Appropriate Taxation Methods

Thanks Paleo, OG and KingGorilla. And kudos to Bill Gates and Chuck Collins for recognizing what helped them become succesful AFTER they got insanely rich. All too many people seem more than willing to profit from everything government has to offer, but very reluctant to give something back.

MJ wrote:

If they say -
Why, why, tell em that is human nature
Why, why, does he do me that way
If they say -
Why, why, tell em that is human nature
Why, why, does he do me that way

Yes, absolutely. It's not like it's the destruction of everything, it's just an economic crash, a la Iceland. Icelanders are extremely unhappy, but they're not dying over there, they're just mad as hell. And poor.

Yes, but that's already different from our situation. They are at what, about 5% unemployment? And they've lost very few businesses. I think any such crash in the US would wipe out thousands of companies, and we'd see unemployment skyrocket (it's already very high.) I think that combination would be a tipping point into a complete wipeout. We are very different from Iceland in our infrastructure, and anything that reduces the transportation sector (for example) or removes a large swath of middle class employers will have dire effects.

That's why I think a crash as a "reset" would be a bad thing. We would not reset without going through a period of either anarchy or totalitarianism, and I don't want to see either.

Robear wrote:

Red, do you believe that if the behavior could be changed, then the debt could be reduced without causing a crash? That's my position. That's why I consider the political and policy aspects as crucial to understanding how we got here and how we deal with it.

I believe there is hope if the behaviors are changed. I believe that the timing of the changes will determine whether we have a recession (during which belts are tightened in a controlled manner) or a crash (where all we can do is react and go into survival mode).

I hope that enough voters are talking to their elected officials to wake our representatives up and we can stop ransoming tomorrow to pay for yesterday. I'm not feeling optimistic, but I'm still trying.

The problem with the government is that they never stick to a budget, because they are not forced to. Whenever they want more money, they just figure out a new way to take it from the people.

What makes me the most sad/angry is that BOTH sides of the aisle have been doing this with impunity for years now.

There really is no good way to tax people. What I would hope for is that they find ways to spend less by becoming more efficient and making better use of what they have. I also hope to win the lottery.

That's why I think a crash as a "reset" would be a bad thing. We would not reset without going through a period of either anarchy or totalitarianism, and I don't want to see either.

And you can thank Alan Greenspan. We are going to crash. We have been trying to crash since 2000, and we keep putting it off and making it worse. There is no way off the train. Now that we're committed to the bailout path, we can't stop. We have no exit strategy, at least not that will work.

I saw a pretty interesting analysis the other day that suggests that the Fed will try to back off, and the system will start to freeze up again in 2010, at which point they'll return to the bailout path. Each time they try to back off, things will start to blow up, and they'll do so faster and faster, and will require more and more intervention just to keep functioning. The system will get gradually more and more dysfunctional until it finally stops working -- and the total pain will be at least an order of magnitude worse than a simple crash would be. A hyperinflation results in the near-total destruction of an economy. A depression at least preserves a functioning core.

We are gaining speed in our headlong plunge into the debt abyss. The sooner we stop, the less damage we take. No matter how painful the deflationary cure is, the inflationary disease is worse.

Remember how I was telling you early this year that we were going to be seeing inflation by year-end? Look at commodity prices and the dollar index; the dollar has dropped something like 12% in a single year, copper's up like 80%, and gold's over $1,000 today. Inflation is not a sudden thing, it gathers momentum slowly, but it's incredibly hard to stop once it does.

The Fed has backed off on its injections somewhat, and actually withdrawn a little bit of cash, so I think that analyst's idea of a partial system freeze and a drop in pricing might very well happen. The Fed also buys about 80% of the mortgages being issued right now, so that's another big source of monetary stimulus, so I'm not sure how that will play out compared with reducing the traditional monetary supplies. If we do get the pullback, that may hide the inflationism around year end, but it should be visible again a few months after they resume intervention.

I screwed up and posted this in the Honduras thread by mistake. So it's a little out of order, but I'll go ahead and put it here for posterity:

*******
Oh, and the REASON there's no option is because we've just gone through three separate speculative manias, all fueled by Greenspan. Greenspan has forced us into this horrific position. He abdicated the very first and most important role of a central banker, which is to actively prevent manias.

The central job of the central banker, it's been said, is to take away the punchbowl just as the party gets started. And Greenspan completely, utterly failed in that job, and has forced us into an incredibly unpleasant position, where all outcomes are bad.

All we get to choose is the least bad outcome. But it doesn't appear we're smart enough to know which one that is.

Whose analysis was that, Malor? The "blind man" scenario, where no one sees the oscillations until it's too late?

Your question isn't parsing into anything meaningful for me, sorry.

Teneman wrote:

I'd need to think it through completely to find the inevitable failings of the scheme, but I'd start with:

Complete exemption of the first $XX,000 of income from taxation.
Flat Y% of all income above that.
No deductions/exclusions/credits.

EDIT: The exemption of the first $XX,000 would have to be a pretty low number too, by the way, to avoid the phenomena we're unfortunately already in where a large number of people pay zero in taxes but have the ability to vote taxes onto those who do pay.

My country basically introduced this five years ago. In the first year tax revenues jumped up almost 40 percent, mostly due to closing all the gaps and removing incentives to evade taxes (the tax has been also significantly lowered to 19% for all). Before that we had progressive taxation of personal income which lead to tax evasion and inefficiency - if you were running a "risk" of your income rising into the higher tax bracket, you either purposefully started working less (leading to inefficiency) or found a way how to split the income into several months, thus not breaking the tax bracket. The tax returns also became much easier to control and cope with, leading to a much leaner Tax Authority.

Mind you, this is system is still not a pure flat tax. If you have a part of your income exempt from taxes (the exempt amount has been quite logically set to 12 times the official minimum monthly wage), those with income closest to the exempt amount still pay almost no tax. The more you earn, the closer you are to the nominal tax rate, i.e. the real individual tax rate is progressive. Our tax code has actually been amended to say that if you earn above 4 times the average wage, you no longer have the right to exempt the part of your earnings. Which again creates incentives to evade taxes etc. But all in all, this lean tax system is (from what I know from the interviews with state representatives, Tax Authority and entrepreneurs) much easier to manage than the former one.

My gut tells me the same thing would happen here wanderingtaoist. Close up all the loopholes and your ultra-rich like Gates/Buffet will be paying more in taxes and the overall take will go up, while at the same time reducing the bureaucracy and overhead needed to administer the taxes.

I also know people personally who are at the very high end of the earnings scale who have flat out told me they'll take the last three months of the year off if current marginal taxes get above x%, leading to the same problem you mention. This type of flat(ter) tax scheme eliminates that problem as well.

I'd love to see the math on it to see what our tax take would be under a system like this, compared to what our actual take is now.

Malor, I was asking about the analysis you cited, where the system oscillates between boom and crash and the same approach is tried every time to fix it, resulting in failure. At least, that's how I read what you posted. I'd like to read it, if it's not from for-pay source. If it is, no worries though.

I saw a pretty interesting analysis the other day that suggests that the Fed will try to back off, and the system will start to freeze up again in 2010, at which point they'll return to the bailout path. Each time they try to back off, things will start to blow up, and they'll do so faster and faster, and will require more and more intervention just to keep functioning. The system will get gradually more and more dysfunctional until it finally stops working -- and the total pain will be at least an order of magnitude worse than a simple crash would be. A hyperinflation results in the near-total destruction of an economy. A depression at least preserves a functioning core.

That's why I called it the "blind man" scenario - hopefully, we won't keep trying the same thing after it fails to work.

RedJen wrote:

I'd like to see taxes come from a simple sales tax model.

You pay N% tax on all goods and services.

If you buy generic store brands that costs $1, then you pay $1 + $(1xN%)

If you buy popular brand name it costs $5, then you pay $5 + $(5xN%)

If you buy the high fashion version costing $500, you pay $500 + $(500xN%)

If you want to pay less in taxes, you use inferior goods or less prestigious labels.

In this way, your use of goods and services drives your tax burden. The quality of the items you buy becomes a built in multiplier to increase the tax output for more expensive goods.

If there needs to be a cushion for lower income, then either have a tax debit card or refund at the end of the tax year/quarter/half year.

You've described FairTax.

Last time I looked, they had tables that were based on your marital status and kid count(up to 4). You find yourself in the table, there was a number. That would be given to all legal residents at the start of the month to address the regression and to pay for things such as food and basic living expenses. Everything would then be taxed at the tax rate.

It does have the advantage of taxing everyone, legal or not. There wouldn't be underground cash employment since the govt wouldn't know either way. There would have to be immigration policy change so that it would be easy to become legal though, else you'd be severely punishing the undocumented. Assuming that, you'd have quite an incentive to become legal.