was $10,000 and my tax rate was 30%, then I would have $10,000 deposited into the account. When I withdraw the money, I would pay $3,000 in taxes and get $7,000 in cash.

The question was: Will people have to pay a tax on every transaction?

The answer is that you only pay taxes when you withdraw money from the inbound tax account. Most people will do this once a pay cycle.

For example, I do all of my spending in a checking account and with a credit card that I pay from my checking account. All of my income goes into a savings account and each month, I transfer money from savings to checking to cover expenses.
So, the object tax essentially forces everyone to go through a budgeting process. I would get my money deposited into my inbound account. I would plan how much money I will spend for the month and pay the tax when I transfer money from my inbound account to my checking account.

Some people like to spend cash. In this case, they would get their paycheck deposited into a tax aware inbound account. They would pay their tax when they withdrew cash for spending.

Our tax code has a bizarre mix of deductions and tax-free expenses. These expenses might come directly from the inbound tax account. For example, you might pay your property tax from the inbound account with no taxes withdrawn.

The super cool thing about this tax is that the system takes the money when people plan on spending. It effectively forces people into developing a personal budgetting processs.

The object tax has the effect of a consumption tax because it forces people to consider taxes when they prepare to spend.

Since the tax is taking place at banks, which are equipped to handle money, this would be the absolute easiest tax in the world to implement.

No comments: