Sensible taxation strategy

Reward the good behavior, penalize the bad- that’s management 101. Unfortunately, the American economic ecosystem isn’t sensible, rational or working very well for most of us.

What passes for debate is more like a game of “gotcha” than a discussion of the merits and failings of our systems. Instead we talk about irrational ideas like the “Flat tax” that are just as regressive as the current system.

My discussion partner, Greg Hunter, forwarded me this post from the Arch Druid Report” blog that I found fascinating. The comments are good too- and I highly recommend you head over and spend some time reading it- but here is the meat of this postulate on a better tax strategy:

The primary economy, which is nature, and the secondary economy, which is the production of goods and services by human labor, are subject to negative feedback loops that tend to hold them in balance. The tertiary economy, which is the exchange of money and other forms of abstract wealth, is subject to positive feedback loops that drive it out of balance in ways that unbalance the other two economies as well…

The taxes on natural goods and services follow the same rough line of logic as property taxes do at present. The federal government, as trustee for the American people, already effectively owns all the real estate within its borders – when you buy property, what you’re buying is the right to use that property within the limits of the laws and the national interest, which is why China can’t just contract with private landowners to buy a couple of disused fishing harbors on our west coast as bases for its navy. The same principle could reasonably apply to every other resource in the country. When you pump oil from the ground, you’re depleting part of the patrimony of the American people, and you should have to pay the government for that privilege. When you dump smoke out of a tailpipe, equally, you’re using the nation’s atmosphere as the gaseous equivalent of a landfill, and once again you should have to pay to do that. Every natural resource of every kind would be subject to the same sort of tax.

Now of course this would mean that the prices of many goods and services would go up considerably. Since everyone would have the money they wouldn’t have to spend on income and sales taxes, this may be a little less of a burden; but the crucial point is that people can avoid resource taxes by their personal choices. If you buy a hybrid car, you’re going to pay a lot less in petroleum tax, and a lot less in tailpipe tax as well – though the extraction taxes for the rare earth minerals in the batteries and electronics may set you back a bit, as they should. If you don’t own a car at all, you laugh all the way to the bank. Similarly, the price of a product made from metal mined from the earth includes the extraction tax for the mining, but the price of a product made from recycled material doesn’t; thus the manufacturer has a big incentive to use the recycled material and undercut the competition….

A tax code that burdens the secondary economy – which is the economy that actually produces goods and services, remember – while encouraging the wasteful plundering of nature and the bubble-blowing antics of the tertiary economy is not going to help us weather the storms of the near future. A tax code, any tax code, that does the opposite – that makes it more profitable to employ human labor to meet human needs, and less profitable to disrupt the natural cycles that undergird our survival or to feed speculative excesses that pump imbalances into an already troubled economy – could be a very helpful asset in a time of crisis, and could be put in place tolerably easily, without having to tear an entire society to pieces and rebuild it from the ground up.

via The Archdruid Report: Immodest Proposals.

It’s the basis for today’s Dayton Grassroots Daily Show- which we just call “Taxation”

We share these discussions with you to try to get you to share your thoughts with us- and to stimulate out-of-the-box new thinking in our community. We believe that the same kind of original thinking that put Dayton on the map- will be the same thinking that brings prosperity back to our community. It’s just going to take a lot more of you watching, sharing and commenting.

Enjoy!

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24 Responses

  1. Shortwest Rick January 3, 2010 / 2:04 am
    Tiered consumption tax (sales tax) and do away with income tax, property tax, inheretance tax, capital gains, tax on earned interest, taxation on income paid out in taxes (double taxation) and all taxes that discentavize savings and production. In Ohio, food is considered a necessity with no sales tax but toilet paper is considered a non-necessity and taxed at the same rate as a Beamer or a Cessna.
  2. Ice Bandit January 3, 2010 / 11:40 am
    The veterans of the American Revolution, who had just defeated the world’s greatest superpower over the issue of unfair taxation, had not even cleaned their muskets when the Whiskey Rebellion brewed (bad pun intended) over the new nation’s taxation of firewater. Unfair taxation has always been the focus of American discontent and revolutionary fervor, a fact folks such as David “I’ve never seen a tax I didn’t like” Esrati cannot seem to fathom. Southwest Rick’s post hit the proverbial 10-penny finishing nail right on its’ flatest spot displaying the absurdity and inconsistency of Ohio’s tax policy. Another example; Coke or Pepsi, which we all consume daily is taxed whereas a milkshake is not (thank you, dairy lobby)…………
  3. David Lauri January 3, 2010 / 1:10 pm
    Not all of us consume Coke or Pepsi daily.  I used to drink multiple Cokes a day, starting with one for breakfast.  I feel much better now that I’m down to a Coke or two a week.
  4. truddick January 3, 2010 / 4:23 pm
    I wish people would move past the notion that we can get by without paying for anything.  Taxes are necessary, and we ought to figure out how to collect them in quantities that continuously support public services while not encouraging bureaucracies and burdening the citizenry.
     
    Rick thinks that a sales tax is a good idea.  It’s not.  It taxes low-income people (who must spend all their incomes on necessities) at a higher rate than high-income people (who reserve almost all of their income as capital).  Using the old standard “if you want to discourage something, tax it” then a sales tax will discourage spending, harming the consumer economy.  Sales taxes are harder to collect, since every little transaction creates another data point in the account ledger.  The national “fair tax” (sales tax) movement would attempt to balance those inequities by creating a sizable rebate (say, up to 24,000) for those of low incomes–which would require that we maintain the current IRS to keep track of incomes and issue rebates, while adding the NSTS (national sales tax service), an equally massive agency, to administer the so-called “fair” tax.  It’s a fool’s proposal.
     
    The only “fair” tax is a progressive income tax with no deductions or exemptions, one that treats all income–including capital gains–equally.  This tax takes from earnings, meaning that people only pay when they have money to do so.  It puts a proportionate burden on those who have financially benefited most highly from our social and economic system.  It eliminates bureaucracy and the unfair burden of complex tax codes on small businesses and individuals.
     
    Yes, it will need to be an income tax at European rates.   Ask Europeans if they think their tax rates are unfair considering their government services, and they’ll mostly respond “no”.  I can’t appreciate why the USA is so stubborn as to reject out-of-hand things that work well elsewhere.
  5. Ice Bandit January 3, 2010 / 4:37 pm
    Congratulations David Lauri, on whuppin’ your Coke (the carbonated variety) addiction. The Old Bandito takes inspiration from those who have joined  the unshackled, be it from cigarettes, booze or any other addiction or compulsion. Alas, David Lauri, the Old Bandito is not composed of the same solid stuff as you are. A severe Pepsi Jones hits the Bandito at about noon every day (after a half dozen cups of morning  java, natch) and lingers until he reaches the somnambulistic state. As a result, the Old Bandito’s upper body, which once resembled a world class athlete, now resembles an advertisement for Michelin Tires. Question, does Betty Ford have a Pepsi wing?…..
  6. Bubba Jones January 4, 2010 / 7:40 am
    @Bandito – you ALWAYS crack me up.  Where can I take “Writing Like the Ice Bandit 101”?
     
    @Truddick – Among other things in your post, you are mistaken about the Fair Tax requiring the IRS to keep track which low income people are entitled to the  rebate (actually referred to as a “prebate”) because EVERYONE will be entitled to it.  That’s right, everyone, rich or poor, will get the same amount back.  This is to ensure that the essentials of life are not subject to the national sales tax and only luxuries will be taxed.  Yes, essentials are taxed when you purchase them but the net effect of getting a monthly prebate/rebate will be that they are not taxed.  And before you start talking about the systems necessary for something like this – they’re already in place.
     
    Also, your assertion that sales taxes are harder to collect is also nonsense.  The facilities for doing that are already in place everywhere in the country except for four states that don’t have a state sales tax.  With sales taxes, you’re only collecting from businesses and not requiring individuals to file anything.  So, you’re reducing the number of  “reporting entities” from 350,000,000 to whatever the number of retail business is.  That should make compliance significantly easier.
     
    As far as a progressive income tax being the only fair tax method, that’s a matter of opinion.  I disagree with you on so many levels but, quite frankly I’ve taken more time than I cared to away from revenue producing endeavors this morning to reply to this.  If you’d like to have a drink sometime to discuss it, I would be happy to oblige.  It’s obvious though that you don’t know as much as you’d like people to think that you know about taxes or computing income.  While it’s easy to say “This tax takes from earnings, meaning that people only pay when they have money to do so”, “earnings” doesn’t necessarily equate to cash.  I’ve seen plenty of tax returns that for businesses, self-employed people and landlords that indicate that a profit was made, yet there is no positive cash flow in the business.  A common example of this is when a business is building inventory.  The cost (cash outflow) of inventory is not a deductible expense until the inventory is actually sold.
     
    @DE & GH – This is only the second or third of your videos that I’ve bothered to watch.  Quite frankly, the video added nothing to what you wrote or to information in the link.  But, on a positive note (since I’m a positive guy!!) I did enjoy reading the ArchDruid piece.  I liked the concept of the consumption tax for taxing the “primary economy” or finite resources and for eliminating the tax burden on human capital.  There are a couple of problems with the proposal though.  First, I can see where the tax on resources is regressive.  It takes roughly the same amount of steel, aluminum, etc. to make a Kia as opposed to a small Mercedes or BMW.  So, the lower income consumer is paying roughly the same amount of tax as the high income consumer.  Also, how do you tax raw materials that come in from foreign sources as opposed to domestic sources if this system is only implemented in the US?
     
    Next, I don’t think that author really thought out what should be taxed as far as “making money from money” is concerned.  He proposes to not tax salaries, wages, dividends and rents but does propose taxing capital gains, interest income and “all other forms of making money from money.”  WTF???  That makes no sense at all!  Dividends and interest are essentially the same thing.  You only get dividends if you invest money and then hope that whatever company you invest in is profitable enough to pay a dividend.  And rent income is derived from taking money and buying an asset that you hope generates income.  And, if the rented asset appreciates and is sold, it generates a capital gain which is taxed.  So, you asset generates tax free income for a while but then when you sell it you have to pay taxes.  It looks to me like the separation of these categories of income were purely arbitrary on the part of the author.
     
    Quite frankly, David, the Fair Tax accomplishes EXACTLY what you have indicated over the years that you want to accomplish.  It taxes the higher income / higher spending person more than a lower income person.  The “prebate” removes the regressiveness of the sales tax and completely eliminates the tax burden from the poor.  It taxes consumption, especially conspicuous consumption, and rewards  frugal behavior.  If you would actually read the bill and research behind the concept, you would know this.
  7. Brian January 4, 2010 / 11:33 am
    @Bubba:  NICE JOB on the FairTax explanation!!
  8. Bubba Jones January 4, 2010 / 12:10 pm
    Aw, shucks, Brian! I’m blushin’!  Thanks!
     
    Well, it’s a little hard to explain something like this in a paragraph or two, but part of the great thing about it is that it’s a simple enough concept that you can get the idea through fairly easily.  Try doing the same thing with the current system’s 50,000+ pages of code.  The Fair Tax bill is only about 100 pages.
  9. Robert Vigh January 4, 2010 / 1:04 pm
    What Bubba Said.
    Only thing I have to add is this assumption that our current tax code is regressive. On Dayton OS, Mike Bock posted the percentages of peoples income that are taxed. However, a responder to his post pointed out that the lowest 20% receive in return $8+ in services for every $1.00 in tax. So looking at both sides of the equation, it is difficult to genuinely say our current system is regressive. Property tax is probably the most regressive form of taxation that we have, I am all for dumping that one.
  10. David Esrati January 4, 2010 / 1:44 pm

    Whoa- @Robert Vigh- if what @Bubba says-

    Fair Tax requiring the IRS to keep track which low income people are entitled to the  rebate (actually referred to as a “prebate”) because EVERYONE will be entitled to it.  That’s right, everyone, rich or poor, will get the same amount back.

    Don’t you have a problem with that- GIVING EVERYONE a prebate- isn’t that socialism? You don’t have to work- you just get the prebate sent to you every month- on the assumption that you’ll spend…

    And, what about minors? Does this encourage us to have more babies- so we can get a prebate for each? I’m sure Gene will have a cow on that one.

    I’m not sure the “Fair tax” moves us forward- although it certainly does cut out the paperwork and mess we have now.

  11. Bubba Jones January 4, 2010 / 3:24 pm
    >>> I’m not sure the “Fair tax” moves us forward <<<
     
    THEN READ THE BOOK!!  I’ll be happy to loan you a copy.  Hell, I’ll even BUY you a copy of your own! :)
  12. David Esrati January 4, 2010 / 3:50 pm

    @Bubba- as long as no one else complains about me accepting payola- I’d love to have a copy of my own.

    Thanks

  13. David Lauri January 4, 2010 / 5:46 pm
    If you’re going to read books about the Fair Tax, David E, perhaps you might want to take a look at The FairTax Fantasy: An Honest Look at a Very, Very Bad Idea by Hank Adler & Hugh Hewitt.  You can preview it via Google Books at http://books.google.com/books?id=3KiDxfWd0G0C&lpg=PA95&pg=PA95#v=onepage&q=&f=false.
     
    Hank Adler “is an Assistant Professor at Chapman University [and] was in public accounting for almost thirty-four years, the last twenty as a top partner at Deloitte & Touche.”  See the rest of his bio at http://townhall.com/columnists/HankAdler?bio=t.
     
    Hugh Hewitt is host of the syndicated radio show The Hugh Hewitt Show.  Andrew Sullivan calls him a Christianist, so Hewitt’s hardly someone whose opinions in general I would respect, but his being socially conservative does show that there’s disagreement about the FairTax on all sides of the political spectrum.
  14. Bubba Jones January 5, 2010 / 9:49 am
    DL – Thanks for the link on that book.  I’ll have to see if the library has it.  The Fair Tax bill is not unique in having disagreement on all sides of the political spectrum.  Look at your precious “health care reform” legislation.  There was a ton of “compromise” (aka bribes) that was done in the Senate to get it to pass.
     
    Like Mr. Adler, I too am a Certified Public Accountant that focused on tax law.  And, like Mr. Adler, I also spent part of my career at a national firm.  I have worked with businesses large and small and I’ve seen firsthand how our current system forces many businesses to make decisions based on the tax ramifications rather than what’s truly best for the business.  The Fair Tax would eliminate a lot of the tax based decision making.  But, that’s just my opinion as Mr. Adler has his opinions.  The interesting thing about the excerpts that you’ve linked to is that I didn’t really see much reasoning behind his opinions.  Much of it was just “this won’t work” and “that won’t work.”  The Fair Tax is the result of $25M in studies performed by many of the nation’s top economists.  What research does Mr. Adler have to back up his claims?
     
    DE – I don’t think that we can consider a $12 book “payola”! ;)  Do you mind a used e-bay copy (so I don’t have to pay sales tax! LOL!) or do I have to buy you a new copy? ;)  If you need a new copy I’ll try to get over to Books & Co (at The Greene so I can save .5%!!) in the next week or so.  I think that I also have a copy of “Fair Tax – Answering the Critics” around here somewhere that I can loan you.  You can probably read both books in a week of evenings.  If I deliver them to your office I might have to make you buy me lunch at that little Hallal market up the street from you. :)
  15. David Esrati January 5, 2010 / 10:10 am

    @bubba- used is fine. Just inscribe it- so I’ll remember who it came from. Lunch at Halal is hit or miss- some days the shwarma is in- some days- not. Just skip the “pickle” thing-

    Let me know when you want lunch- my dance card is filling up. And, btw- if you think I can take off a week of evenings (I work from 9am to 10pm- or 11pm most days)- you’re smoking something. I will try to read it as fast as possible.

  16. Bubba Jones January 5, 2010 / 10:41 am
    It’ll be a couple of weeks.  January is usually a busy month for me.
     
    And, if evening reading doesn’t work for you, I’m sure there’s a bookshelf in your “reading room” where you can store the book and read it during the day! ;)
     
    In the meantime, I’ll be thinking of a wonderful inscription for the book.
  17. Ice Bandit January 5, 2010 / 2:30 pm
       Bubba- thanks for the props. But please take a bow and accept a standing O from the Old Bandito for explaining the Fair Tax in terms that even a taxophile like David Esrati can understand. And kudos for having the intellectual backbone to step up and defend your thesis even though the blog meister referred to the tax as “irrational.” As a CPA with an insiders’ knowledge of the real impact of our counterproductive tax system, you mentioned what El Bandito calls the “compliance tax.”  For even after Uncle Sam and his co-conspirators in Columbus are done picking us up by the ankles, turning us upside down, and giving us a not-too-gentle shaking with the income tax, sales tax, franchise tax, gas tax, ad infinitum, our pockets are still not immune from being picked. For the state wields a heavy blackjack, and because the laws on taxation are so murky and incomprehensible we rush to tax preparers and tax lawyers to stay out of the exercise yard of Leavenworth. These folks add nothing to the bottom line, but add handsomely to the cost of enterprise. And to Truddick and others in the cult of “poor obsession” please consider this; taxation adds at least 25 percent to the cost of everything in the marketplace, and with the implementation of the Fair Tax, prices would take and immediate and permanent plunge. And what would be a bigger boon to the impoverished than increasing their purchasing  power by 25 percent? Fact is, the Old Bandito finds David Esrati’s tax fetish, in a city and state where industry is leaving skid marks bailing because of our high taxation, not just a little baffling. It cannot be confirmed, but rumor has it that when David Esrati wants to add a little spice to his love life, he has his sweetie dress not as a cheerleader or nurse, but as an IRS agent…..
  18. Bubba Jones January 6, 2010 / 8:25 am
    >>> It cannot be confirmed, but rumor has it that when David Esrati wants to add a little spice to his love life, he has his sweetie dress not as a cheerleader or nurse, but as an IRS agent….. <<<
     
    Now, THAT’s funny!!  Weird? Yeah.  Kinky?  Yeah.  Funny?  Hell Yeah!!  :)
     
    DE – can you either confirm or deny the statement posted above?  I promise that your answer won’t be used in any campaign literature from opposing candidates in future elections! ;)
     
    Surprisingly to the general population, a large number of CPA’s that I’ve talked to support The Fair Tax.  Would it eliminate some billable work for them?  Sure, but it also frees them up to focus on the business consulting end of their business which is much more enjoyable, rewarding and profitable.  “Tax Season” is a brutal time of year where you don’t see daylight or your family for three months.  The tax prep firms like H&R Block, Jackson-Hewitt, etc. are opposed to something like The Fair Tax.  The only make their money from the prep work.
  19. David Esrati January 6, 2010 / 9:42 am

    @Bubba- as to my love life- gentlemen don’t ask, and gentlemen don’t tell.

    Do I agree that accountants should be doing cost/benefit analysis- and actually add to the GNP instead of being a cost center for most businesses (unless they are figuring out ways to skirt taxes) – absolutely.

    But – again, tax policy can be policy neutral- as the “Fair tax” supposedly is- or it can be used to adapt behavior (as it is now- but poorly). I prefer the tax on the primary and tertiary economies- because it forces changes in un-productive behaviors.

    And- dividends and interest are not the same thing. As a CPA you should know that. Dividends are paid to shareholders as a return on investment. They are not guaranteed unless the company makes a profit- and the CEO doesn’t keep it all for himself. Interest- is a contractual obligation paid on debt. Quite different.

    But, I guess I passed that part of finance and you didn’t.

  20. Bubba Jones January 6, 2010 / 12:21 pm
    Once again, David, you give some snarky reply.  As far as passing “that part of finance”, yes I did.  And, just to let you know, the finance and accounting majors always joked that marketing majors were the accounting majors that couldn’t pass accounting 301.  Many of your comments concerning the  economy, business and taxation are proof that those jokes were grounded in reality.
     
    My point was that dividend income and interest income are both income derived from investments.  While interest income may be a “contractual obligation”, it is by no means guaranteed.  Just ask the many bond holders (bonds pay interest, not dividends) that are holding worthless corporate (and in some cases, municipal) bonds.  Dividends are by no means guaranteed either, regardless of whether or not the company makes a profit.  (Your statement of “They are not guaranteed unless the company makes a profit” infers that dividends are guaranteed if the company does make a profit.)  They are similar enough that it doesn’t make sense to tax them differently which was my original question (which you never addressed) about the ideas put forth on the blog that you linked to.
     
    David, we can have meaningful dialogs about policies and ideas or you can play with semantics.  If you choose the latter, count me out and you can continue to play with yourself. ;)
     
  21. Robert Vigh January 6, 2010 / 12:33 pm
    I think David got his feelings hurt. He went back 13 posts to find something snide to say:

    “But, I guess I passed that part of finance and you didn’t.”

    Also you misrepresent what Bubba said, as usual. He said essentially dividends and interest are the same thing as it relates to making money with money. Lets see, I can loan money and make interest. Or I can invest money and make dividends. Both sound like making money with money to me.

    David likes something because it FORCES other people to what he likes. My criticism of the arch druid’s idea is that it seems like a giant property tax. When is it taxed? As soon as you touch the land you own or only when you sell mineral from the land you own? How do you clearly define what gets taxed from the earth without empowering the government to tax everything? Furthermore, why would you tax the tertiary economy and not the secondary? To force incentives into creation and use of the lands natural resources as opposed to the financial infrastructure which helps to develop peoples surplus into capital projects and investment.

    There is also the matter of competition. If we tax all minerals at the time of mining, all costs go up. What if we import the mineral………tax it the same? OK, what if we import a product made with non-taxed minerals, but we are receiving the final good?

    He makes some other assumptions that I disagree with.

  22. Robert Vigh January 6, 2010 / 12:37 pm
    Bubba,
    We cross posted. I was trying to explain that and you beat me to it. I am a highschool dropout and I understood it. ………………….Where does that put marketing majors?
  23. Bubba Jones January 6, 2010 / 1:26 pm
    >>> Where does that put marketing majors? <<<
     
    Well, I could give my opinion but since I suggested to David that he should try to be a little less snarky, I’ll be quiet! :)
     
    What high school did you drop out of that introduced you to the wonderful world of Libertarianism? ;)
  24. Robert Vigh January 6, 2010 / 2:59 pm
    West Carrollton HS.
    I think I began to realize I was a libertarian only recently. It was about 2-3 years ago I began reading alot (in regards to this topic, I have always read alot) and paying attention to the political environment. Freedom is of utmost importance to me and I could not stand how so many people seemed to think there was a distinction between economic freedom and other freedoms. They are intimately intertwined.

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