Reasoning about Taxes
billdietrich.me
billdietrich.me
Small economies that don't issue reserve currencies can experiement more. They can even drop major forms of taxation and fund themselves on the resulting financial tourism. Like States that run on gambling revenues, this only works when they are in the minority.
This isn't to say that meaningful tax reforms are impossible. But they have to address this dynamic.
Just giving a break to long-term capital gains is enormously complicated. Check out "substantially identical securities" for an example. Or try handling wash sale adjustments if you trade the same securities at more than one brokerage.
If you don't priviledge any flows, or let the economy route everything through the priviledged flows, it can be very simple.
“They are a burden for each citizen to fill out”
I may be crazy but that’s an argument for making taxes simple (it shouldn’t just be simple it should be literally simpler than paying an electricity bill).
My main issue with abandoning income taxes is that it would be so hard to replace them. Wealth taxes, corporate income and sales taxes are tricky to implement.
It's much more palatable to call it a "tax rebate for installing solar panels" than "a government subsidy for installing solar panels".
However, just getting rid of that and making it rather automatic (e.g. like in some Scandinavian countries, where your employer and banks send some forms to the government, which in turn computes your taxes, leaving you to just sign off on the prefilled stuff) would be such a relief!
They already do that. Employers are required to withhold income taxes on your behalf. The only thing missing is for the IRS to consolidate all the reports for you and give you a pre-filled form rather than having you do it yourself.
This already happens in the US, your employer sends a W-2 to the government reporting exactly how much taxes they've paid on your behalf. Your bank does something similar.
AND THEN everyone is required to fill out a form reporting how much they've earned, as if the government didn't already know, just so Intuit can make more money. Yaaaay, capitalism!
Capitalism also provides free options like freetaxusa or credit karma taxes.
Not sure what the word for a system where corporations gain political influence through lobbying, but I don't think that's what "capitalism" is.
Where I live (Norway), it goes like this - at the most basic level:
(1) Annually, the gov. issues me a tax "card", which basically just contains some tax-information about me - like what rate I should be paying. This is based on my previous year of income, or I set one myself, based on what income I believe I will have this year.
(2) My employer requests that card/information from the gov., and will deduct the taxes I owe on my salary. My employer then pays in those taxes, to our tax agency.
(3) Once a year, I will receive a document that shows my income, how much I've paid, and what my balance is. If it looks good, I don't need to do anything. If I want to add certain deductions, external/unreported salaries, or what not, I'll have to fill them inn on that document.
That's it. If my balance ends up negative, I have to pay back taxes. If it's close to zero, I nor get or pay anything back. If it's positive, I get back the difference.
Sure - it can become complicated if you have a ton of investments, companies, deductions, and what not - but for regular people? It's a breeze. For most, actually, the only active thing you have to do, is to check that your tax rate looks OK, and that takes you under 5 minutes. Once a year.
Since then Intuit and others have been a powerful lobbying force against filing simplification for obvious reasons. In fact they are incentivized to make free filing as impractical as possible. The path to free filing is best described as an anti-funnel. Online tax filing systems are a field guide to dark patterns aimed against finding their way toward free filing. And why not? Tricking millions into paying for something that is ostensibly free is a great business tactic.
What we actually get is a resulting tax system which is purposely confusing to get people to pay for something they should be able to get for free already and which funds lobbyists to fight against changing it. Good for us.
Edit: found this funny. Turbo Tax's Encroachment strat https://www.documentcloud.org/documents/6483061-Intuit-Turbo...
Would you really want to file on a website controlled by the IRS? Imagine an auditor calling you to say "we noticed you entered a big number in this field and later edited it to a smaller number, can you explain why?"
It's like the difference between talking to a lawyer and talking directly to the police.
The IRS itself is mainly just following the directions of the politicians. These directions may or may not include looking for fraud, depending on who is currently in power.
They are also quite pleased with how supposedly socialist America already is. It seems almost like a reverse psychology trick.
Are you speaking about the US as a whole or just the federal government? If you only consider federal income taxes, then yes, our system looks progressive by comparison. However, US citizens pay federal, state and often city taxes and the tax rate become more flat in many locations when all levels of taxation are considered. Also, for the full picture, you really should consider benefits. For example, even as someone with no major health problems, my health insurance and healthcare costs between 10% and 20% of my pre-tax income - as it does for many Americans. Other nations have comparable healthcare systems that are funded by taxes, so excluding that benefit skews the comparison.
While I gave Sweden as an example, I was initially comparing against Canada as that's where the topic came up in the discussion I had. We also have some flat income tax provinces too. A straightforward comparison would not be easy.
Everyone pays in a solid fraction of their earnings, and when in need, the state steps in and pays.
This routes around the case where people saves nothing and have be bailed out, while those who do save get nothing.
For a sales tax to derive the same amount as an income tax, it would have to be very large. Warren Buffett said that his effective income tax rate is around 16%. For a sales tax to be comparable, it would have to be, say 32% and Buffett would have to spend 50% of his income on taxable goods.
The author does mention a wealth tax, but does not really elaborate on that.
1. The author repeatedly says that punishing "Excess" consumption is a good thing and is part of why a consumption tax is good without really explaining why.
2. The author argues that the tax code is too complex right now so moving to a consumption tax will be simpler. There is then a list of necessities he wants to make tax-free, different tax levels on "luxury" items, and a proposed scheme to refund people already taxed monies. It seems like we've just recreated the complexity of the tax code but moved it somewhere else?
3. You mention a wealth (assets) tax at the very beginning as 1 of 2 big changes you want to make but then you never discuss the wealth tax part at all...
For example, I’m sympathetic to the perspective that federal taxes are really about preventing inflation. I’m not sure it changes anything fundamental, but it suggests that we can be less concerned about deficit spending as long as inflation is low. (But this assumes the government can predict what will cause excessive inflation far enough in advance to avoid it.)
Also, in the presence of inflation, income taxes and wealth taxes are similar since you need to earn a return just to stay even with inflation. In a way, we already have wealth taxes, but they’re mild since inflation is low.
There’s a lot more that could be said. It’s a complicated area.
This is the (first) fundamental mistake of the article. The purpose of taxes is to raise funds for necessary services, as stated in steps 1 - 5. The only question is how to raise those funds fairly.
As soon as you start thinking about incentives and changing behaviors, the tax system suddenly has two purposes rather than one, and those two purposes can be at odds. Really, in a free (as in freedom) country, the government has little or no purpose in trying to guide behavior, except to prevent people from illegally harming others.
"Individual income taxes are bad because: They penalize people's initiative, hard work, savings, investing, and attempts to better themselves."
It's not a penalty, it's simply a fair rate based on ability to pay. Even under progressive taxation, you still end up better off by making more money. There would only be a "penalty" if the tax rate were 100% or somehow >100% for additional income.
The only thing that prevents people from bettering themselves is means-testing some essential service, such as health care. In other words, losing your health care or having it priced out of reach when you get a better job or start your own business. This is why we need single-payer. (And arguably government-subsidized higher education.)
They are positive in a free market economy because you can let the market find less damaging alternatives. Without them you rely on more legislation which tends to be ham-fisted and full of holes.
This ends up just penalizing poor people. Cigarettes are addictive. Higher taxes don't magically cure addictions. Anyway, lots of things in the world are bad for you. But it's a free country. If someone wants to smoke and drink and eat a bunch of junk and never exercise, they have that right. There are a ton of "bad" things you could tax, it's an endless futile exercise.
> high fuel taxes to reduce pollution
Does this actually even work? My own driving behavior is completely unaffected by gas prices. People still need to go places. It seems to me that convenient public transportation would do better in affecting behavior. If public transport is crap/inconvenient/nonexistent, people won't use it.
Possibly. But neither the article author nor anybody else is suggesting a 500% sales tax.
Moreover, super high sales tax that significantly reduces consumption directly conflicts with the original goal of taxes: to raise revenue for government services.
But after all the cigarette butts we don’t make a fuzz about the tobacco industry’s agency any more; they were just vessels for the lifestyle choices of the smokers.
Weed is still illegal in a lot of places. I guess because you can make less of a profit off of it compared to certain pharmaceuticals. Things are opening up though, perhaps in the US in particular.
There are 2 issues here:
1) Higher taxes are a very strange and indirect way of stopping something that's considered unacceptable. Suppose we made murder legal and simply taxed "hit" contracts with a very high rate. That would be crazy, right? But that seems to be our policy with cigarettes. If we're serious about stopping smoking, then we'd make it illegal, and put the tobacco companies out of business entirely.
2) Tobacco companies specifically target children, who aren't mature enough to make good choices, and then the kids get hooked on nicotine for life. So that needs to be addressed specifically. I'm amenable to protecting kids, but much less so about paternalism for adults. Again, though, I don't see tax policy as the answer here.
If you consider nicotine addiction to be a moral issue, which it might be, then there are very perverse incentives involved in taxing cigarettes, because the government is making money from something it considers immoral. I would also mention the addiction that many state governments have to lottery ticket revenue.
[1] Bader P, Boisclair D, Ferrence R. Effects of tobacco taxation and pricing on smoking behavior in high risk populations: a knowledge synthesis. Int J Environ Res Public Health. 2011;8(11):4118-4139. doi:10.3390/ijerph8114118
Quote from the above article:
"There was strong evidence that raising cigarette prices through increased taxes is a more effective tobacco control policy measure for reducing smoking behavior among youth, young adults, and persons of low socioeconomic status, compared to the general population."
That's great, for the small percentage of people who quit smoking. But for the majority who continue smoking after higher taxes, it is indeed as I said, "This ends up just penalizing poor people." It's blatantly obvious if you go to any convenience store that smoking has not been stopped by higher cigarette taxes, and thus a lot of people are simply paying more in taxes while continuing to smoke.
It's interesting that the article talks about the effect of cigarette taxes on youth, because currently in the US, retailers are forbidden to sell any nicotine product to anyone under age 21. If anything, it seems that the issue is not taxes but rather our extremely lax enforcement of the law against selling cigarettes to minors.
You did not present a reasoned argument as to why this is a mistake. Taxes are one way to incentivize behavior AND ALWAYS HAVE BEEN, historically.
> The only question is how to raise those funds fairly.
This is not the only question, specifically because "fair" has a philosophical answer, not an objective one.
> It's not a penalty
That's a matter of perspective. It's bad because it's regressive (historically), as you allude. It's not like there can't be a better sliding scale based on cost/consumption indexes but that's not practical in a country as large and disparate as say... the USA.
I did. I argued:
1) The goal of incentivizing/deincentivizing behavior comes into conflict with the goal of raising revenue for government services. For example, people have suggested high taxes on cigarettes and gasoline. But if you significantly reduce consumption of products, then you limit the ability of the government to raise revenue from sales of those products.
2) It's a free country, and thus the government has no business trying to do Skinnerean behavior modification on the populace. IMO that's a pretty disgusting idea and reeks of totalitarianism.
3) Income taxes do not actually stop people in any way from trying to better themselves financially. There is simply no empirical evidence of this.
> "fair" has a philosophical answer, not an objective one.
Yes, so?
Generally speaking, you want to incentivize people to try to better themselves financially by pursuing highly productive and legal activity. If the best way to better yourself financially is rent-seeking, becoming a government bureaucrat, corruption, or participating in the gray/black market, that is what you will get.
Anything you tax you should be ready to have less of, and anything you subsidize you should expect to have more of.
The USA hasn't changed effective taxes in decades. Whenever politicians have 'lowered taxes' it has been completely ineffective. This is a goal, they don't wish to adjust a knob that may impact such large complex systems. They dont want to be the one who destroyed X.
>The USA should enact a wealth (assets) tax, to address wealth inequality.
Very effective in the short term and then becomes an utter disaster for the country. Your goal of retirement is you save up money to live. If you die, you want your family to get the money.
What happens when countries have implemented this; people dont keep the money. Wealth taxes are use it or lose it. So people use it. You then end up with situations where families are on their own. Their is no family wealth anymore. In the short term there's boost to your economy because of the spending. But then you start to build generational debt to insane levels. You have money leaving your country to avoid the taxes and then suddenly you just dont have the original wealth of your country and debt overwhelms.
I see a possibility with the help of technology to open new ways how to represent global consensus instead of giving power to one centralized authority which is not transparent, not flexible and highly prone to corruption.
a slave has a relationship with slave master and both are benefiting from this contract - one has no responsibility and burden of choice the other has the power and control.
I'm sure people will solve this problem in the future and will thrive until there will be some brave individuals who do not tolerate abuse and have a sense of self worth.
speculation - solution lies somewhere in the domain of culture.
First I think we should tax limited resources, especially with a land-value tax. Tariffs are also good because they encourage decentralization. Taxes on financial transactions will discourage high frequency trading. A wealth tax will discourage power centralization. Let's think about things we can do that both earn money and make society better.
No, it doesn't.
Arguably, the structure of US income (including payroll) taxation discourages labor and, even moreso, employment, but that's not inherent, but a result of deliberate inequities in how different sources of income are treated.
If instead of paying somebody $20/hour you need to pay them $30 because of taxes, that makes hiring them more costly and you're incentivized to look for other options.
Now, the specifics of the US system of taxation on income discourages labor/employment quite heavily, by tax favoring income through gifts and inheritances (up to a very large quantity) over capital income, which itself is favored over general income, which itself is favored over labor income. But none of that is inherent in the concept of an income tax system.
That's seems true regardless of other taxes. The only way it wouldn't be true is if raising taxes on labor also raised taxes on all other possible actions in somehow an exactly symmetrical way.
If the government has to raise $N total in taxes, that amount of money is coming out no matter what. It has to come out somewhere. The real question is distribution, and that's when you have to look at fairness of taxation and ability to pay. You can't just say income taxes discourage labor and ignore the question of where you're getting the taxes instead, and how the alternative taxation method affects labor.
But that is not necessarily a bad thing, it is actually a good thing in the right context/environment. It becomes a problem once people can't even afford the basics anymore.
If we need to raise (consumer) taxes, then we may hit that upper limit you mentioned where people can’t afford the basics.
Whereas if you tax income, no one will complain if billionaires are charged more.
As a percentage of their income, yes that's true!
> If we need to raise (consumer) taxes, then we may hit that upper limit you mentioned where people can’t afford the basics.
I think the solution is not to stop raising consumer taxes, but instead to have a way to make sure people can still afford the basics. And that can very well mean to _also_ tax income and/or wealth. Not to replace consumer taxes, but to enable them.
In the end, taxes are more less a 0-sum game in terms of money. So, in my (maybe naive) opinion, it is advantageous to create tax so that people are incentivized to create a better life (for everyone).
Think about it: with a high income tax and a low consumption tax, you are essentially giving people who have wealth but don't work an advantage. And there are certainly ways to get wealthy without working, be it inheritance, luck (lottery) or even illegal ways of getting rich without paying tax. Hence I think they opposite way is better, given that it is not at the cost of poor people.
And (potentially) straight up dollar value. "Rich" people can afford to purchase items in bulk at a discounted rate. "Rich" people can shop at Sam's club and buy a years supply of toilet paper at once than someone living paycheck to paycheck that buys 1-6 rolls at a time.
Other basic costs like laundry. For a poor person, they need to drive/bus/carry their laundry every week to a mat and pay $5/load. A rich person pays the upfront cost once and enjoys discounted in-home laundry for the life of the appliance.
If items cost less for rich people, then the tax on those items would be lower as well.
> make sure people can still afford the basics
One way to make the basics more affordable would be to not tax them. :)
Having said that I think there is a good case for treating it and dividends as regular income.
My gripe with income taxes is how each year is taxed in isolation. You could be making minimum wage your whole life except for 1 year where you get a big windfall, and that year you'll be taxed as if you're wealthy and lose most of it to taxes despite needing the money more than most people who paid less tax that year. Perhaps income taxes should be taxed based on a rolling average or something.
I can't see how wealth / asset taxes would play out in practice. Elon Musk is the wealthiest man in the world but most of that is unvested TSLA options that he can't sell. The world's wealthiest person could end up owing more tax than he has liquidity for. I think we need to stop all taxation on unrealized gains. Already, things like AMT on ISO exercises penalize the middle class the most, as plenty of people realize each year trying to participate in their employer stock plans.
Increasing capital gains tax (only when cash out or transferring) would increase tax on the wealthy, and make life simpler and less stressful for all.
For example if I make $7 million in the market tomorrow I cannot use that money to buy a $7 lunch until I pull some of that money out of the market into a more liquid account (checking or saving). Pulling the money out of the market is where it becomes taxable income.
Changes to CGT may have some minor indirect changes on investment by altering perceptions of investment principle. It may even benefit the market by reducing the frequency of money leaving the market.
It is also worth noting that the combined long-term capital gains tax rates in the many parts of the US are already among the highest in the world. You will receive more favorable tax treatment in most of Europe than California, for example.
There is a separate policy issue: governments want to incentivize long-term investment, which are inherently more risky than short-term investments, ceteris paribus. If you treat long-term capital investments like short-term income investments, it strongly incentivizes investment to flow into rent-seeking cashflow businesses -- same expected return with much less risk. You see this in many parts of Europe where an enormous percentage of available capital flows into rental property investment.
That isn't correct. You can lose money with income. As a consultant you are on your own for expenses and can end up earning a negative rate if your expenses exceed your income rate. Whether or now those expenses are deductible against your income taxes is immaterial to the more immediate accounting at hand.
Other kinds of income can be negative even with no expenses.
The point stands that there is no such thing as a negative paycheck.
If you deincentivize consumer spending by enacting larger taxes on consumables/services, that's inheritly bad for the overall economic system.
In any case. It seems to me that tax systems are complex (if they are) because you can use money (the thing that is ultimately being taxed) in order to get around regulation. If you can pay some people 10,000 USD in order to save yourself 200,000 USD, then obviously you are gonna want to do that. So then if you already have high wealth inequality you would have to device ever more clever schemes in order to truley tax the rich more than the poor.
So can you really create a simple tax system under these conditions?
I don’t know if overconsumption is really what should be disincentivized, if the author wants a good economy. It’s a consumption-driven economy. Does the “economy” want every household to get a vacuum cleaner, a television set, a washing machine, a stove, and not much else? Probably not since that creates less economic activity. Sure, that leads to environmental problems and to “poor people hating us” (though I don’t see how that matters), but those are “externalities”.
that conclusion doesn’t follow. for instance, prices could rise to result in the same level of economic activity (this is unlikely to be the sole response however). the amount of money and the velocity of the economy is correlated to human output (leveraged in various ways), so it’s not that elastic (at least in ways that matters). the money then has to find different routes, nooks, and crannies to fill, and it will.
the last 100+ years has been about how to advantage capital and capital holders. it’s time to retire that poor paradigm (re, the inequalities it’s produced) and focus on work and workers as the core economic engine it is.
Paying taxes feels a lot more like an inconvenience than theft to me. Maybe I don't earn enough to truly feel how onerous taxes are.
> There is no such place
Not really, there is very little ability or willingness of any government to control what a single individual might do in wastelands like deserts or Antarctica
> Government is and always has been the principal enabler of every single genocide, war, and mass atrocity in history.
And assuming you are right, they are also the principal protector of property and capital. Who would you rather protect the food that you depend on while it is being grown by a farmer in a field from opportunistic hungry thieves, if not mercenaries, an if the latter, from the mercenaries themselves? I believe government meeting these basic needs are so much a better good than the alternative that it more than balances out the occasional genocide, war, and mass atrocity.