Redistributing Wealth, Simplified
It’s not fully clear what president-elect Obama plans to do on tax policy other than “redistribute” and make those families making over $250,000 pay their “fair share.” But I was intrigued by his platform pledge to:
I don’t think for a minute that real tax simplification and genuine transparency (to make protest and revolt easier) are imminent; but one can fantasize.
The heyday of the simple “flat tax” idea was back in the ‘90s. Dick Armey’s flat tax on a postcard was a simplified income tax. Meanwhile, two prominent consumption tax proposals (according to my hazy memory) were a sales type tax, and a “savings exempt” version that would apply a tax rate to income not saved. The first is collected at the point of sale, and the second is computed by the individual. If we ever reach the stage of actually debating Mr. Obama’s brand of simplification, the pros and cons of a consumption tax are worth keeping in mind. (Presumably any flat(er) or simpler tax would generate calls to move the base increasingly toward a consumption tax rather than an income tax). Some thoughts:
Consumption tax: what’s good, or might be:
- It gets the IRS out of the public’s pocket
- As long as it’s not like a value-added tax (applied at every level of production), a consumption tax could reduce bureaucracy. (I wrote an angry riff against a value-added tax back then).
- Americans now spend billions of hours filling out gov’t paperwork, most of it tax forms. That’s the equivalent of millions of Americans working full-time all year.
- Taxing consumption rather than income can increased production and wealth-creating incentives.
Consumption tax: what’s bad:
(I’m assuming a “point of sale” type of tax that exempts no one: however this can be modified to help avoid these “bads.”)
- No one is exempt, as many would be with a flat tax paid by filing a simple return.
- May hit poor and middle class hardest, who spend a higher percentage of their budget on necessities.
- Since the tax is so broad based, vast amounts of money can be raised with very tiny, almost imperceptible rate increases, and since no return is filed people may lose track of just how much they are paying.
- Might encourage black market transactions (But if you know anything about me I’m more tempted to put this in the “what’s good” category).
- The tax must replace the current income tax, not supplement it. This is probably the greatest threat.
- Since a consumption tax might hit the poor hardest, it may provide a built-in excuse to expand social welfare programs. (This has happened in European countries that have adopted VATs. One economist argued that a VAT could be made fairer in the U.S. by expanding Food Stamps rather than by staggering rates.)
- Since exempting necessities to protect the poor will decrease revenue potential, higher rates may come to be imposed on politically incorrect categories of luxury goods.
Let the debates begin.
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Life’s two certainties (being sold out by the Swiss may be one of them)
As yesterday’s New York Times reports. Lost in the universal focus on the credit crisis, we have seen a somewhat troubling change taking place in Switzerland’s longtime bank secrecy laws.
Switzerland’s tax authorities, under pressure from a growing United States investigation into the Swiss bank giant UBS, are expected to hand over confidential data on wealthy American clients of UBS to the Justice Department, two people briefed on the matter said Tuesday.
The move would represent a significant shift in Switzerland’s banking secrecy laws, whose tradition dates to the Middle Ages.
Swiss neutrality (which is irritable to some) and stability has enabled its banking sector to become a source of prosperity for the nation. Reasonable exceptions to their secrecy laws for actual criminal activity should be allowed, but forcing banks to share private information on its clients merely for ’suspicion’ of tax evasion (something often disputable due to folks scrounging through the complicated tax code to reduce liability) seems quite dangerous. Especially since Swiss tax law has a different view of tax evasion than the U.S.
Swiss law makes disclosure of client data or names a crime unless the Swiss authorities think that the client has committed a serious crime, like money laundering or tax fraud. Unlike in the United States, Switzerland does not consider tax evasion to be a crime, though both countries have largely similar definitions of tax fraud.
And the Swiss are capitulating! In direct contradiction to their own legal view of tax evasion. Even though some may argue that this is moot because the U.S. does not consider a financial transaction as something beholden to privacy rights, the Swiss do–and besides, the U.S. view is wrong. A person’s financial records should be considered as sacred as their medical records.
Every citizen should maintain a healthy distrust of its government, after all, we have seen federal bureaucracies used to abuse the rights of citizens in many ways by many different regimes. If the government has the power to search through someone’s private financial dealings in another country solely on suspicion, where does our right to privacy stand? In terms of what constitutes law-breaking in one country as opposed to another, can the U.S. impose its view of a crime on another sovereign nation? Here, the U.S. Justice Department wants to see foreign bank records of thousands for the suspicion of committing an act NOT considered a crime in the country in which those records are held (I know, it happens).
Under pressure in recent months from the Justice Department, Switzerland’s justice ministry, taxing authority and banking regulator have adopted the view that some American clients of UBS may have committed tax fraud.
Note what this says, “Under pressure…[from the DOJ],” Swiss officials “have adopted the view…” that sees, contrary to their own law, these folks as criminals–because the DOJ ’suspects’ that they are.
So where does this lead? If the DOJ can pressure a foreign authority into ignoring its own legal views, where does this leave the U.S. on other issues, namely environmental and other laws that seek to usurp national sovereignty (there are a few)? What’s worse, under U.S. tax law, a U.S. citizen can still be taxed on income he earns outside of its borders and cannot renounce his citizenship solely to avoid taxes (how they’d find out who knows)–which is in my opinion just wrong–leaving you with the IRS and DOJ chasing down every red cent of your money they feel entitled to. Add to that some of the invasive banking provisions of the PATRIOT Act, and you have further intrusion into people’s lives and business by a government that knows no boundary. This is not a “pro-rich” or pro-tax cheat view, but a pro-civil rights and sovereignty view.
-GH
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Washington Post Blames Private Sector for Government Failures
On the front page of the Washington Post, writer Steven Pearlstein contradicts himself by writing that mortgage giants Fannie Mae and Freddie Mac are being “rescued from the harsh discipline of markets and the consequences of their own misjudgments,” undercutting arguments for “privatization, deregulation, and a faith in free markets.”
But the failure of Fannie Mae and Freddie Mac is hardly an indictment of the free market: Fannie and Freddie are “Government-Sponsored Enterprises,” not products of the free market or the private sector.
Moreover, mortgage lending is not exactly an unregulated, free market. Just a few days ago, Pearlstein himself admitted in his column that federal affordable-housing mandates deserved a “good chunk of the responsibility” for the Fannie and Freddie failures that he now blames on the free market. (Earlier, we noted that federal regulations promoting “affordable housing” and “diversity” helped cause the real estate bubble and the mortgage crisis). Continue reading this post »
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Tax Complexity? Bah.
I’m a case study in complex taxes. During 2007, I switched jobs, got income from a half dozen sources, bought one house, sold another, made energy saving upgrades to the home I bought, and had a baby. I didn’t sell any investments outside of tax sheltered accounts but I did have interest and dividend income from a bunch of places. So how difficult were my taxes? Using name brand software provided through a major financial services company, I finished my taxes for $44.00 and two and a half hours of time on a Sunday afternoon. A lot of my information was copied from last years’ return or downloaded directly from people who paid me or were paid by me.
I’m not bragging. Actually, I’m not even that organized. I know that businesses, particularly small ones, do have real problems with tax compliance. But I’ve never thought that complexity provided a compelling reason, or even a decent one, to change America’s tax system. Particularly with computers–which most Americans have in their homes–doing taxes isn’t that hard. It’s the size of the bite that government takes that bothers me, not the difficulty of figuring out its exact size.
I’ve long favored some sort of flat tax because it is fair, pro-investment, and transparent. But not because it will make things simpler. In fact, I think there’s a downside to making taxes much simpler than they are now: a paperless-for-average-people tax system like the one in the UK lets most people go through the entire year without getting a stark reminder of just how much government costs. And, at least for me, that’s worth “wasting” a few hours a year.
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