Friday, June 14, 2013

Tax Complications

The Flat Tax, Fair Tax and 9-9-9 Tax all start with the assumption that the complexity of taxation comes from the progressive tax rate.

Through the years, I've learned that the complexity of taxation comes from the mind numbing process of accumulating the information to calculate my taxes.

Each year I spend a full day going through all of my receipts to calculate my taxes. Rereading and classify receipts is difficult. The process of looking up the tax rate and calculating taxes is the easiest part of the job.

The "object tax" starts with the assumption that the most difficult part of the tax system is gathering information. The goal of the tax is to simplify the accounting problem.

The Object Tax is named for the design technique behind the smartphone. A smartphone is an extremely complex device attached to a mind-boggling complex network. Despite all this complexity, a well designed smart phone is extremely easy to use.

With my smartphone, I can swipe my finger one way to play music. I swipe it another way to make a phone call. When I'm bored, I can play Angry Birds or Tweet on Twitter.

A smartphone is a complex device that is intuitive and easy to use.

This is the magic of Object Design. Object Design allows people to create intuitive interfaces for complex things.

The goal of the Object Tax is to create an intuitive interface for collecting taxes.

The government has a poor track record on designing the interface for the tax system.

The Object Tax faces this challenge by separating the tax code from the interface used to implement the tax code.

The process starts by creating an abstract model of the tax code that can be implemented as the current income tax or that could be implemented as a service offered by a financial institution.

The abstract model states that all financial objects (salaries, capital gains, interest, inheritance) must be taxed at some point between income and consumption.

The tax can be collected as an income tax. This minimizes disruption.

Financial institutions can offer products that collect taxes at various points between income and consumption.

My favorite implementation comes in the form of a Tax Aware bank account. The Tax Aware bank account works as follows: Your entire paycheck will be deposited into a bank account. You will pay a tax when you withdraw money from the Tax Aware account for spending. If your paycheck was $1,000 and your tax rate 20%. You will pay a $200 tax when you withdraw the money and receive $800.
Tax Aware Accounts can implement the complexities of the current tax code. For example, it can replicated a $3,000 standard deduction by allowing people withdraw the first three grand tax free. It can replicate the charitable deduction by allowing taxpayers to transfer money to a charity's account without paying taxes.

I love the idea of a tax aware account. I would simply deposit all of my income and the bank will calculate my taxes as I withdraw the cash.

Now, I am a poor man of simple tastes. Other financial institutions might come up with even better implementations of the tax code.

This is way object design works. A large number of companies have different ideas about what a smart phone should do. They design different phones and compete in the open market.

The Object Tax makes an abstract model of the current income tax. The tax can be implemented as the income tax (avoiding unnecessary disruption). The tax can also be implemented by third parties.

The Abstract model will require that taxes be paid at some point between income and consumption.

Because people like to avoid taxes, financial institutions will approach the tax by creating implementations of the tax that encourage savings. This will shift the tax from an income tax toward a consumption tax.

The idea of using the same design techniques behind the smartphone to revamp the taxing system is likely to result in a taxation system that is easier to use than the current income tax. It will be easier to implement than the Fair Tax, the Flat Tax or the 9-9-9 Tax.

The complexity of taxation is not the result of the tax rate. The complexity of taxation is inherent in accounting. With the Object Tax, financial firms will compete by creating programs that help people with the complex task of accounting and budgeting. 

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