Monday, June 03, 2013

Taxes + Object Oriented Design

If someone wanted to make a huge impact in the 2013 election, they could contact me and discuss the Object Tax. If a political group developed and pushed this idea, the group would position itself to take a leading role in shaping America's future.

Most tax proposals start with a political objective. The group seeking Tax Reform wants to reduce taxes on their friends and increase taxes on enemies.

The Object Tax is different. The tax proposal is based on a powerful design technique called Object Oriented Design. This proven design technique is used in everything from the iPhone to complex manufacturing processes.

Because the tax is driven by a design technique and not a political objective, the tax will allow Congress to structure a new tax code that fits the political objectives of the nation with minimal economic disruption.

The tax itself is quite simple. The tax starts with a declaration that every financial object has a tax attribute. The attribute has the value of PRETAX or TAXED. When people pay the tax, the object switches from PRETAX to TAXED.

In most cases the object is a bank account.

Most people would experience the following. They would have their entire paycheck deposited into a PRETAX account. They would pay a tax to withdraw money from the account.

This structure would eliminate the need for payroll tax withholdings and it would eliminate the annual tax filing process.

The tax rate can be progressive based upon a person's income and net worth. (NOTE, Warren Buffet would pay taxes at the highest rate even if his declared income for the year is low).

So, let's imagine that your paycheck was $1000 and your tax rate was 20%. The entire thousand dollars would be deposited in your bank account. When you withdraw the money, you would pay a $200 tax and get $800 for spending.

Unlike the FAIR Tax and FLAT Tax. The Object Tax can be implemented with minimal disruption. The first job of the reform is to replicate the entire tax code in the new tax framework. One can replicate the standard deduction by allowing people to withdraw a given amount of money without paying a tax. One can replicate the charitable deduction by allowing people to transfer money to a charity without paying a tax.

Having reproduced the current tax code, the second step is to modify and extend the program to achieve a more balanced tax code.

For example, I would like to replace the regressive Capital Gains Tax with a more progressive tax.

The Capital Gains Tax is problematic because it distorts financial decisions.

Business decisions should be based on changes in the business landscape and not on taxes. When people make investing decisions based on tax implications and not on the financial landscape, they make bad decisions.

Having a low Capital Gains Tax is regressive. It allows investors to earn money at a lower tax rate than workers.

The Object Tax would allow us to eliminate the Capital Gains Tax in a progressive manner.

Remember the tax is account based. Investors will have their stock held in PRETAX account. An investor could sell a stock and buy another without worrying about the tax implications.

Investors will pay a tax at a progressive tax rate when they transfer money out of the PRETAX account for consumption.

Currently, the progressive tax rate is based on annual income. I would modify the rate so that it takes into consideration a person's total equity. An investor with a million dollars in stock would pay at the top rate even if the investor's reported income for the year was low.

The Object Tax solves the problems of inheritance tax.

The Inheritance Tax has two big problems. The first problem is with double taxation. Let's say your parents pay taxes on their income. The family pays a second tax when the children inherit the parent's savings.

A second big problem is that the inheritance tax forces the family to break up equities owned by the parents to pay the tax. If the parents owned a farm, the children would be forced to sell a large chunk of the farm to pay the inheritance tax.

The Object Tax solves this problem. All financial objects have a tax attribute. Objects that are PRETAX could be inherited as PRETAX. Financial objects that are TAXED could be inherited as TAXED.

So, lets say the parents had a farm that was PRETAX and a valued painting that was TAXED. The children would inherit the farm as PRETAX and the painting as TAXED. The children would have to pay the regular progressive tax rate if they sold the farm. The children would only pay taxes on selling the painting if it increased in value.

IN CONCLUSION: The Object Tax is based on the design principles used in system engineering. The design process would allow us to create a new streamlined tax system with minimal disruption.

The robust design techniques of the object tax allows us to encapsulate and extend the current tax code.

The robust design technique allows us to create a new tax system that combines the best of a progressive income tax with the benefits that would come from a consumption based tax.

The tax also allows us to handle tricky tax situations like capital gains in an equitable manner.

I am a computer programmer who loves mathematics and system engineering.

My approach to taxation is to create a system in which all financial objects are taxed once at a progressive tax rate, but nothing is taxed twice.

I hate politics with a passion.
If a politically inclined group were to meet and discuss this design technique, that group would be positioned to have a big impact on tax policy.

I believe that, if we applied the solid design methodology of advanced system engineering to the tax code, we could create a tax system that is more equitable and that raises more taxes at a lower rate than the current broken system

If there is anyone on this planet who is willing to engage in a substantive discussion of tax reform, I would be more than happy to set up a meeting.

I live in Utah. I am a bit cash strapped at the moment, but this state is full of beautiful places and is ideal for holding meetings. If someone were to travel to Utah, I could guarantee they would see some unique and beautiful things.

 BTW, I am not LDS. I am not Republican. I am an Independent with classical liberal leanings.

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