There is one really good thing about the income tax:
The income tax is a personal tax. The tax confronts taxpayers directly with a portion of the money the government takes away from them each year.
The Fair Tax is a big tax placed against merchants. The FAIR tax will make consumers despise the small businesses saddled with collecting the tax. They won't associate the tax with excessive government.
A personal tax allows the government to set a personal progressive tax rate.
The ideal tax structure would be a personal tax that taxes consumption.
I developed a program called the "Object Tax." (The tax uses ideas from Object Oriented Design).
This design taxes an abstract object between income and consumption. Using advance design techniques allows us to combine the best part of the income tax with a consumption tax.
The tax structure is easy. All financial object have a tax attribute of "Pre-Taxed" or "Taxed." The tax is easy to implement.
Your paycheck will go into a pre-tax bank account. You will pay a tax at your personalized tax rate when you go to spend the money. The personal tax rate would be based on a combination of your estimated net worth and yearly income.
So, if I get paid $1,000 and my tax rate is 10%, then I would get only $900 when I withdrew the funds.
In other words, one pays the tax when transferring money from a pre-taxed account to a taxed-account for spending. People will pay taxes when they do their budgetting. This program does a great job raising awareness about the amount of money government takes.
The object tax eliminates capital gains tax. Investments will exist in a pre-tax account. Investors would pay a tax when they transfer money from their investment account to their spending account. This allows us to sock rich investors will a high progressive tax without adversely affecting investment decisions.
Inheritance tax would be as follows: Pre-taxed items would be inherited into pre-taxed accounts. Taxed items would be inherited as taxed items.
This way one can inherit the farm without breaking it up. It also allows people to inherit all the heirlooms without a lot of tax complications. The government will collect money if the heirs sell the family farm.
The Object Tax assures that all items will be taxed once at a personalized rate. The program also avoids double taxation which happens with Herman Cain's 999 tax.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Friday, September 23, 2011
Friday, May 06, 2011
A Letter to Herman Cain
Herman Cain currently stands out as the best candidate for the Republican presidential contender in 2012. Unfortunately, he's been bamboozled by the FairTax group. So, I wrote the following letter to Herman Cain to consider an alternative approach to tax reform.
Dear Mr. Cain,
The FairTax is a bad idea.
Making the retailer the tax collector will essentially destroy all of the small independent retailers in the nation leaving only mega-marts and chain stores. Even worse, the "prebate" is an entitlement. To pay this entitlement, one must collect more taxes than needed.
A better solution is to create a personalized consumption tax. My tax proposal is as follows.
All income goes into a savings account.
People pay taxes when they transfer money from their savings account to their spending account for consumption.
This design makes banks the tax collector. People pay their taxes when they plan to spend money. As such, it encourages people to develop a budget and better spending habits.
The tax rate would be progressive depending on the taxpayer's net worth and yearly income. The progressive tax rate will take into account prior income, current assets and current income.
The system creates a consumption tax without burdening retailers. For that matter, it removes the tax collecting burden from employers.
Tax collection would take place at the bank.
This change does not create an onerous burden for banks because banks already handle all of the transactions related to taxes.
The tax collection process is extremely efficient. Taxes would be calculated and collected when people transfer money from savings to spending. People would realize the full effect of their taxes when they prepare to spend money and would not need to file a tax return.
People only touch taxes once at the moment when they budget money for consumption.
This is much more deliberative than the FairTax.
Imagine that your paycheck was $1000 and your tax rate was 20%. Your employer would deposit $1000 in your account. The account would show only $800 available for spending. Let's say you decided to spend half of your money. You would withdraw $500.00 from the account. $100.00 would go to taxes, and you would have $400.00 for spending.
The Fair Tax, the Income Tax and Flat Tax have people revisiting their tax decisions multiple times during the year. My proposal has people realizing the impact of tax related decisions at the moment that they make the decision.
I called my program the "Object Oriented Tax." The system taxes an abstract object between income and consumption. I chose this strange name because I am a computer programmer and programmers use strange terminology because we are all a bunch of geeks.
Geeky terminology aside, the idea of taxing an abstract object between income and consumption allows us to combine the best of a progressive income tax with the best of a consumption tax.
The abstract design lets us apply taxes to assets other than bank accounts. Essentially, all assets have a tax attribute set to either pre-tax or post-tax. One pays taxes to change the attribute. This structure lets us replace all the complex deductions in the current tax code by assigning a tax attributes to purchases. For example, a small business could invest in new equipment with pretax dollars. The equipment would have a pretax attribute. The business would pay a tax to transfer the equipment to personal use. (No more complex depreciation schedules).
The OOT eliminates capital gains tax. Investors could buy and sell investments without considering tax implications. They would pay taxes when they transfer money to a spending account for consumption.
NOTE: The progressive tax rate considers both income and net worth. If a person had millions in investments, he would pay taxes at the highest rate regardless of reported income. Warren Buffet would pay a higher tax rate than his secretary even though Mr. Buffet chose to live modestly.
Inheritance tax becomes very interesting. Heirs would inherit the tax status of assets along with the asset.
For example, the family farm might be a pre-tax asset. The heirs would inherit the farm as a pre-tax asset. If the heirs sold the farm, the money from the sale would go into pre-tax accounts. They would pay taxes when they squandered their inheritance.
The heirs would inherit post tax assets as post tax assets. This eliminates double taxation.
NOTE: Some post tax assets, such as antiques, increase in value. If the heirs chose to sell post tax assets, they would need to pay a tax on the increased value of the assets. A person could inherit the family Rembrandt. They could keep the painting at no cost as an heirloom. However, they would have to deposit the gains from selling the painting into a pre-tax account.
The OOT allows heirs to inherit the family fortune intact. They would end up paying taxes if they sold the assets to consume other things.
The idea of taxing an abstract object between income and consumption allows us to create a sophisticated tax code that is fair and easy to implement.
The design allows people to pay their taxes when they make financial decisions.
The abstract design allows us to build a robust system that follows each step in our decision making process.
I can inherit the family farm intact. When I choose to sell the family farm, the proceeds go into a pre-tax account. When I choose to squander the money on billiards, I pay the tax.
I am a system engineer. I designed the OOT to encapsulate and extend the current tax code. This allows us to transition from an income tax to a consumption tax with minimal disruption. Businesses set up to collect their employees taxes can continue to do so. Employees would get their paycheck as post tax money.
Employees would still file tax returns to help reconcile differences between withholdings and what they actually owe.
Because the OOT encapsulates the income tax system, people can gradually transition to it over several years. This abstract design process gives people to move to the new system at their leisure.
Both the Flat Tax and Fair Tax create a sudden and major disruption in the way people handle their expenses.
Proponents of the FairTax are correct in wanting to transition from an income to a consumption tax. The OOT would create a smooth transition from an income tax to a consumption tax with a minimal disruption.
Using modern object oriented design techniques would allow us to create a more robust tax system in which taxes were collected at the bank when we make our spending decisions.
I am happy to see new faces on the political scene. Washington needs new thinking. Your decision to replace the income tax with a consumption tax is the type of leadership we need in Washington. However, I hope you take time to consider alternative methods of accomplishing this goal than the FairTax.
Dear Mr. Cain,
The FairTax is a bad idea.
Making the retailer the tax collector will essentially destroy all of the small independent retailers in the nation leaving only mega-marts and chain stores. Even worse, the "prebate" is an entitlement. To pay this entitlement, one must collect more taxes than needed.
A better solution is to create a personalized consumption tax. My tax proposal is as follows.
All income goes into a savings account.
People pay taxes when they transfer money from their savings account to their spending account for consumption.
This design makes banks the tax collector. People pay their taxes when they plan to spend money. As such, it encourages people to develop a budget and better spending habits.
The tax rate would be progressive depending on the taxpayer's net worth and yearly income. The progressive tax rate will take into account prior income, current assets and current income.
The system creates a consumption tax without burdening retailers. For that matter, it removes the tax collecting burden from employers.
Tax collection would take place at the bank.
This change does not create an onerous burden for banks because banks already handle all of the transactions related to taxes.
The tax collection process is extremely efficient. Taxes would be calculated and collected when people transfer money from savings to spending. People would realize the full effect of their taxes when they prepare to spend money and would not need to file a tax return.
People only touch taxes once at the moment when they budget money for consumption.
This is much more deliberative than the FairTax.
Imagine that your paycheck was $1000 and your tax rate was 20%. Your employer would deposit $1000 in your account. The account would show only $800 available for spending. Let's say you decided to spend half of your money. You would withdraw $500.00 from the account. $100.00 would go to taxes, and you would have $400.00 for spending.
The Fair Tax, the Income Tax and Flat Tax have people revisiting their tax decisions multiple times during the year. My proposal has people realizing the impact of tax related decisions at the moment that they make the decision.
I called my program the "Object Oriented Tax." The system taxes an abstract object between income and consumption. I chose this strange name because I am a computer programmer and programmers use strange terminology because we are all a bunch of geeks.
Geeky terminology aside, the idea of taxing an abstract object between income and consumption allows us to combine the best of a progressive income tax with the best of a consumption tax.
The abstract design lets us apply taxes to assets other than bank accounts. Essentially, all assets have a tax attribute set to either pre-tax or post-tax. One pays taxes to change the attribute. This structure lets us replace all the complex deductions in the current tax code by assigning a tax attributes to purchases. For example, a small business could invest in new equipment with pretax dollars. The equipment would have a pretax attribute. The business would pay a tax to transfer the equipment to personal use. (No more complex depreciation schedules).
The OOT eliminates capital gains tax. Investors could buy and sell investments without considering tax implications. They would pay taxes when they transfer money to a spending account for consumption.
NOTE: The progressive tax rate considers both income and net worth. If a person had millions in investments, he would pay taxes at the highest rate regardless of reported income. Warren Buffet would pay a higher tax rate than his secretary even though Mr. Buffet chose to live modestly.
Inheritance tax becomes very interesting. Heirs would inherit the tax status of assets along with the asset.
For example, the family farm might be a pre-tax asset. The heirs would inherit the farm as a pre-tax asset. If the heirs sold the farm, the money from the sale would go into pre-tax accounts. They would pay taxes when they squandered their inheritance.
The heirs would inherit post tax assets as post tax assets. This eliminates double taxation.
NOTE: Some post tax assets, such as antiques, increase in value. If the heirs chose to sell post tax assets, they would need to pay a tax on the increased value of the assets. A person could inherit the family Rembrandt. They could keep the painting at no cost as an heirloom. However, they would have to deposit the gains from selling the painting into a pre-tax account.
The OOT allows heirs to inherit the family fortune intact. They would end up paying taxes if they sold the assets to consume other things.
The idea of taxing an abstract object between income and consumption allows us to create a sophisticated tax code that is fair and easy to implement.
The design allows people to pay their taxes when they make financial decisions.
The abstract design allows us to build a robust system that follows each step in our decision making process.
I can inherit the family farm intact. When I choose to sell the family farm, the proceeds go into a pre-tax account. When I choose to squander the money on billiards, I pay the tax.
I am a system engineer. I designed the OOT to encapsulate and extend the current tax code. This allows us to transition from an income tax to a consumption tax with minimal disruption. Businesses set up to collect their employees taxes can continue to do so. Employees would get their paycheck as post tax money.
Employees would still file tax returns to help reconcile differences between withholdings and what they actually owe.
Because the OOT encapsulates the income tax system, people can gradually transition to it over several years. This abstract design process gives people to move to the new system at their leisure.
Both the Flat Tax and Fair Tax create a sudden and major disruption in the way people handle their expenses.
Proponents of the FairTax are correct in wanting to transition from an income to a consumption tax. The OOT would create a smooth transition from an income tax to a consumption tax with a minimal disruption.
Using modern object oriented design techniques would allow us to create a more robust tax system in which taxes were collected at the bank when we make our spending decisions.
I am happy to see new faces on the political scene. Washington needs new thinking. Your decision to replace the income tax with a consumption tax is the type of leadership we need in Washington. However, I hope you take time to consider alternative methods of accomplishing this goal than the FairTax.
Tuesday, April 19, 2011
A Simple Consumption Tax
Taxes tend to discourage the thing taxed. An income tax discourages job growth and a capital gains tax discourages capital improvement.
For this reason, there are many people who would like to change America's tax system from an income tax to a consumption tax.
There is a simple way to do this.
This simple plan has the odd name: "The Object Oriented Tax."
I developed this idea while studying object oriented programming. My goal was to apply system engineering techniques to complex systems like tax collection.
This new system taxes an abstract object between income and consumption. As such, the tax allows designers to combine the best of an income tax with the best of a consumption tax.
Because the OOT taxes an abstract object between income and consumption, it is possible to implement the tax with an minimal amount of disruption.
The tax is surprisingly easy to implement.
In its simplest form, a taxpayer would have a savings account and checking account. All income goes into the savings account tax free. The taxpayer must pay a tax to transfer money from the savings to checking (or to cash).
The OOT is essntially a personal consumption tax.
As it a personal tax, one can easily make it progressive. The state could implement a standard deduction by allowing people to transfer a set amount from savings to checking without tax. It is also possible to use a progressive tax rate.
The OOT makes banks the point of taxation.
This makes a lot of sense. The income tax makes employers the point of taxation. Tax compliance is expensive and reduces demand for labor.
The fairtax makes stores and businesses the point of taxation. Stores and small businesses have problems with compliance and collection.
Banks, by their nature, are set up to handle large amounts of money and extremely large numbers of financial transactions.
Because banks are institutions specifically set up to handle financial transactions, collecting taxes at the bank would have significantly lower compliance costs than either the income tax (where taxes are collected at the place of employment) or the fairtax (where taxes are collected at stores).
The OOT also helps protect your privacy. The income tax invites the government into your place of business to scrutinize your employment. The Fairtax invites the government into stores to scrutinize your purchases. The OOT restricts the government to looking at your bank statements.
One intriguing aspect of the OOT is that it encourages people to develop a budget as part of their day to day life. The tax is not collected at the point of consumption, but at the point when a person prepares for consumption.
This process of preparing for consumption is called budgeting. The OOT would encourage large numbers of people in the lower middle class to start budgeting which would move them into the middle class.
Separating the tax collection from employment would encourage people to develop multiple streams of income ... which would improve the lot of many Americans.
The OOT is a little bit more complex than a simple account tax. As mentioned, the system taxes an abstract object between income and consumption. In the example I gave, the abstract object was the transaction between savings and checking.
The OOT assigns to all financial instruments a tax attribute. This attribute has two states: "pre-tax" and "post-tax." While the system is likely to be used in an accounting system, the OOT goes beyond simple accounting allows people to track the taxation on any object of value.
The OOT has many interesting implication for things like capital gains and inheritance taxes.
The OOT would eliminate the current capital gains tax. People could buy and sell stock or other goods without paying tax. However, they would have to pay tax whenever they transferred money from their investment accounts into a spending account for consumption.
BTW: I noted that the OOT is progressive. I would actually design the trigger so that it considers both income and capital assets. A millionaire would have to pay the high tax rate even if the millionaire had a low income.
The OOT also simplifies inheritance tax. When a person dies, the assessor would determine the tax status of all of the items in the estate.
The heirs would inherit things along with their current tax status.
Assets in a pre-tax state would be inherited into pre-tax accounts. Items in a post tax state would be inherited into a post tax account.
For example, lets say a person had a wide screen TV bought with post tax dollars. The heirs would inherit the TV with no taxes. They could sell the TV with no tax penalty.
Let's say the deceased had a farm. The heirs would inherit the farm into a pre-tax state. If the heirs sold the farm, they would pay taxes.
This structure allows for the continuity between generations without a big tax hit.
There would be some complexity with art collections and antiques. Such items were purchased with post tax dollars but had a substantial financial gains in which case the heirs would need to pay a tax on the difference to maintain their post tax status.
I confess that the name "Object Oriented Tax" is awkward. However, this notion of taxing an abstract object between income and consumption allows the government to develop a robust progressive tax that is easy to implement.
Taxing an abstract object between income and consumption allows the government to develop a fair an
For this reason, there are many people who would like to change America's tax system from an income tax to a consumption tax.
There is a simple way to do this.
This simple plan has the odd name: "The Object Oriented Tax."
I developed this idea while studying object oriented programming. My goal was to apply system engineering techniques to complex systems like tax collection.
This new system taxes an abstract object between income and consumption. As such, the tax allows designers to combine the best of an income tax with the best of a consumption tax.
Because the OOT taxes an abstract object between income and consumption, it is possible to implement the tax with an minimal amount of disruption.
The tax is surprisingly easy to implement.
In its simplest form, a taxpayer would have a savings account and checking account. All income goes into the savings account tax free. The taxpayer must pay a tax to transfer money from the savings to checking (or to cash).
The OOT is essntially a personal consumption tax.
As it a personal tax, one can easily make it progressive. The state could implement a standard deduction by allowing people to transfer a set amount from savings to checking without tax. It is also possible to use a progressive tax rate.
The OOT makes banks the point of taxation.
This makes a lot of sense. The income tax makes employers the point of taxation. Tax compliance is expensive and reduces demand for labor.
The fairtax makes stores and businesses the point of taxation. Stores and small businesses have problems with compliance and collection.
Banks, by their nature, are set up to handle large amounts of money and extremely large numbers of financial transactions.
Because banks are institutions specifically set up to handle financial transactions, collecting taxes at the bank would have significantly lower compliance costs than either the income tax (where taxes are collected at the place of employment) or the fairtax (where taxes are collected at stores).
The OOT also helps protect your privacy. The income tax invites the government into your place of business to scrutinize your employment. The Fairtax invites the government into stores to scrutinize your purchases. The OOT restricts the government to looking at your bank statements.
One intriguing aspect of the OOT is that it encourages people to develop a budget as part of their day to day life. The tax is not collected at the point of consumption, but at the point when a person prepares for consumption.
This process of preparing for consumption is called budgeting. The OOT would encourage large numbers of people in the lower middle class to start budgeting which would move them into the middle class.
Separating the tax collection from employment would encourage people to develop multiple streams of income ... which would improve the lot of many Americans.
The OOT is a little bit more complex than a simple account tax. As mentioned, the system taxes an abstract object between income and consumption. In the example I gave, the abstract object was the transaction between savings and checking.
The OOT assigns to all financial instruments a tax attribute. This attribute has two states: "pre-tax" and "post-tax." While the system is likely to be used in an accounting system, the OOT goes beyond simple accounting allows people to track the taxation on any object of value.
The OOT has many interesting implication for things like capital gains and inheritance taxes.
The OOT would eliminate the current capital gains tax. People could buy and sell stock or other goods without paying tax. However, they would have to pay tax whenever they transferred money from their investment accounts into a spending account for consumption.
BTW: I noted that the OOT is progressive. I would actually design the trigger so that it considers both income and capital assets. A millionaire would have to pay the high tax rate even if the millionaire had a low income.
The OOT also simplifies inheritance tax. When a person dies, the assessor would determine the tax status of all of the items in the estate.
The heirs would inherit things along with their current tax status.
Assets in a pre-tax state would be inherited into pre-tax accounts. Items in a post tax state would be inherited into a post tax account.
For example, lets say a person had a wide screen TV bought with post tax dollars. The heirs would inherit the TV with no taxes. They could sell the TV with no tax penalty.
Let's say the deceased had a farm. The heirs would inherit the farm into a pre-tax state. If the heirs sold the farm, they would pay taxes.
This structure allows for the continuity between generations without a big tax hit.
There would be some complexity with art collections and antiques. Such items were purchased with post tax dollars but had a substantial financial gains in which case the heirs would need to pay a tax on the difference to maintain their post tax status.
I confess that the name "Object Oriented Tax" is awkward. However, this notion of taxing an abstract object between income and consumption allows the government to develop a robust progressive tax that is easy to implement.
Taxing an abstract object between income and consumption allows the government to develop a fair an
Why the Fairtax is Foul
Conservatives are often a fount of bad ideas. One particularly bad idea in the news is a thing called "The Fair Tax." This tax replaces the income tax with a national sales tax.
The goal of the tax is to replace our income tax with a consumption tax (which is a good idea).
The Fairtax would have the sales tax collected at the point of sale. To make the progressive, the government will send checks to people called "prebates."
Both of these things are really bad.
The prebate is bad for several reasons. The first problem is that one has to collect taxes to pay the prebates. If you are going to pay out a hundred billion dollars in prebates, then you must collect an extra hundred billion in taxes ... taxes which distorts the pricing mechanism. The prebate system will create an extra entitlement in a system drowing in entitlements. Finally, this system where the government writes out rebate checks from money taken from businesses re-inforces the notion that government is good and business is bad.
The really big problem with the Fair Tax is that it turns America's small businesses into the tax collectors. Small businesses already have enough problems. Lumping the responsibility of tax collection on their shoulders will break many small businesses.
Collecting payment is the hardest task of any small business. Making small businesses collect taxes along with their payments is untenable.
FairTax.org defends turning small business into tax collectors with the weak jusification:
The fact that chains have taken over 80% of retail does not eliminate the fact that the tax adds prohibitive costs to the remaining 20% of small business.
As FairTax points out, the compliance costs for collecting taxes from enormous chains is significantly lower than an small mom-and-pop store. The mom-and-pop store will have to absorb this additional burden and will no longer be able to exist.
The fact that gigantic firms already dominates retail does not justify a tax law that will utterly destroy all other stores and small businesses.
The Fairtax will immediately destroy half or more of the remaining independent small businesses in this nation. The cost of complying with the new law will be three to four times higher for a mom-and-pop store than the beloved Wal-Mart. These stores are already marginal. The Fairtax creates a paradigm where they simply cannot exist.
The sales tax system that currently exist in each state already favors big retailers over small.
It once was possible for Americans to start their own little store. This idea that we will turn small business into the nation's tax collector will destroy this dream.
The Fairtax is correct that transitioning from a income tax to a consumption tax is a possitive direction. There are better ways to do this. (Which will be the next post).
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The goal of the tax is to replace our income tax with a consumption tax (which is a good idea).
The Fairtax would have the sales tax collected at the point of sale. To make the progressive, the government will send checks to people called "prebates."
Both of these things are really bad.
The prebate is bad for several reasons. The first problem is that one has to collect taxes to pay the prebates. If you are going to pay out a hundred billion dollars in prebates, then you must collect an extra hundred billion in taxes ... taxes which distorts the pricing mechanism. The prebate system will create an extra entitlement in a system drowing in entitlements. Finally, this system where the government writes out rebate checks from money taken from businesses re-inforces the notion that government is good and business is bad.
The really big problem with the Fair Tax is that it turns America's small businesses into the tax collectors. Small businesses already have enough problems. Lumping the responsibility of tax collection on their shoulders will break many small businesses.
Collecting payment is the hardest task of any small business. Making small businesses collect taxes along with their payments is untenable.
FairTax.org defends turning small business into tax collectors with the weak jusification:
"80 percent of all retail sales now occur at large retail chains like Wal-Mart. The point is oversight will still reside under the Treasury Department but the government's responsibility will be over a far smaller "universe" of tax collection points making compliance oversight far less costly and far more effective than the current system."
The fact that chains have taken over 80% of retail does not eliminate the fact that the tax adds prohibitive costs to the remaining 20% of small business.
As FairTax points out, the compliance costs for collecting taxes from enormous chains is significantly lower than an small mom-and-pop store. The mom-and-pop store will have to absorb this additional burden and will no longer be able to exist.
The fact that gigantic firms already dominates retail does not justify a tax law that will utterly destroy all other stores and small businesses.
The Fairtax will immediately destroy half or more of the remaining independent small businesses in this nation. The cost of complying with the new law will be three to four times higher for a mom-and-pop store than the beloved Wal-Mart. These stores are already marginal. The Fairtax creates a paradigm where they simply cannot exist.
The sales tax system that currently exist in each state already favors big retailers over small.
It once was possible for Americans to start their own little store. This idea that we will turn small business into the nation's tax collector will destroy this dream.
The Fairtax is correct that transitioning from a income tax to a consumption tax is a possitive direction. There are better ways to do this. (Which will be the next post).
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Friday, December 03, 2010
The Challenge of Progressive Taxation
We've heard the sound bites. We all know by now that George Bush caused the recession (though we don't know how or why).
We also know that the Bush Tax Cuts are evil.
Oddly, despite the fact that we have the most progressive president in US history, legislatures are waffling on letting the tax cuts expire.
The BLS reported unemployment at 9.8% today. It would be higher if the BLS was honest in its definition of the unemployment and included those who gave up hunting for a job.
The fear is that higher taxes would cause a further jump in unemployment.
So, despite the fact that vilification of the Bush Tax Cuts is a primary stance of the Obama administration, the government is worried that letting the tax cuts expire would hurt a large number of people.
I am clearly an evil person because I don't blame Bush for the recession. Even worse, I favor the Bush Tax Cuts.
The problem faced by policymakers supporting a progressive tax system is that businesses make their investment decisions based on the highest tax rate.
Even though most small businesses fail to achieve a coveted position of being in the top income bracket, small businesses actually end up making many investment decisions at the top tax rate.
The top tax rate has an adverse affect on small business. There are many small business owners who live a modest life but throw everything into the business. Since their personal finances are tied in with the business, they end up paying the top rate despite a modest lifestyle.
My solution to the progressive tax challenge is to create a new tax system which I called the Object Oriented Tax. This system taxes an abstract object between income and consumption.
Basically, people would have an investment account and a spending account. There would be no taxes on investment related transactions in the transaction account. Taxation would happen when people transferred funds from their investment account into the spending account.
One could set a progressive tax rate based on the size of the investment account.
Warren Buffet would pay a higher tax rate than his secretary because he has a massive amount of investments.
The challenge of progressive taxation is that business decisions are made at the top rate. Taxes have an adverse affect on the very business decisions that generate wealth. Creating a new tax system that taxed an abstract object between income and consumption would simplify investment decisions while preserving a progressive tax.
As it stands, since businesses make investment decisions based on the highest tax rate, I believe the wise course of action is for Obama to ignore the wealth-envy rhetoric of his campaign and extend the Bush Tax Cuts. If we want to continue a progressive tax system, we might consider something like the Object Oriented Tax that cleanly separates investment decisions from taxes and taxes only consumption:
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We also know that the Bush Tax Cuts are evil.
Oddly, despite the fact that we have the most progressive president in US history, legislatures are waffling on letting the tax cuts expire.
The BLS reported unemployment at 9.8% today. It would be higher if the BLS was honest in its definition of the unemployment and included those who gave up hunting for a job.
The fear is that higher taxes would cause a further jump in unemployment.
So, despite the fact that vilification of the Bush Tax Cuts is a primary stance of the Obama administration, the government is worried that letting the tax cuts expire would hurt a large number of people.
I am clearly an evil person because I don't blame Bush for the recession. Even worse, I favor the Bush Tax Cuts.
The problem faced by policymakers supporting a progressive tax system is that businesses make their investment decisions based on the highest tax rate.
Even though most small businesses fail to achieve a coveted position of being in the top income bracket, small businesses actually end up making many investment decisions at the top tax rate.
The top tax rate has an adverse affect on small business. There are many small business owners who live a modest life but throw everything into the business. Since their personal finances are tied in with the business, they end up paying the top rate despite a modest lifestyle.
My solution to the progressive tax challenge is to create a new tax system which I called the Object Oriented Tax. This system taxes an abstract object between income and consumption.
Basically, people would have an investment account and a spending account. There would be no taxes on investment related transactions in the transaction account. Taxation would happen when people transferred funds from their investment account into the spending account.
One could set a progressive tax rate based on the size of the investment account.
Warren Buffet would pay a higher tax rate than his secretary because he has a massive amount of investments.
The challenge of progressive taxation is that business decisions are made at the top rate. Taxes have an adverse affect on the very business decisions that generate wealth. Creating a new tax system that taxed an abstract object between income and consumption would simplify investment decisions while preserving a progressive tax.
As it stands, since businesses make investment decisions based on the highest tax rate, I believe the wise course of action is for Obama to ignore the wealth-envy rhetoric of his campaign and extend the Bush Tax Cuts. If we want to continue a progressive tax system, we might consider something like the Object Oriented Tax that cleanly separates investment decisions from taxes and taxes only consumption:
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Thursday, April 15, 2010
OO Tax Recap
To recap the Object Oriented Tax Post (OO Tax).
This system taxes an object that sits between income and consumption. It effectively combines the best parts of the income tax with a consumption tax.
Your income would go into a pre-tax account. You pay tax when you transfer money from the pre-tax account into a post tax account for spending. Deductible expesnse would not trigger the tax object.
The tax rate could be progressive. The progressive rate could be based on trailing income, calculated net worth, or a combination of the two.
This struture solves the problem of capital gains. An investor could make all of their trades on the pre-tax side of fence; so as not to distort investment decisions with tax consequences. Investors would get the full force of a progressive tax when they go to withdraw money for personal spending.
This means Warren Buffet will pay a higher tax rate than his secretary.
The tax is account based. The taxes would most likely be collected by the bank. This would shift a massive regulatory burden from America's businesses and help them compete.
The tax would actually be easier to administer than the flat tax.
The difficulty with taxes is that people have to touch each expense multiple times. Businesses have to withhold taxes, individuals have to pay estimated taxes. On tax day, we have to undergo the unpleasant activity of summing up all income and expenses for the year and paying the tax.
The OO Tax gets charged when people move money between accounts in preparation for spending. The system has people paying their taxes during a financial planning step. This will help Americans make better budgeting decisions.
As the name implies, the Object Oriented Tax was designed with object design principles in mind. It would be possible to design the tax so that it encapsulates and extends the current tax structure. As such it would be relatively easy to implement a design where the legacy tax structure runs alongside early adopters of the OO Tax design.
I like the idea because it would save me the day I spend compiling all of my tax records and filing taxes.
This system taxes an object that sits between income and consumption. It effectively combines the best parts of the income tax with a consumption tax.
Your income would go into a pre-tax account. You pay tax when you transfer money from the pre-tax account into a post tax account for spending. Deductible expesnse would not trigger the tax object.
The tax rate could be progressive. The progressive rate could be based on trailing income, calculated net worth, or a combination of the two.
This struture solves the problem of capital gains. An investor could make all of their trades on the pre-tax side of fence; so as not to distort investment decisions with tax consequences. Investors would get the full force of a progressive tax when they go to withdraw money for personal spending.
This means Warren Buffet will pay a higher tax rate than his secretary.
The tax is account based. The taxes would most likely be collected by the bank. This would shift a massive regulatory burden from America's businesses and help them compete.
The tax would actually be easier to administer than the flat tax.
The difficulty with taxes is that people have to touch each expense multiple times. Businesses have to withhold taxes, individuals have to pay estimated taxes. On tax day, we have to undergo the unpleasant activity of summing up all income and expenses for the year and paying the tax.
The OO Tax gets charged when people move money between accounts in preparation for spending. The system has people paying their taxes during a financial planning step. This will help Americans make better budgeting decisions.
As the name implies, the Object Oriented Tax was designed with object design principles in mind. It would be possible to design the tax so that it encapsulates and extends the current tax structure. As such it would be relatively easy to implement a design where the legacy tax structure runs alongside early adopters of the OO Tax design.
I like the idea because it would save me the day I spend compiling all of my tax records and filing taxes.
The Object Oriented Tax
In the early days of the object oriented design revolution, I engaged in a thought experiment in which I applied basic object oriented design principles to the problem of taxation. I developed a clever little reform that I like to call the Object Oriented Tax. One can abbreviate this as the OO Tax.
Our current tax system is form based. People accumulate all of their receipts for the year. On tax day, they sum up their income and tax deductible expenses. They then pay taxes on the differences between the two.
The difficulty of taxes lies in this act of keeping the receipts and summing things up.
The complexity of this system is not simply the simply the 1040 form. The system depends on a very complex reporting system that includes payroll withholding, estimated tax payments and W9 forms.
The object oriented tax takes a completely different approach to collecting and filing taxes.
The Object Oriented tax is account based. The system assigns a tax status attribute to financial accounts. An account is either pre-tax or post-tax. All income goes into pre-tax accounts. One pays taxes when transferring money from the pre-tax to the post-tax account.
Let's say you had $1000 in your pre-tax account and your tax rate was 25%. You would pay $250 in taxes during the transfer and end up with $750 for spending.
The tax rate in an object oriented structure can be progressive. The government could assign different tax rates based on past income or estimated net wealth. With a progressive tax rate, Warren Buffet might have a 50% tax rate. His secretary might have a 25% tax rate. Warren Buffet would have to take $1500 from a pre-tax account to get $750 spending cash, while his secretary would have to withdraw only $1000.
BTW, isn't the math interesting? Doubling the tax rate actually triples the taxes Buffet must pay to get $750 spending cash.
Of course, people are apt to have more than two accounts. This is where the object-oriented design comes in. The system simply assigns a tax status attribute to accounts. Transferring money from a pre-tax to a post-tax account charges a tax. People could have a variety of pre-tax investment accounts and a variety of post-tax spending accounts.
For example, a person might have pre-tax savings account, an IRA or a Medical Savings Account. On the post tax side of things, a person would have credit cards, checking accounts and cash.
A person would pay taxes when transferring money from the pre-tax savings account to the post-tax checking account. They would not have to pay taxes on transfers from the post-tax checking account to he post-tax credit card account.
The system could allow currently deductible expenses to take place from pre-tax account. Charitable deductions, business expenses, medical expenses and other deductible expenditures could take place directly from pre-tax accounts.
The great advantage of the OO Tax is that it has people paying their taxes during the budgeting process.
Having people pay taxes in the budgeting process makes them more aware of the affects of taxes on their spending.
By taxing an abstract object between income and expenses, the OO Tax effectively transitions the income tax into a consumption tax.
The object oriented tax solves the conundrum of the capital gains. It is bad economic policy to tax capital gains as such taxes adversely affect investment decisions. The OO tax puts investments in a pre-tax status allowing people to adjust their investment portfolio without having to factor in the tax consequences.
Rich investors can be soaked when they go to spend their gains.
Please note, the progressive tax rate can take into account both a person's current income and net wealth. This allows progressives to hit investors with a really high tax rate even if they don't realize much income in a given year.
I think progressives would like the structure. We can have our peoples' struggle against the rich and economic growth too.
The OO Tax also solves the problem of inheritance taxes.
Inheritance tax is problematic. People tend to leave estates with a disarray of paid and unpaid taxes. Taxing inheritance results in some double taxation. Removing the death tax leaves large chunks of income and investments untaxed.
The OO Tax provides a mechanism from straightening out this problem. Post-taxed accounts and assets could be distributed to post-tax accounts. Pre-tax assets would be transferred to pre-tax accounts. In some cases, there is substantial capital gains on post-taxed assets. In those cases, one might place the capital gained on post tax income into a pre-tax account.
The family farm, which is held in a pre-tax account, could transfer to a pre-tax account of he children and stay in tact. It only gets slip up if the children sell the farm and must realize tax.
The tax rate on inheritance would be based on the inheritor's wealth. This means inheritance tax becomes progressive.
So, if I left $1000 in pre-tax accounts to Warren Buffet and $1000 to his secretary, Mr. Buffet would have to pay his high tax rate on the gains. His secretary would pay a lower tax.
Because I want to avoid paying taxes, I might decide just to cut Mr. Buffet out my will and give all of the inheritance to his poor, underpaid secretary.
Of course, the converse is true. Let's say a trust fund baby is working as a burger flipper. This person inherits a million dollars. That person will now be hit with the high tax rate the money gained from burger flipping.
Taxing an abstract object between income and expenses allows us to create a hybrid tax with the best features of an income tax and consumption tax.
As tax payments happen in real time during account transfers, the tax is easier to implement than the flat tax, which still requires complex withholding and reporting efforts. One only has to touch each transaction once.
The tax transfers compliance from employers to banks, which reduces burdens on the employer, making America's businesses more competitive.
The tax is conservative in that it essentially treats everyone like a business and allows people to make investment decisions without having to pay a capital gains tax. The tax is progressive in that it allows tax rates based upon one's wealth and assures that the wealthy pay an onerous tax on any money they spend on themselves.
If the object oriented tax were in place, I would already be done with this horrid tax filing process, and could spend tax day with the patriots protesting on the Capitol Steps. Here's my photos from last year's tax day protests.
Our current tax system is form based. People accumulate all of their receipts for the year. On tax day, they sum up their income and tax deductible expenses. They then pay taxes on the differences between the two.
The difficulty of taxes lies in this act of keeping the receipts and summing things up.
The complexity of this system is not simply the simply the 1040 form. The system depends on a very complex reporting system that includes payroll withholding, estimated tax payments and W9 forms.
The object oriented tax takes a completely different approach to collecting and filing taxes.
The Object Oriented tax is account based. The system assigns a tax status attribute to financial accounts. An account is either pre-tax or post-tax. All income goes into pre-tax accounts. One pays taxes when transferring money from the pre-tax to the post-tax account.
Let's say you had $1000 in your pre-tax account and your tax rate was 25%. You would pay $250 in taxes during the transfer and end up with $750 for spending.
The tax rate in an object oriented structure can be progressive. The government could assign different tax rates based on past income or estimated net wealth. With a progressive tax rate, Warren Buffet might have a 50% tax rate. His secretary might have a 25% tax rate. Warren Buffet would have to take $1500 from a pre-tax account to get $750 spending cash, while his secretary would have to withdraw only $1000.
BTW, isn't the math interesting? Doubling the tax rate actually triples the taxes Buffet must pay to get $750 spending cash.
Of course, people are apt to have more than two accounts. This is where the object-oriented design comes in. The system simply assigns a tax status attribute to accounts. Transferring money from a pre-tax to a post-tax account charges a tax. People could have a variety of pre-tax investment accounts and a variety of post-tax spending accounts.
For example, a person might have pre-tax savings account, an IRA or a Medical Savings Account. On the post tax side of things, a person would have credit cards, checking accounts and cash.
A person would pay taxes when transferring money from the pre-tax savings account to the post-tax checking account. They would not have to pay taxes on transfers from the post-tax checking account to he post-tax credit card account.
Deductible Expenses
The system could allow currently deductible expenses to take place from pre-tax account. Charitable deductions, business expenses, medical expenses and other deductible expenditures could take place directly from pre-tax accounts.
The OO Tax and Budgeting
The great advantage of the OO Tax is that it has people paying their taxes during the budgeting process.
Having people pay taxes in the budgeting process makes them more aware of the affects of taxes on their spending.
By taxing an abstract object between income and expenses, the OO Tax effectively transitions the income tax into a consumption tax.
OO on Capital Gains
The object oriented tax solves the conundrum of the capital gains. It is bad economic policy to tax capital gains as such taxes adversely affect investment decisions. The OO tax puts investments in a pre-tax status allowing people to adjust their investment portfolio without having to factor in the tax consequences.
Rich investors can be soaked when they go to spend their gains.
Please note, the progressive tax rate can take into account both a person's current income and net wealth. This allows progressives to hit investors with a really high tax rate even if they don't realize much income in a given year.
I think progressives would like the structure. We can have our peoples' struggle against the rich and economic growth too.
Inheriting OO
The OO Tax also solves the problem of inheritance taxes.
Inheritance tax is problematic. People tend to leave estates with a disarray of paid and unpaid taxes. Taxing inheritance results in some double taxation. Removing the death tax leaves large chunks of income and investments untaxed.
The OO Tax provides a mechanism from straightening out this problem. Post-taxed accounts and assets could be distributed to post-tax accounts. Pre-tax assets would be transferred to pre-tax accounts. In some cases, there is substantial capital gains on post-taxed assets. In those cases, one might place the capital gained on post tax income into a pre-tax account.
The family farm, which is held in a pre-tax account, could transfer to a pre-tax account of he children and stay in tact. It only gets slip up if the children sell the farm and must realize tax.
The tax rate on inheritance would be based on the inheritor's wealth. This means inheritance tax becomes progressive.
So, if I left $1000 in pre-tax accounts to Warren Buffet and $1000 to his secretary, Mr. Buffet would have to pay his high tax rate on the gains. His secretary would pay a lower tax.
Because I want to avoid paying taxes, I might decide just to cut Mr. Buffet out my will and give all of the inheritance to his poor, underpaid secretary.
Of course, the converse is true. Let's say a trust fund baby is working as a burger flipper. This person inherits a million dollars. That person will now be hit with the high tax rate the money gained from burger flipping.
Conclusion
Taxing an abstract object between income and expenses allows us to create a hybrid tax with the best features of an income tax and consumption tax.
As tax payments happen in real time during account transfers, the tax is easier to implement than the flat tax, which still requires complex withholding and reporting efforts. One only has to touch each transaction once.
The tax transfers compliance from employers to banks, which reduces burdens on the employer, making America's businesses more competitive.
The tax is conservative in that it essentially treats everyone like a business and allows people to make investment decisions without having to pay a capital gains tax. The tax is progressive in that it allows tax rates based upon one's wealth and assures that the wealthy pay an onerous tax on any money they spend on themselves.
If the object oriented tax were in place, I would already be done with this horrid tax filing process, and could spend tax day with the patriots protesting on the Capitol Steps. Here's my photos from last year's tax day protests.
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