Thursday, June 06, 2013

A Revolution in Personal Finance

A Revolution in Personal Financial Tools

Can we use technologies developed in Silicon Valley to improve our governance?

I believe the answer is "Yes." For example, I believe that we could use Object Technology to improve the tax system.

Currently, the US government uses an income tax system. Many economist would like to transition to a consumption tax. Business leaders want us to eliminate the capital gains tax, while moralists wish us to tax the wealthy at a progressive rate. Inheritance Tax is a mess. Some assets are taxed twice, others not at all.

Object Technology can fix these problems.

The Object Tax is named after a system engineering technology. The method places a tax on an abstract object laying between income and consumption. Taxing an abstract object between income and consumption allows us to create a tax that combines the best of a progressive income tax with a consumption tax.

The tax starts by stating that all financial objects have a tax atribute. This atribute tells us if the object was taxed and the amount of tax collected.

There are many different ways to implement the object tax.

The Object Tax can be implemented as an income tax.

In computer speak, the object tax will encapsulate and extend the current tax code.

This means that we can pass the object tax without requiring companies to change their current payroll procedures. Individuals and companies can switch from the payroll tax to the object tax at their convenience.

Back to the design: The object tax taxes each financial object once between income and consumption. If your employer opts to stay with the payroll taxes, taxes will be collected as a payroll withholding. Employees will continue to file annual tax returns.

The Object Tax extends the current tax structure by allowing employers to deposit employees' paychecks into tax aware bank accounts.

People who take this option will see their entire paycheck deposited into a tax aware bank account. They will pay taxes (at a progressive tax rate) when they withdraw money from their tax aware account.

Let's say you had $1,000 in your tax aware account and your tax rate was 20%. When you withdraw the money, you will pay a tax of $200 and get $800 in cash.

The taxes are now collected on an individual basis at the bank.

The Object Tax encapsulates and extends the current tax code. Employers will have the option of continuing the costly process of payroll tax withholding, or they could choose to substantially cust their payroll costs by depositing paychecks into Tax Aware bank accounts.

Banks compete on the services they provide customers. Wanting to retain current customers and gain new customers will create new budgeting software to process the new Tax Aware accounts.

The magic of Object Technology is that the design principles of Object Technology allows companies to encapsulate and extend a system.

Cellphones are a great example of Object Technology at work. The invention of cellphones did not require the elimination of the wired telephone network. Cellphones encapsulate and extend the functionality of the telephone system. Smartphones add internet functionality to cellphones. Smartphones did not require the destruction of the cellphone network to come into existence. Smartphones encapsulate and extends the functionality of cellphones.

The Object Tax uses this solid and proven technology to encapsulate and extend the income tax.

The Object Tax starts by creating a set of design specifications that encapsulates the design of the income tax, but allows the tax to be implemented by a bank on an account level.

The tax creates a choice. Employers can continue with the costly process of payroll withholdings or the employer could deposit the entire paycheck into a tax aware account.

The Treasury Department would create the basic design specifications for Tax Aware. Banks, wanting competing on costumer service, will add budgeting functionality to the tax aware accounts.

The effect of the Object Tax is that the tax will lead directly to a new generation of advanced budgeting software created and distributed by banks competing on customer service.

The Object Tax will create the following experience for people. They will have their entire paycheck deposited into a tax aware account. They will pay a tax when they transfer money from the tax aware account to other accounts for spending. Banks will offer a slew of new budgetting tools.

The effect is that people will have their money in Tax Aware Accounts in banks competing on providing budgeting tools. Customers will pay a tax when they transfer money from their Tax Aware account to spending accounts. People who never budgeted before will be using a budgeting system that has a built in aversion to wasteful spending.

The Object Tax creates a tax code that encapsulates and extends the income tax. Banks will extend the Object Tax by giving every customer access to advanced budgeting software. The tax leads immediately to a revolution in personal finance.

As promised at the beginning to the post. I need to address capital gains tax and income tax.

Capital Gains Tax is collected when people sell financial assets. Imagine that you had a $1M in stock that you've accumulated over the decades. You want to sell the stock and create a company that will create five jobs. if you sell the stock, you will have to pay a 20% capital gains tax.

If you don't sell the stock, it would continue to apprecieate. The capital gains tax forces you to forgo the dream of starting five new jobs and you keep the stock. The wealth you would have created for you and your community is now gone.

The Capital Gains Tax creates a world in which investors make their decisions on taxes rather than on the production of wealth. This diminishes our communities.

The Object Tax will eliminate the Capital Gains Tax and replaces it with a progressive consumption tax.

An investor can sell an asset and deposit the funds in a tax aware account from which the investor can buy new financial assets. The investor will pay a progressive income tax on any money transferred from the tax aware account to personal income.

The current progressive tax rate is based on annual income. The Object Tax would calculate the progressive rate on a combination of income and net worth. A millionaire would pay at the highest rate even if the millionaire has a low declared income.

The object tax allows investors to buy and sell stock without paying a tax. They will pay a progressive tax on the funds they transfer out of their portfolio for consumption.

Inheritance tax is problematic. Inheritance requires a family to pay a hefty tax when the parents pass away. If the parents are farmers, the children will be forced to break up the farm to pay the hefty inheritance tax.

The Object tax simply states that all financial objects have a tax atribute that records how much tax has been paid. Heirs will inherit the tax atributes of all the items in the estate. If the farm has not been taxed, the heirs will inherit the farm without paying tax. They would pay a tax if they sold the estate and consumed the resources.

IN CONCLUSION: The Object Tax is based on the same proven design techniques used in advanced technologies. The program declares that all financial objects have a tax attribute that must be resolved between income and consumption. The tax can be implemented as a payroll tax or through a system of tax aware accounts.

Taxing an abstract object between income and consumption allows us to combine the best of a progressive income tax with a consumption tax.

The tax can be implemented as a payroll tax (with an annual return) or it can be implemented as a Tax Aware account hosted by your local bank.

The robust design of the Object Tax allows for equitable taxation implemented through a variety of different programs. The Object Tax will lead immediately to a new generation of personal budgeting software that is likely to substantially increase the financial well being of a majority of Americans.

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