Saturday, June 15, 2013

Business Tax v. Consumption Tax

Many believe that we can achieve positive economic benefits by switching from an income tax to a consumption tax. If properly implemented, a consumption tax would increase savings and personal income while reducing wasteful consumption.

The FairTax is a proposal that replaces the income tax with a national sales tax.

Unfortunately, the FairTax is a poorly designed tax that will not accomplish the desired goal.

The failure of the FairTax becomes obvious when one examines the way money flows through the system.

If you want to understand how a business works, follow the flow of the money.
A sales tax is a taxed placed on sales from a business. The business collects the revenue and the money flows to the state.

A tax is placed on business and paid from the business to the government is a business tax.
In a true consumption tax, the money would flow from the consumer to the state.

This brings up the question: Is is possible to create a true consumption tax?

Why, Yes. As a matter of fact, I just happen to have a model for a true consumer tax sitting in my back pocket.

Decades ago, when I was studying system design, I asked myself if it was possible to apply the same principles used to design the smart phone to the tax problem.

As a thought experiment, I I took the ideas from Object Oriented Design and applied these proven ideas to taxation.

My radical idea is to use the same techniques that made the smartphone to redesign the tax code.

I called my the program "The Object Tax."

The ObjectTax states that all financial objects must be taxed at some point between income and consumption.

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

The project starts by creating an abstract model of the current tax code that can be implemented as an income tax or as a product offered by a bank or financial firm.

The Object Oriented design technique allows us to change the tax system with a minimal amount of disruption.

The tax says that all financial objects will be taxed at a progressive tax rate between income and consumption. Businesses that are heavily invested in the income tax can continue doing what they are doing.

The ObjectTax invites financial firms to create new implementations of the tax.

The government will create an abstract version of the current income tax that can continue to implemented as an income tax.

The government will invite financial firms to create programs that implement the same tax in different ways.

This technique was used to design the cellphone. The cellphone took the functionality of a telephone and extended it. The invention of the cellphone did not require a destruction of the telephone system.

The smartphone took the basic functionality of a cellphone and extended it. The invention of the smartphone did not require the destruction of the cellphone network.

Object Technology allows designers to extend existing systems with a minimal amount of disruption.

The fact that you can call a smart phone from a telephone shows that this is a proven design technology.

I am not pursuing some hair-brained scheme. I am using a solid design technique with proven results.

So the ObjectTax can be implemented as an income tax. The object tax can be implemented in new wasy by financial firms. For example a bank can implement the program as a Tax Aware Account.

A Tax Aware Account. works as follows: Workers will have their entire paycheck deposited into a Tax Aware Account. They will pay a tax to withdraw money from the account.

Lets say Bob is paid $1000. This money goes into a Tax Aware Account. When Bob withdraws the tax, the tax aware account will look up Bob's progressive tax rate. Let's say the rate is 20%. Bob's tax aware account will charge Bob a $200 tax. Bob will get $800 for his night on the town.

The tax takes place at the bank. The money flows from Bob Tax Aware Account to the government.

The Tax Aware Account gives Bob the ability to decide when to withdraw the money and pay the tax. Bob might only need $400. In which case he would withdraw $500, pay a $100 tax and leave $500 in savings.

The Tax Aware Account is a consumption tax in its purist form. People pay the tax at the money they decide to consume the money. We know it is a consumption tax because the money flows from the consumer to the government.

With this true consumption tax on the table, we can compare it to the Fair Tax.

The Fair Tax is a Sales Tax directly levied on business. Businesses are forced to collect. The money for the tax flows from the business to the government.

Anyone who has studied mathematics and logic know that there is a profound difference between a direct action and an indirect action.

Because the Fair Tax is placed directly on a business, the Fair Tax places an immediate negative pressure on the business.

Consumers will experience the FairTax indirectly as a massive price increase.

Unlike a true consumption tax, the FairTax does not directly challenge consumers with a choice of spending or saving. Consumers will simply see the Fair Tax as a massive increase in taxes.

As the history of inflation show, people respond to price increase erratically.

Don't you see?

The flow of the money determines the effect of the tax and not the action that triggers the tax.

The ObjectTax is a true consumption tax. The money flows directly from the consumer to the state. This creates a direct incentive to save. The Object Tax has indirect effects on business.

The Fair Tax is a business tax. The tax has a direct and immediate effect on business. Any effect on the amount of savings is indirect.

This is basic logic. A tax placed on business, and collected from business is a business tax.

A tax placed on consumption and collected from consumers is a consumption tax.

The FairTax is a business tax. It will have direct and immediate consequence on business.

Any affect on savings is indirect.

The ObjectTax is a true consumption tax. The money flows from the consumer to the government. The tax has an immediate and direct impact on savings. The impact on business is indirect.

To add insult to injury. The FairTax promises to be one of the must disruptive taxes ever imposed.

The FairTax will burden businesses with a massive tax increase. Businesses that make a mistake in the implementation of the tax will be forced out of businesses.

Consumers will see price increases that directly diminish their quality of living.

The ObjectTax, in contrast, uses design techniques which would allow tax reform to tax place with a minimal amount of disruption.

It uses the same design techniques that Steve Jobs used to create the iPhone.

The iPhone was designed to extend the existing cellphone network.

The ObjectTax uses design techniques that allow it to be implemented with a minimal amount of disruption.
The FairTax is a massively disruptive tax. We will place a massive new tax on business that will cause a world of hurt.  Thousands of businesses will immediately fail.

The FairTax is a disruptive tax that is apt to have negative effects on business.

If you are with the Freedom Movement, I beg you, please stop supporting the FairTax. It is a bad design.

We can and should do better.

With just a little insight and imagination the freedom movement could come up with tax plans that blow the FairTax Away.

A proper tax design should start by realizing that the flow of the money that determines the effect of the tax.

A sales tax is a business tax. The FairTax directly suppresses business. We know this because the money flows from the business to the state.

The ObjectTax is a true consumption tax. We know this because the money flows from the consumer to the state the moment a taxpayer decides to transfer money from savings for consumption.

If the FairTax was a great idea, it would have won the day in 2012. It lost. Let's come up with something better.


Leila Peterson said...

As far as I am concerned, I would absolutely not trust the government far enough to allow my entire paycheck to be deposited in ANY bank. And there isn't any bank that I would trust to "hold" my money for me even while I'm alive, much less after I'm dead and my dependents needed access to it. In fact, I am a firm believer in Jefferson's statement, "I believe that banking institutions are more dangerous to our liberties than standing armies." And, I'm sorry to say, that goes DOUBLE for our government. It IS a good idea to reform the system without causing disruption--in most cases--but the IRS NEEDS disruption. Theirs is a case of a government agency gone absolutely INSANE and they need to be abolished and replaced with the least disruptive system available.

y-intercept said...

Thanks for the comment.

There is a good reason that I call the reform "The Object Tax" and not "An Account Tax."

The program taxes "financial objects." The financial objects could be silver rounds or goods held for barter.

The term "account" is somewhat abstract as well. An account is simply a collection of financial objects.

While I figure most people would use bank accounts, the Object Tax does not assume that financial objects are bank accounts.

One of the criteria I want to set for the tax is that it should be designed so that people who work with alternate currencies (such as the bitcoin) or who engage in barter can use the system.

BTW: I should point out that if you received a paycheck, the money is entrusted to a bank until the money is cashed and put into another equity.

The abstract definition of the tax will allow it to encompass a wider variety of life styles than the current tax.

The reason I use such a bizarre name is that the Object Tax creates a tax code that can be implemented as the current withholding system. It can be implemented as a system of Tax Aware Accounts hosted by a bank or as by other certified third parties.