I wrote this a few years ago in response to a similar piece:
The problem is that the rich have the ability to take their income in alot of different ways.
Tax income more, they'll take it as dividends.
Tax dividends more, they'll take it as capital gains.
Tax capital gains, they won't realize their capital gains until they can offset them with realized losses or they'll just get bank loans again't their stock holdings.
Tax assets on death and they'll pass them o n in trusts.
Some will move money off shore if they think they can get better returns that way.
The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code.
Who would have thought 25 years ago that companies would buy other companies in different countries, not to acquire their products or markets, but to acquire their headquarters address to lower the tax paid in the US.
That's like saying it will always be possible to murder someone so there is no point in trying to curb chemical weapons sales to children.
Every loop closed makes tax evasion harder and riskier. There will always be people who do it, like there will always be people killing other people, but it is worth making it hard and risky enough that most people will consider other solutions before resorting to murder/tax evasion.
Because most loopholes are in fact deductions that are there for a reason.
The overall tax rate is too high (or it would be too expensive to lower the overall rate), so politicians give certain people sweetheart deals on certain things because they consider it relevant, thus offering someone, somewhere a tax break. Others are then free to use the same deduction for their benefit.
The wealthy aren't stupid. They're generally quite pragmatic and flexible when it comes to making money.
You can actually use them, but probably are not, since you're a high income, high income tax paying person? If you can earn $300k a year as an entrepreneur, vs $300k as an employee, then it's a lot more likely you'll be paying significantly less taxes when going the self employed route.
Simpler isn't always better. The simplest rule would be "no violence" but then the court system would have to make a bunch of decisions. is it literal? so is everyone that harms an insect in criminal jeopardy? So, now that we've introduced complexity we need to argue about degree not absolutes.
> What if you make the rules so simple that there are NO loopholes and there is no/little possibility for tax avoidance?
Then we could lower tax "rates", reduce dead weight loss, and increase tax receipts.
But no, we've decided, for example, that home ownership is important for everyone so we subsidize home ownership by letting people write off mortgage interest. This has the unintended effect of driving up prices for homes and encouraging people to buy more home than they need.
When taxes are too high, it causes pathological behavior.
Some people will, even if it nets them less after taxes, minimize taxes paid. "Tax shelters" in the 80's would be all but guaranteed to lose money, and yet people would still buy into them because they would reduce their taxes and pay huge fees based on the total taxes that would be reduced. These arrangements were legal (although the IRS was hawkish on them) but actually made no business sense for investors.
Home mortgage interest deduction serves to put the financing of private home ownership on the same footing as financing of commercial house ownership (wherein the interest on loans for income-seeking activities is deductible).
Eliminating the MID without eliminating the deductibility of commercial loans' interest makes commercial purchasing of real estate cheaper than private purchasing. IOW, eliminating the MID is a big handout to commercial landlords and serves to keep even more people renting rather than owning their housing.
> Home mortgage interest deduction serves to put the financing of private home ownership on the same footing as financing of commercial house ownership (wherein the interest on loans for income-seeking activities is deductible).
Sounds fair. Can I also reduce my income by furnishing my building (home) with equipment (e.g. furniture and appliances) in the same way that commerce can? Would that make sense?
> Eliminating the MID without eliminating the deductibility of commercial loans' interest makes commercial purchasing of real estate cheaper than private purchasing. IOW, eliminating the MID is a big handout to commercial landlords and serves to keep even more people renting rather than owning their housing.
There's only so much housing stock. If more are renting, there's more business in renting, but that mostly affects the mid to upper classes. Do we really want to subsidize urban sprawl? Maybe we do. Maybe we should. Should we do it forever? I... don't like it.
Maybe all subsidies should have a phase-out/sunsetting period to avoid economic shocks while reducing the plethora of loop-holes and market distortions that they create.
> There's only so much housing stock. If more are renting, there's more business in renting, but that mostly affects the mid to upper classes.
I'm not following you here. Rental market dynamics affect the lower and middle classes and the rent/buy margin affects the middle class. If the gulf between renting and buying widens (by buying becoming relatively more expensive), how does that not help landlords (mostly upper-middle and upper class), who in turn achieve increased power over the poor and middle classes (vs the status quo)?
Every 750 credit score, 2 steady income, $100K household income family who doesn't buy a house but instead rents put pressure on someone worse off in the economic stack-rank.
I think the problem is not with the complexity of the tax code, but that those taxed by it have significant incentive to avoid paying taxes, and have the ability to manipulate information such that they can pay less.
No matter how you slice it, if government taxes "income", and your business is set up such that you decide what your "income" is, you can control how much tax you are bound to pay. The only way around it is to make people think that spending more money on more government is a good and sensible thing to do. Or perhaps that spending more money on higher employee payroll is a good and sensible thing to do.
Another is to tax things that are very hard to structure around. Taxing land, taxing stock sales (the SEC section 31 fee), taxing retail purchases, etc.
If you believe that too much wealth equates to too much power in a democracy then the simplest tax code would be all wealth over X is taxed at 100% all transgressions are punishable by death. Personally, I think that's a little harsh but some people only see black and white.
With principles based legislation you can introduce rules that make it illegal to find "creative" ways only to circumvent restrictions. These rules already exist for anti money laundering and terrorism financing.
The problem is that changes also always affect some of the non-rich. You'll never manage to tailor laws so that everyone is hit exactly as desired.
You can't define "creative ways" in an objective way in a law. It's black or white. What you want is a clear rulebook of what isn't allowed. Everything else is fair game, because that's the only logical way to approach things.
You don't want the IRS dictating what they consider to be creative ways. The IRS can not agree with something you've done, but you don't want to end up in a situation where they effectively make the law. That makes no sense at all.
With principles based legislation you can introduce rules that make it illegal to find "creative" ways only to circumvent restrictions.
Read: Arbitrary and capricious legislation what will be abused in creative ways. I'd prefer laws remain as objective as possible, and I'm a lot more concerned about bad legislation than 1%ers moving their money around.
I don't think the parent poster is saying 'don't try,' as much as countering the very real propaganda from the rich about how "We're the new enlightened rich, are we're not greedy or dangerous, and we're not hurting the working people at all."
Claiming 'nothing has changed' in this regard is mostly true. There's some more red tape to get through but we're very clearly moving towards a Gilded-Age level of corruption and inequality in the US. Heck, we even put one of these 'enlightened' billionaires in as president!
Wish I had more to contribute to this conversation, but its pretty hopeless as the wealthy can simply propagandize people via their media sources to vote against their interests and can successfully lobby politicians to give them almost anything they want. Trust me, the Koch brothers aren't funding reason.com because they're academics, but because the libertarian philosophy it sells lines their pockets the most. I suspect this is the norm for later-stage capitalist economies that pride themselves on low regulations. High regulatory European economies seem to have a stronger firewall against this compared to the US. This isn't going away barring a massive economic change, perhaps when we can't continue to hide what automation and wealth hoarding are doing to working people. That could be anywhere between 10 and 100 years from now depending on how its handled.
I suspect deep automation will simply lend itself to a new economic and social reality. I just don't envy our kids and grandkids who will have this fight against the status quo. The 'enlightened' wealthy aren't going to concede on anything that affects wealth and status easily.
The point you are missing about these loopholes, is that broader strategies are mostly indistinguishable from "legitimate" usage of the same strategy. Wealth allows people to take more risk, and will/can do so... even at the risk of not having the money go to taxes. That is what you have to "solve"...
This is the Nirvana fallacy. Because we can't fix everything, there's no point in trying to fix anything. For example: "what's the point in having seatbelts? People still die in car crashes." The reality is, just like a seatbelts reduce the number of fatalities in car crashes, each loop hole closed makes things a little more difficult for people to shelter their assets.
But at what point, OP's criticism is a qualitative criticism of the approach being advocated?
For instance, if someone says that alternative medicine fails for n different reasons, would you say that the person is committing Nirvana fallacy or that there is something to say about the fundamental failures of alternative medicine?
The qualitative fault I'm trying to point out is that trying to tax 'rich people' is a failed attempt because no matter how effective you can implement your tax measures, at the end of the day people can move to other countries and your own country starts to suffer more than it benefits from the increased taxes.
It is a Nirvana fallacy if someone says "No matter how hard you try to curb murders, serial killers always keep finding new ways to commit crime", because at the end of the day, if all the serial killers move out of your country to a more serial killer friendly country, you don't actually suffer, you did your job.
On the other hand, in terms of taxes, you don't want your tax paying population to move out or be rendered incapable of producing wealth. That kind of 'equality' is not worth it.
> no matter how effective you can implement your tax measures, at the end of the day people can move to other countries and your own country starts to suffer more than it benefits from the increased taxes.
The first half of this--that rich people can move to other countries if they think they are being taxed too much--is certainly true, but I have doubts about the second half.
There are people who have as part of their drive a desire to see humanity as a whole better off than we were before, and there are people whose primary drive is "eff you, I got mine." That's the kind of rich person who will be the first to abandon a high-tax country in droves, and in my opinion we are better off without them: they are the profiteers who make life for those working under them hellish, who feel no responsibility for polluting and underpaying and ignoring externalities and racing to the bottom. What we want, who we should hope to see become successful, are principled people who understand that the riches which come their way are only possible within the context of a healthy society, and who are willing to part with a larger share of their fantastic revenues to ensure its continued improvement (while of course still being able to enjoy the fruits of their labor).
To argue otherwise, as it looks to me at least, is to argue that (1) the only way to make a lot of money is to be selfish and unethical, and (2) we still need that money in taxes (at a lower tax rate) to maintain a healthy society. I am sure I'm simplifying things.
His argument, as stated, is a use of the Nirvana fallacy. But it can certainly be re-phrased and re-worked into something substantial. The general sentiment isn't completely without merit; people will always exploit loop holes in the tax system. But to say there isn't any point in closing this loop hole or that loop hole because people will just use another is an assertion, not an argument. You need to provide evidence to support this claim. Maybe those other loop holes are more of a hassle, or require substantial initial investment to take advantage of (like re-structuring your company to incorporate in a different country), or don't shelter as many assets from taxes. The point is, you need evidence to back up the claim.
> The qualitative fault I'm trying to point out is that trying to tax 'rich people' is a failed attempt because no matter how effective you can implement your tax measures, at the end of the day people can move to other countries and your own country starts to suffer more than it benefits from the increased taxes.
That's more of an argument against taxes in general, isn't it? You tax people high enough and they'll leave. There's a certain "sweet spot" at which you tax people just enough to provide good services without making people leave. I wouldn't dispute that. But for that to be a valid argument in this case, you'd have to provide evidence to show that closing these loop holes puts the tax burden of people above that "sweet spot."
"The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code."
I disagree. I simple flat tax rate where everything is taxed at a single rate would close every single one of the loopholes above, if only by making it moot.
The fact that the rich can maneuver themselves into a much lower tax rate than the average person presents a significant, unfair advantage in my opinion. A flat tax rate would make things much more equitable. Plus it would asimplify the tax code tremendously.
A flat tax rate is not a good idea whatsoever; if you tax e.g. 20% of earnings ,do you believe people who earn $30k a year are impacted the same way as people earning $200k or more? Sure, those who earn more pay more, but it hits them in "extra" earnings, while the poor are taxed on money they need to survive.
A (very) progressive tax rate with a few ways of reducing the tax based on social (e.g. number of children, etc) criteria would probably work better here.
A "flat rate" can also be tiered. In this case I'd take it to mean a flat rate on all money earned during a time period. Whether income or capital gains, dividends, assets or whatever, you are still giving up x% of whatever you earned that year.
So even when tiered, a person earning under some amount in total might get a lower tax rate than a person earning a higher amount but it is still flat.
The "flat tax" would be taxed on all jurisdiction. So call it a "universal flat tax". That way, there is no persuasion to register in a foreign country and it would dissuade multi geography registrations as you would just be taxed in multiples by each territory.
To avoid double taxation, perhaps, a company can register in multiple countries but since the tax is the same everywhere, the portion of the x% taxed would be proportionally divided to the territories.
This assumes of course that the whole world agrees on one tax policy and tax havens are eliminated. :)
You are correct it is an oxymoron, but the most realistic Flat Tax proposals do just that.
They say there should be a 20% tax, on any income above the $35,000 a year threshold. While it still does effect people on the lower end more, the first part of their income is at least partially untaxed.
And the bar is low enough that the super rich will not be able to create schemes to keep there income under that bar.
I'm having trouble seeing a flat tax proposal that doesn't massively decrease tax revenue. Also, a tax on what, exactly? Income? Capital Gains? Sales? Property?
It's ironic that a number of former Soviet countries have moved on to the flat tax, while the west has a progressive income tax (#2 plank of the Communist Manifesto).
Idk about you but I can't think of many former soviet block countries that have a healthy distribution of wealth between working, middle, and upper classes. Furthermore the list of countries given there are not places where you want to be poor.
Are you saying that flat tax is good, but that all countries that have implemented it coincidentally have other economic issues that are wholly unrelated?
Romania and Poland were never soviets. Communist, yes. Behind the Iron Curtain, yes. Members of the Warsaw Pact, yes (Poland is kind of obvious on this). But never soviets.
That seems like an income tax mixed with a sales tax credit? It sounds awkward because income tax comes out of your paycheck but the sales tax is applied at the point of sale. You'd have income tax withheld, buy food with the money you have left over, get credited for the essential goods you bought, then pay rent, then get a credit for that...
You would do a flat tax on anything above X, where X is essentially a number calculated on base living costs in your area for the number of people in your household. Anything above X is taxed at a flat rate. This ensures people can afford to live and meet their minimum requirements. It also makes it so that the tax code is extremely simple.
For me personally - I would add one more change that most people don't like. I would put an actual cap on total income tax that can be paid in a single year. The reason for this is that these progressive systems act as a social welfare system that transfer money. That's why people propose a flat tax. Well, flat tax is much better but still presents the possibility for a wealthy person to pay, for example, 200k in income tax in a year. A lot of people would say "so what?". Well, I believe income tax shouldn't be treated as a maximum pain threshold. The basis of taxation is to fund public goods. We all consume roughly the same amount of public services on average. If someone is paying something like 200k a year in income tax they are paying way, way above anything they could possibly consume in public goods/services for that year.
That might be oversimplifying what flat means. Suppose it's not a linear function? Pick your function to begin kicking in above the poverty line and maybe get linear above 200k.
But "no loophole tax" might be a better characterization of the flat idea, yes?
It certainly isn't an oversimplification in context. The comment up the thread that raised the idea of a flat tax defined it as "everything is taxed at a single rate".
Maybe single means a complex function? I doubt it.
A flat tax you only start paying above a certain threshold then? For sake of argument everything under 20k is tax free, you pay flat tax on everything above? Problem solved?
I think what msla is saying is that people who are at or below the threshold for taxation would contribute nothing to taxes, which would be unfair in theory because they consume public goods and services like the rest of us.
In what way would a flat tax rate close loopholes? I hear that all the time but it doesn't make sense. In the end the problem with taxes is determining what counts as taxable income. The flat tax doesn't change this. As of now it would just be another huge tax cut for high incomes which in my opinion it's designed for.
> I disagree. I simple flat tax rate where everything is taxed at a single rate would close every single one of the loopholes above, if only by making it moot.
Flat tax rate has nothing to do with the loopholes, those are completely orthogonal. You could as well say "a simple progressive tax rate ...".
If you meant to say 1) close all loopholes, and 2) implement flat tax rate, then OK, but those are still two different things. In that case, what's wrong with 1) close all loopholes, and 2) leave the progressive tax rate?
What would the flat tax actually tax though, income? Wouldn't they just dodge that then by not having income? Sure, for you and me it would make it easier -- my W2 says I made exactly 100k, here's exactly 50k of it, period. For people who have a flexible income, why report any amount that would make you pay in?
Don't have income tax at all, tax every transaction 20%, like a flat rate VAT except that you can't claim it back on your business expenses. Simplify the entire tax system without having loads of brackets, exemptions and special cases - if you sell goods or services, 20% of that is paid as tax, end of story.
I mean, I am not an economist, I have no idea if that would work or not(probably not)
The big problem there is that it encourages companies to grow as big as they possibly can, because "internal" transactions aren't taxed.
So Amazon would own the entire supply chain: Manufacturing widgets, selling widgets, storing widgets, shipping widgets, handling returns, etc. They already sort of do this, but if you add a 20% tax at each hop they would eliminate the remaining hops as fast as they possibly can or buy the hops.
And you could never start a small business, because everyone who'd want to buy from you would save a ton of money doing it themselves. By not taxing business transactions, it's zero additional cost to have someone else do something for you, so it makes it possible to grow a small business.
In particular, grocery stores with a 2% margin would be hit hard.
The idea is to have everything taxed at the same rate: income, dividends, capital gains, whatever. So every source of 'money coming in' gets treated and taxed the same way.
By having a flat tax it doesn't make sense to shift 'money in' under different categories because all gets taxed the same rate.
So for example, income, capital gains, dividends would all be taxed at 10% or 15% or whatever.
Then why not hold stock, realize no gains by not selling it, and take out a loan with stock as collateral. Or, you could leave it all in a company that you own, draw no income and have the company pay for your housing, meals, travel, etc.
> Then why not hold stock, realize no gains by not selling it, and take out a loan with stock as collateral.
You can already do this today. Eventually you will need to sell and pay the taxes, eg. if interest rates rise and it's no longer worth it or when you die and have to pay the loans off.
> Or, you could leave it all in a company that you own, draw no income and have the company pay for your housing, meals, travel, etc.
If your company pays for your personal expenses like housing, it's taxable as income. Lots of SV companies pay for their interns' housing and the rent was always listed on their W2's.
>If your company pays for your personal expenses like housing, it's taxable as income.
Sure, but it can be a strategy to reduce taxable income. My point is that people at the top end are highly incentivized to avoid taxes and will find ways to do so. I'm not making any policy prescription, tax policy is hard and I don't claim to know what's optimal or even necessarily better.
Explain how you're reducing taxable income? The taxes on the free rent are the same as the taxes you're saving by reducing your company profits with the extra expense.
If you own a company and would take a salary of 1 million you get taxed on that 1 million. If instead the company pays 70k that year for rent on your condo, 35k on the lease of your vehicle, and another 20k on food and you draw no salary, so your taxable personal income is 125k. You keep the other 875k in the company until you can find more preferable tax treatment for that money.
Obviously this is a terribly contrived example, but it is somewhat descriptive of the type of strategy used to reduce taxable income. Things are obviously more complicated when you have numerous types of income from domestic and foreign sources.
Not if you have foreign holdings and don't repatriate all of the profits.
I also don't think you could easily manage raising the effective corporate tax rate very much without seeing further offshoring of profits, which is the present situation. We presently live in a world where capital movement has been liberalized and the movement of people(Schengen notwithstanding) has not. So even if you have some sort of profit/income agnostic flat tax, any business that can seek lower tax rates abroad will.
The modern progressive income tax system is not even remotely a millennium old. We didn't even have income taxes in the US until 1861, and they weren't generally applied until 1913.
There aren't many sovereign nations that have been in existence since 1017 AD, so that sort of makes your question moot.
The Code of Hammurabi describes Babylonian taxes and the manners of levy. The Egyptians and Romans levied income taxes. There is of course the gafol/Danegeld/heregald of the Anglo-Saxons. You've got taxes/tolls paid by merchants on the Silk Road and certainly I've read of taxation in Ashoka's era and other sub-continental sovereignties.
You have the taxation/feudal levy system that existed even in archaic Greece where boats, rowers and soldiers were expected to be provided by patricians in times of war.
China (especially) and Japan have long histories of taxation.
The idea that recorded human history has been mostly without tax seems to be ahistoric.
>There aren't many sovereign nations that have been in existence since 1017 AD, so that sort of makes your question moot.
Sure. Which is why it's a bit ridiculous to say there has been a millennia of income tax we have been learning from.
Tax in general has existed - progressive income taxes, however, seem to be a fairly recent development. Purely in the administration sense, it would have been far more difficult to do in the past and as a progressive tax system does not actively benefit the people in power in a feudal or imperial government, it would be unlikely for a progressive tax to be implemented, especially one that exists in peace-time. In fact, feudal era taxes seem to have been actively regressive.
Removing a progressive tax system, something I believe is a bad idea to do, wouldn't roll things back to older systems of taxation. We wouldn't sacrifice the development of financial policies and tax frameworks, and we didn't arrive at the concept of a progressive system because of hundreds of years of failed tax policies. We have a structurally different government than countries did for hundreds of years prior.
The first "bank" was also founded much earlier than 1000 years ago (and wasn't a bank), but we did know a bit about financial systems even before then.
You replied in a discussion of income tax to a person talking about the history of income tax. Your objection appeared to be that the person you replied to was talking about US income tax history and your millennia of progressive income tax talk covered other countries.
Not necessarily. But in that case we wouldn't argue for a "simple" tax system. A tax system has to be complicated because humans and their activities are complicated things.
edit: at that point, if we threw out the tax system, why not just get rid of states and corporations and start everything from scratch, said the junior dev
How would a flat tax rate avoid the unfortunate reality of burdening the poor with relatively high taxes? Tax brackets, in theory, mitigate this by reducing or eliminating taxes for low income individuals and families. A flat tax rate would surely simplify things, but I'm not convinced it would be the best solution.
A flat tax (eg. land tax + sales taxes, which are harder to manipulate than income tax) can be used to fund a universal basic income, which automatically gives you a smooth progressive tax system with no weird breakpoints setting up inefficient incentives.
I was under the impression that by flat tax you meant flat income tax. Property taxes are, at least in California, a very local form of taxes that finance local school districts. Using property taxes for something else (ie, to provide UBI for anyone not living in the direct school district) would be a large change in how those funds are distributed.
The exact mechanism of taxation is an implementation detail. All that's need to qualify as "flat" is that the tax paid must be in fixed proportion to the property or activity being taxed. The only reason I suggested other taxes is because precisely defining "income" in such a way that taxpayers can't manipulate it to their advantage is difficult.
There could be a basic minimum income level that is tax free. This would be very similar to what we have right now. For example, income under around 9,000 (or was it 10,000?) in Canada is not taxed federally.
While I agree that a flat tax is drastically superior to our current convoluted tax scale, it would still have many unfortunate depressant effects. When you introduce friction at every trade, you hurt the market's ability to reach an optimum. This could never happen in the US (or any country that follows the Geneva convention, since it forbids revocation of citizenship), but it would be extremely interesting to have a small nation where the only tax was a constant head tax, like $X thousand/person/year. All of a sudden, many incentives that don't currently line up would start to.
No matter how simple you make the calculation of tax owed, you cannot simplify the complexity of relying on individuals and businesses to report accurate information to feed into the formulas.
You eventually have to define your terms, and those definitions will have the loopholes embedded in them.
That's not to say that simplification is useless. It would still cut a lot of waste out of the costs of collection, enforcement, and compliance.
Every flat tax proposal I’ve seen has either an income floor or a ‘prebate’ to counteract this. Generally they are set at an amount that actually improves the lot of the lowest income earners, largely due to knee-jerk reactions such as yours.
1. For individuals, simple tax code which does not distinguish where your income came from, but does keep income brackets (not flat tax).
2. For businesses, distinguish between:
- "US-based" company which would pay 10% corporate tax. A US-based company would need to have at least 66% of employees based in the US and/or at least 50% of the products/services produced in the US.
- "international" company would pay 35% corporate tax, if they want to do business in the US.
Unfortunately, its never going to happen. It will be phone-book-sized for the foreseeable future.
Even loopholes which, by common sense, should be closed are fought against with ferocity. For example, the corporate jet loophole-- effectively a "gift" for millionaires and their corporations... https://qz.com/196369/why-buying-a-corporate-jet-pays-for-it...
That clearly doesn't work since that ends up being negative for capital heavy businesses (airlines, manufacturing companies, car dealerships). Some businesses generate massive amounts of revenue, but have very low margins + not much profit.
There's a reason why things are the way they are. Redrawing the playing field is complicated and can't be done easily without (business) casualties.
The wealthy pay a decent amount for the resources of society they generally consume, which is fine.
Good job torpedoing this discussion, I hope you get a bonus from your "think tank".
None of your points should preclude us from doing something, you'd have us just throw up our hands and say "aw shucks, those rich fella's are just too smart."
The discussion is about the merits of raising taxes and this user derailed a large part, probably the only part most people will read, into a discussion on how we could or could not tax the wealthy.
This. I recently started my own business, and having an accountant explain to me all the different legal ways of optimizing the tax foot print of myself and my business has definitely been an eye opener.
It's also been humbling. When I was just an employee, I used to wonder why taxes couldn't just be a simple linear function of income. These days, I have a much greater appreciation for the complexities involved in designing taxes such that they maximize income for the state (local or otherwise) while still being a fair system by some measure, possibly determined by ballot boxes every four years or so.
I generally agree with you. People often say we should "just do X" with taxes, et. al. and we'd have lots of money for Y. They fail to understand that if you change the rules, you will change the behavior. Extremely rich people get (and stay) that way by leveraging their resources to not pay taxes if they don't want to. The economy will always need jobs and housing and the tax code must incentivize for those necessities. If you make things too costly, companies will move to other countries that would be glad to tax you less. This already happens at the state level as local governments compete on deals to attract good jobs to help their economy.
We spend way too much effort designing these systems as all "stick" and no "carrot". There are much easier ways to incentivize the rich (and companies) for the behavior you want.
>The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code.
You can, legislators just have a number of strong incentives to do the exact opposite.
You can tell how delicate this state of affairs is for the wealthy by the fits that they pitch via the media whenever a legislator proposes closing one or more of these loopholes (e.g. carried interest).
Moreover, many loopholes are often opinion based and require the tacit acceptance of the IRS to continue. Change the IRS leadership and boost its funding and the house of cards would start to collapse.
The problems are that they tell us to be fatalistic about this and we believe them and corporate-friendly lobbyists have more cash than union friendly lobbyists.
The reality is that people will calculate risk/reward based on the situations that they face. Tax enforcement is a pretty simple concept. You don't invest $1 in enforcement to net $1 in compelled compliance, you use enforcement to net $100 in voluntary compliance. Tax authorities can and do calculate how much they can harvest from enforcement activity.
Enforcement increases both the risk and impact when people do that risk calculation. If doing some shady bullshit to re-swizzle income has a X% risk of costing me $Y or Z months of bureaucratic torture, it's going to impact my decision process.
US Federal tax enforcement is a joke today. Through de-funding and neglect, the ability of the tax authorities at the Federal level to perform even basic enforcement activity has been kneecapped. To give a anecdotal illustration of the current situation, a friend of mine is a now-retired tax enforcement person. His particular speciality was staffed with as many as 75-100 people nationwide in the early 90s... when he retired earlier this year there were two other people in that function and most prosecutions in his speciality were being abandoned as no Federal people exist to testify at trial!
There's a simple solution to it, no? Abolish all taxes on income, dividends, or capital gains. Introduce a single tax on wealth. Every year tax a certain percentage of one's capital holdings, whether capital gain is realized or not.
Under your proposal, the roughly 50% of Americans with zero net wealth would pay nothing. That’s fine on paper, but it would actually incent people to stay in debt and dis-incent the accumulation of savings.
Look at it this way, I can either buy a bigger house with more debt whenever I have some extra money laying around, or I can save that cash and have the government take some of it every year. You also incent people to spend money on non-material things like travel and entertainment, rather than spending cash on a reasonable car (because leasing the car and blowing the other $20k in Vegas sounds like more fun).
There’s a simple maxim in taxes and economics - do not tax activities you want to encourage, and tax those which you want to curtail.
I wouldn't start taxing any wealth below a certain threshold at all. Like $200K or something.
If you buys a bigger house, if equity portion of that house is above a taxable threshold -- say a $1M house, and you have $200K equity, then that equity will be taxed. Very minimally I might add.
> do not tax activities you want to encourage, and tax those which you want to curtail.
That's not working out currently. Unless you want to encourage massive wealth inequality.
What about a business that is worth 10 million dollars but has a bad year and makes no profit. So now the owner has to pay a tax on the 10 million dollar wealth and liquidate his business ?
Why would they liquidate their business? I'm not advocating for a 100% rate. If they continuously lose money year after year, then the wealth tax would just be an additional incentive for them to shutdown, yes.
If you are wealthy and have a lot of holdings, create an offshore company and move all your wealth to it, then just get a company credit card. All your wealth and possessions is now owned by that company...
Spit balling here, but I'm not sure a wealth tax will fix it.
If you're an owner of an asset, and your primary residence is in the country of wealth taxation, you pay a wealth tax on the value of that asset, no matter where that asset is located.
Another problem though is valuation of that asset. There will be huge incentives to show lower valuations, but that's already a case for things like real-estate property taxes, and somehow the system still works.
> Capital in motion and at a high velocity is generally good for everyone. Capital at rest serves very few and is very harmful to everyone else.
This is dangerously wrong. No economist would tell you that a high velocity of money is an inherent good, or even that increasing the velocity of money is an unfettered good.
Public infrastructure, mortgages, venture capital, small business loans - all of these are investments, and making it more expensive to hold capital will dry up access to money for these sorts of projects.
The lower the efficiency of a system the higher employment and the more capital is spread around, making everyone better but making it very difficult to aggregate wealth.
Public infrastructure is exactly that...public. It is isn't taxed.
More money would be available for loans with higher velocity. Venture capital already has extremely high velocity...that's why it is even possible for extreme high risk investing to be profitable in the first place.
Where the penalty would be applied to businesses, banks, investment firms sitting on CASH or near cash assets doing nothing. Put those assets to work or tax the hell out of it.
Piketty argues we need a low worldwide universal capital tax. At the very least one of the advantages would be to have a census of wealth, just like we have for income.
> No economist would tell you that a high velocity of money is an inherent good
You may be confusing money and capital. Money velocity is almost always good. If someone buys infrastructure bonds and then those proceeds are spent on contractors to build infrastructure (who in turn pay suppliers and employees) you have lots of money moving with velocity.
> You may be confusing money and capital. Money velocity is almost always good.
I am not confusing anything. Increasing the velocity of money is not always good. In fact, under some schools of thought, long-term increases in the velocity of money are neutral-to-slightly-bad.
> If someone buys infrastructure bonds
Increasing the expense of saving capital means increasing the expense of bonds, which decreases the incentive to buy them in the first place.
> you have lots of money moving with velocity.
Uh, no, the tail end of that process does describe consumption behavior, but this situation actually has very little to do with the velocity of money, since we haven't addressed the propensity to spend that money a second time within any finite timespan.
Define "hold capital". Most capital held in banks ends up helping the velocity of money because it's used for loans. If we tax the hell out of money stored in banks, banks will have less reserve, which reduces the fraction of which they can lend, which means your average joe has less access to loans for their cars, maybe their first house, a small business, etc.
Past that, if it's expensive to hold money in America, they'll stop holding money in America, which means capital flight, which is its own very large problem worth avoiding.
Which is why I say tax ALL holdings of people operating in the US. Foreign AND domestic. A few countries already do that.
The idea is to with as much force as can be brought to bear get money to move into investments that hire people instead of just accrue capital gains.
An investment that puts people to work and generates 10% is much better than an investment in a fund that generates 10% in cap gains. Same gain, vastly different outcomes.
Yes, and that explains why rich people are often leftists and support complicated tax system - for them it does not matter, they will not pay a penny, but if someone tries to build competing business from scratch and cannot afford "tax optimalization" then taxation is one more obstacle on the road.
I've always thought that the central problem with a progressive tax code - though laudable - is that it takes the view that people don't deal with money in absolute terms.
For example: If I go hunting under my couch cushions I might find $1.50 in change. By that logic of a progressive tax code if I do the same activity on Bill Gate's couch I should find 3 or 4 million dollars.
Obviously that's insane. I would argue that it's insane because on some level everyone looks at a million dollars and thinks "That's a lot of money".
On top of that anyone encountering the sticky end of a progressive tax code is always confronted with the calculation of the cost of avoidance vs. the cost of the tax. And there's always a price you can pay to avoid a tax. It's generally based on the price of lawyers and the price of politicians.
Which isn't to say a progressive tax code isn't a good thing. Frankly I'm all for it. But to be equally frank how we raise the money for Government in this country is over thought. An unfair tax code that raises a reasonable amount of money is loads better then a fair one that raises an unreasonable amount of money.
I was trying to see if there is a way to fix this- "no tax code can close all loop holes", and my first thought was Formal methods- and lo and behold Google points me to http://snapl.org/2015/abstracts/hsu.pdf
It sure looks promising. But still wondering if it has been applied in practice.
A better approach might be to just stop them acquiring the things that ordinary folks need in a bid becoming rentier parasites, namely homes.
In a world where food is abundant (for now) that's what keeps everyone else poor. Limit their ability to become greedy landlords and they'll be forced to invest in real businesses and take risks.
This can be started on a local level and enforced easily by only allowing people who live in the homes or community trusts or government to own them.
If some billionaire owns 10 ferraris, has millions in offshore accounts and a super yacht why should anyone else care? It's not taking away from anyone and creates demand for luxuries that wouldn't otherwise exist and create jobs.
The rich do pay some tax so it's not impossible to get them to pay and rich people in different countries pay different percentages of their overall wealth. So it's by no means impossible to make them pay more, if that is what society desires.
Tax stocks steeper and someone wealthy enough will create the same investment exposure in the futures market, where every trade gets a mixed lower capital gains rate automatically!
Make cash transaction reporting requirements over $10,000 for everything, and someone wealthy enough will get real estate totally exempt from it!
Get an APA or a private ruling from the IRS where they agree on all the ways you aren't going to pay them!
Tell everyone else this is a problem so you can write a law with a new tax change that really only benefits you and your friends, because all the constituents you pander to have a base of voters that only somewhat understands income tax!
For a very long time, Swiss banks were bastions of impenetrable secrecy. The wealthy from all over the world used to stash their wealth there because they knew it was safe from prying eyes and even from the nearly all-powerful IRS. But then a couple of decades ago, the US government successfully made Swiss banks much more transparent -- to the effect that they are not nearly as reliable a safe haven for tax evaders as they were.
This doesn't mean that the wealthy have no more places to hide their money, but it does make it much more difficult for them, and is a sign of progress.
Much of this could be solved by switching from an income-based approach to one based on increase in.net worth. We shouldnt care whether income is realized or not in a given period. If someone is now worth more than yesturday, that difference is taxable income. Such an approach would eliminate the need for a great many rules.
(With standard policy-based exemptions such as tbe rise in value one one's primary residence etc)
This is fairly limited thinking - your perception of the problem is constrained by the current status quo. What if Dividends, Income and Cap Gains shared the same tax rate? What if Trusts were not tax protected? Off-shoring is already pretty much illegal under the current tax regime, all you need to improve is enforcement rates.
> The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code.
Especially that they can use their wealth to hire teams of world-class specialists and pay them to figure out creative loopholes. It's something regular people can't do.
I hope more people will research Georgism and start trying to spread the idea around. It's the only tax-system that comes anywhere close to closing up any of these loopholes.
The can't easily dodge sales tax, because the responsibility is on the sellers to collect it. Most of them won't have the resources to cheat and get away with it. They can't easily dodge land taxes either, because land can't be moved.
A progressive sales would be very difficult to implement and maintain. Virtually every good / service would need to have a tax associated with it. How much do you tax a Honda Civic vs an Acura RSX? A BMW? Bentley? How much do you tax a 33ft yacht? A 60ft yacht? This thing would also need to be updated very often as new technology comes out. Think about Apple Watches, VR headsets, etc. You'd need a small army of tax lawyers to come up with and enforce this tax code.
Why would you need to tax each of those at a different rate? You make a consumption tax progressive by providing an advance rebate (prebate) to everyone in an amount that covers the consumption tax for a defined standard of living. Any consumption above that level burdens the consumer, and when averaged out over a quarter or year will be progressive.
The problem is that the rich have the ability to take their income in alot of different ways.
Tax income more, they'll take it as dividends.
Tax dividends more, they'll take it as capital gains.
Tax capital gains, they won't realize their capital gains until they can offset them with realized losses or they'll just get bank loans again't their stock holdings.
Tax assets on death and they'll pass them o n in trusts. Some will move money off shore if they think they can get better returns that way.
The problem is that no tax code can close all loop holes because you just can't foresee the creative ways people will out maneuver the tax code.
Who would have thought 25 years ago that companies would buy other companies in different countries, not to acquire their products or markets, but to acquire their headquarters address to lower the tax paid in the US.
I don't think anything has changed.