Re: Taxes: Taxonomy and Evaluation

From: Dave Long (dl@silcom.com)
Date: Thu Mar 29 2001 - 10:11:58 PST


Jeff, thanks for the framework. I am afraid I have
problems with a number of the assumptions. In the
interests of brevity, I offer three main objections,
as well as a simplified (9 line) framework.

-Dave

---------------
Assumptions
---------------

> THEFT IS IMMORAL. For the purposes of our discussion, I assume that
> we'll all agree that theft is immoral. By theft, I mean the taking
> of one's property by another without the first party's consent

true so far...

> For the purposes of this discussion, I assume that confiscation of
> taxes up-front is coercion, coercion is theft, taxes levied on income
> are a form of theft; therefore taxes collected directly from income
> are immoral.

Income taxes are not confiscated up-front; they
are only collected after one has done something
(a taxable event) to incur a tax liability.

If one is out in Central Park, and a mugger asks
for money, then that would be theft. If one has
a business in a co-op building, and the tenants'
representative asks for money, then that would be
collecting the rent. When the IRS asks for money,
it is much more like the latter than the former.

Furthermore:

Individuals have just as much control over their
income as they do over their spending. Whether
a tax is on income or spending, the amount to be
contributed by each citizen will in a degree be
at his own option, and can be regulated by an
attention to his resources. Even property taxes
do not eliminate individual control.

-------------------------
A Taxonomy of Taxes
-------------------------

The categories here are not mutually exclusive;
depending upon what one considers to be the base
quantity, a single system will have multiple
mappings.

For instance, FT may be an FR system in spending,
but an FP system in percentage of spending, and,
as spending only goes up half as fast as income,
it is a PD (PURE DECREASING) system in income.
It also has WE characteristics: one can avert
consumption taxes via owning assets.

----------------------------
Qualities of Tax Systems
----------------------------

As much as I like FAIRness:

> FAIR. (F) In evaluating tax systems, we'd like to ask "is this
> fair?" For our purposes, Fair will be defined to mean that (given
> the Assumptions above) no person receives a disproportional benefit
> (i.e. provided services) from the system relative to their input into
> it.

this goes against CAPITALISM. In a free market,
a producer can offer a bundle of services (A,B)
at a price 5 such that consumer X (value of A=6,
value of B=0) and Y (value of A=5, value of B=5)
will both buy (input), although they receive a
disproportional benefit: X benefits by 1, and Y
benefits by 5.

All else equal, of course we'd prefer the FAIR
system, but in selecting initial candidates,
I prefer:

PRAGMATIC-FAIR. (PF) Every citizen benefits
sufficiently from the system that they continue
to choose to buy its bundle of services.

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

Simplified Framework
--------------------

- We have a total tax burden (to fund *some* set of mutually-agreeable
  government activities) resembling the current level of collection.

- We do not want the tax system to affect the wealth distribution.

Therefore, to evaluate any proposed tax system,
decide first: does it raise enough revenue?, and
second: does it change the pretax distribution
of wealth?

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

Application
-----------

In the case of a consumption tax, high wealth individuals
have incomes that are not significant fractions of their
wealth, and furthermore consume at a rate about half that.
Low wealth individuals have incomes that are as high or
higher than their wealth, and (for an average 30K earner)
consume nearly all of that.*

We take 23% as sufficient to fund the government, and
move on to the second question: what happens to wealth?

If the low wealth individual faces the full 23% rate on
consumption, which would be ~23% of income and perhaps 46%
or more of wealth, and the high wealth individual faces
a rate of 23% on consumption which maps to only 12% on
income, and perhaps 6% or less of wealth, it is clear the
wealth distribution will be flattened into the corner,
so consumption taxes fail the second test.

Going back to Bone's Lemma:

Both have attempted to better their economic situation via
economic productivity, yet due to the magnitudes involved,
the high wealth individual translates nearly all of that
productivity directly into corresponding betterment of
situation, whereas what little betterment the low wealth
individual might achieve is swallowed by the inhibitory
effect of facing the full consumption tax rate.

--------
* from <http://stats.bls.gov/csxstnd.htm>:
(consumption ~= income * .5 + 15K, for "consumer
units", which include households and individuals)



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