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Wednesday, December 8, 2010

Public Funding

One thing I think about a lot is the best way to accomplish revenue generation for public services and assets.

So far I can think of no ideal solution.
Currently the USA employs a mixture of taxation techniques to raise revenue.
The one that most people readily think of is the income tax. Our income tax is a graduated tax system that taxes people a greater percentage depending on the amount they make. This is, of course, completely unfair and it penalizes people for working hard to improve their own lives. In an effort to counter that unfairness we have many income tax deductions that allow people to deduct things that are costs of living for them to decrease their income tax burden. This, too, is completely unfair as it rewards people for having families and, indirectly, penalizes people who choose to have smaller (or no) families. Plus the deductions have a rule structure that is so absurd that people can spend thousands of dollars to private accountants to circumvent the taxation system with a net result of saving money.
Any system that is inherently unfair to start with that adds layers of complexity which create additional unfairness is a poor system that should be abandoned. If there MUST be an income tax it should be a flat percentage regardless of how much you make with no deductions. Unfortunately, there is a problem with this model, too. If your income is at the poverty level you end up requiring a greater percentage of your income to merely survive than those who earn significantly more than the poverty level. In addition, managing all of the income tax collection and processing requires a huge fleet of agents who are employed by the government. Their salaries and benefits and office space, etc all detract from the value of EACH AND EVERY tax dollar collected.
The income tax is, therefore, a conundrum that is a lose-lose situation for everyone.

The next most common taxation method is the sales tax. EVERYONE buys things. Rich people tend to spend significantly more than poor people because they have more money to spend. If there were a flat percentage sales tax then EVERYONE could control their level of taxation by choosing how much they spend. Of course, there is a minimum level of spending that anyone can accomplish because there is a minimal set of necessities for basic survival. This means that the poor would be taxed a higher percentage of their income than the rich in a minimalistic situation. Compounding this issue is the reality that the less the rich are spending the more they are saving or investing. The more they invest the more wealth they will accumulate, thus making the poor even poorer.

The third taxation method that affects people on a regular basis is the property tax. I, personally, find the property tax to be the least fair of the current taxation methods because it forces those who own property to pay for all of the local public services that are consumed by everyone. Renters don't (directly) pay for the schools their children attend: the landlords do.

I've thought about this a lot and the possible outcomes of changing the system. The conclusion I've come to is that a combined taxation system is necessary, but not one as convoluted and corrupted as the one we have now.

Here's the thought I have:

1. Eliminate the personal income tax and replace it with a 15% federal income tax. My paycheck currently sees more than 15% deducted for the variety of federal income-related taxes. If all of those went away and were replaced with a 15% income tax on everything the ultra-rich who avoid their income taxes would cease to be able to circumvent the taxation system so revenues would go up. In addition 85% (a complete guess that is unsubstantiated by any research) of the IRS would be able to be laid off (a one-time economic disruption) creating a large savings in cost. More revenue and lower cost means an improvement in the efficiency of the funds collected AND an expansion of the services that our tax revenues are able to provide. The majorirty of people for whom this additional taxation would become an overly large burden are probably already on some sort of assistance service. Their "benefit" could be adjusted upward to compensate for this and the difference in benefit would, essentially, be a neutralizing agent on the increased revenue for that segment of the population.
2. An investment / capital gains tax to prevent an increasingly larger and larger accumulation of wealth by the top 1% of the population. If we start with a fixed number for raw investment value (I will use $100,000 because it makes the math easy) as the baseline starting point we could apply an investment tax on the earnings that the investment makes. If your investment generates 10% return in cash each year ($10,000) then you pay the investment tax on the $10,000. The more cash dividends you earn on you investments the more raw volume of taxation you receive. Capital gains taxes work in a similar manner, but they are the value of the investment itself. Stocks and real estate are common examples of items that experience capital gains taxes. If you purchase an item for $100,000 but sell it for $1,000,000 then you have earned $900,000 on that investment. Capital gains taxes you on that earning. Because of the inherent inequality between being rich and being poor I think it is important to create taxation levels that help slow the general accumulation of wealth by the rich, but only to a point that is fair and equally applied to EVERYONE.

So, in short:
No income tax + 15% federal sales tax = more money in my wallet each week, more money for the government AND less cost.
Investment and Capital Gains task = limited wealth accumulation by the rich and a second taxation base to level the percentage of "surplus" income that is taken by the government.

Anyone have any additional thoughts on this?

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