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 Post subject: Tax System
 Post Posted: Sun Feb 04, 2007 1:13 am 
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No, this isn't a thread about the Fair Tax. I've gone about as far as I can in that direction, and it's tiring to argue against everybody by myself.

Rather, I'd like to hear discussion on a different but related subject.

Question the first: Is the current tax system the best system possible?
Question the second: If not, what tax system would you like? It can be an idea which already exists, or you can make your own.

Let the discussions begin!

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 Post Posted: Sun Feb 04, 2007 1:33 am 
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I never thought much about taxes but a flat percentage rate always seemed like a good idea to me. Something like 10% of all income whether rich or poor. No deduction or loop holes. Just simple math. I made 42K I owe 4.2K at the end of the year. I earn 4.2B at the end of the year I pay 420M. And I think that income should be all money earned plus gifts over a certain price.

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 Post subject: Re: Tax System
 Post Posted: Sun Feb 04, 2007 1:33 am 
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Malice wrote:
Question the first: Is the current tax system the best system possible?

Hell no.
Quote:
Question the second: If not, what tax system would you like? It can be an idea which already exists, or you can make your own.

The current system is "pretty good". It isn't complicated in theory, only in practice. All it needs is an adjusted standard deduction, tied to inflation - and no other deductions. That's it. Just the standard - which has additions for dependents already.

We don't need to differentiate forms of income, either. Wages, dividends, inheritance - it's all taxed the same.

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 Post Posted: Mon Feb 05, 2007 1:28 am 
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I'd say the current tax system is pretty good, except that it doesn't do an adequate job of collecting taxes on income from things like stock sales and inheritances because of the Bush tax cuts.

Niftyboy wrote:
I never thought much about taxes but a flat percentage rate always seemed like a good idea to me. Something like 10% of all income whether rich or poor. No deduction or loop holes. Just simple math. I made 42K I owe 4.2K at the end of the year. I earn 4.2B at the end of the year I pay 420M. And I think that income should be all money earned plus gifts over a certain price.
This has the advantage of simplicity, but no other advantages whatsoever.

First of all, I assume that when you say 'money earned', you mean 'income'. Those aren't the same things; 'earnings' are money you get from working at a job, while 'income' includes everything else (such as the proceeds from stock sales). The two are commonly confused; it's one of the reasons people are able to get away with regressive taxation on 'earnings'. Nobody has a 4.2 billion dollar salary; though there might concievably be people who have that much income.

As for why a flat tax [/i]specifically[/i] is a bad idea, it goes like this. Rich people are in a better position to accumulate wealth, as opposed to income, over time. If I make $40 000 a year for 25 years, I won't have a million dollars. At most, my savings are only going to be a few thousand, if that much. So I will have little or no wealth (in the sense of accumulated money and resources) to show for my income and work. But if I make $40 000 000 a year for 25 years, it's likely that I will have hundreds of millions tucked away in various investments.

The reason is simple. As long as my income is measured in tens of thousands of dollars, I will have plenty of things to spend every penny of it on. Expenses like gasoline or my children's college education will eat up my money as fast as I can earn it. But if I make millions of dollars a year, then I have so much money that I can buy gasoline out of pocket change and my children's college education out of petty cash. That gives me plenty of money to invest in whatever I or my agents see fit, which in turn means that I can make even more money next year.

So rich people accumulate wealth and non-rich people, by and large, don't. You can easily see this in your own life. Non-rich people usually have debts roughly balancing their accumulated wealth. If they do have a substantial net worth, it's in the form of their home. And homes don't really count for much because if you sell your home you have to buy a new one to replace it, which nullifies a lot of the money you made from selling the old one.

The reason this is a problem is that wealth is power. If I have wealth to draw on, I can make financial decisions with consequences for other people. If I have wealth, I can afford to throw parties at which I connect with other powerful people, which lets me convince them to do things in ways that non-rich people cannot. If I have wealth, I can offer to donate some of it to a politician's campaign. And so on.

Rich people have more power per person than non-rich people. It's a fact of life. The problem is that this goes against the values of democracy, which hold that every person should have the same power to run things as every other person. I should have as much political power as Rupert Murdoch, but I don't. And you don't either, because you aren't a billionaire who has control over a major TV news network, and he is.

Of course, a society without the possibility of getting rich pretty much guarantees that everyone will end up poor in the long run. So we do not want to create a society where getting rich or staying rich is impossible. But given that rich people have proportionately more power over the way society works than poor people do, it's hard to justify taxing them at the same rate. If rich people are taxed at the same rate as non-rich people, then the rich will steadily get richer and the non-rich will not, because the rich have more ways to make money than the non-rich do. Eventually, the rich end up having so much power that everyone else is pretty much helpless against them.

This has happened before in real life; it can happen again in real life. I'm not talking about some kind of weird pie-in-the-sky theory here. This problem of rich people getting really really rich and controlling society actually happens in real societies. Ask Kea. She'll tell you all about how the rich business interests have taken over Hong Kong.

The first way to keep the rich from becoming super-powerful is to make sure that there's a steep tax on piling up more money on top of a large fortune. That makes it hard to go from being a millionaire who has lots of money but relatively little power as an individual to a billionaire with the kind of power that can rival that of minor governments. To do that, you need a progressive income tax, one that hits rich people who get income from investments harder than it hits non-rich people who earn money by working at a job. You need the opposite of payroll taxes and sales taxes. Those taxes are regressive, hitting non-rich people harder than rich people.

The second way to keep the rich from becoming super-powerful is to place a tax on large inherited estates. The tax doesn't have to apply to the estates of ordinary people; you can make a pretty good case that it shouldn't. I'm in favor of making the first five million or so dollars worth of an estate tax-exempt, so that nobody will lose a family home, a family business, or a family farm to estate taxes. But if you're next in line for the Hilton fortune or something, there's no reason why you should be able to get a hundred million dollars dropped in your lap tax-free just because you happened to be born to the right parents.

The third way to keep the rich from becoming super-powerful is to enact laws that make it hard for private money to influence public policy. That means campaign finance reform, which isn't really part of the tax system. That makes it harder for the millionaire (who don't have much individual power) from controlling society as a class, passing laws that favor investors and business owners over wage-earners.

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 Post Posted: Mon Feb 05, 2007 2:39 am 
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I think we should tax foreigners living in other countries.

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 Post Posted: Mon Feb 05, 2007 3:16 am 
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Simon_Jester wrote:
Rich people accumulate wealth and other people don't. You can easily see this in your own life.


That is the most depressing bumper sticker ever.

Questions: Are Paris Hilton's parents dead? What's to prevent parents from passing on their huge wealth to their children before they die? Doesn't the estate tax only apply to actual inheritance?

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 Post Posted: Mon Feb 05, 2007 4:25 am 
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That's called a gift tax, Malice. You can shield some assets by giving them while alive; but it's not going to let you pass millions or billions along scot free.

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 Post Posted: Mon Feb 05, 2007 4:30 am 
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Korandder wrote:
I think we should tax foreigners living in other countries.


I would tax the nude in my bed. No - not tax. What is the word.~ Oh - welcome

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 Post Posted: Mon Feb 05, 2007 4:44 am 
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Korandder wrote:
I think we should tax foreigners living in other countries.
That's called collecting tribute, and it only works if you are willing and able to fight them as often as necessary. Many nations have made it work, at least for short timespans.

Malice wrote:
That is the most depressing bumper sticker ever.
Well, they wouldn't be rich in the first place if they didn't accumulate wealth. So the mere fact that there are rich people proves that those rich people are successful accumulators of wealth. If a non-rich person finds a way to accumulate a meaningful amount of wealth, they will become rich themselves.

I'm not depressed by it, because I don't mind some people having much more money than others. What I mind is some people having much more power than others, or some people having much more money than others because they screwed those other people over.

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 Post Posted: Mon Feb 05, 2007 5:11 am 
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Alrighty, alrighty... I worked for several days on my toy economy before realizing the salient fact that it had nothing to do with anything, since I was modeling a medieval system where the FairTax would have been a marked improvement. (Nobles controlling all the wealth and paying no taxes at all.)

I do however heartily endorse the game I mostly based it on: Patrician III, the guys at Ascaron are really cool and they even put my name in the credits for help with the translation. :kiki:

So we have all the tools for an objective FairTax analysis, once I gathered the appropriate numbers.

r(GDP - FederalBudgetWagesandPayments) - ((r) * Cost of Living * Households) = (1 + r)FederalBudgetGoodsandServices + FederalBudgetWagesandPayments

GDP - $13.22 trillion - CIA World Factbook (Don't mess with 'em.)

We had previously established that the US Cost of Living * Households works out to 25% GDP, as the household poverty level = 10,000 and the average household income = 40,000, and it logically follows that avg Household Income * Households = GDP.

For the division of the federal budget into Goods and Services versus Wages and Payments, I had to do some legwork and make some assumptions. There may be some slight variations in numbers with reality, as I had to settle with numbers from 2005 and 2006 in some cases.

First off is Medicare. I am admitting this as a purchased Good and Service. Since the monies paid out by Medicare go directly to pay for medical goods and services, they will either have to go up with the sales tax increase or have seniors left seriously in the lurch.

We have the following stats for Medicare:

Medicare Enrollees: 42.5 million -The almighty Wikipedia

Medicare Payments: $394.5 billion -The almighty Wikipedia

Next Social Security, I'm going to allow that as a payment not increased by the sales tax, for the reason that some recipients pay income (But NOT Payroll) Taxes on their benefits. We will analyze the effect on the "Average" senior couple later.

Here are my figures:

Social Security: $586.1 billion ~The almighty Wikipedia

Social Security % GDP = 4.44%

Social Security Enrollees: ~42 Million. (Extrapolated from scare graph somewhere in the Senate webspace.)

Our last major adjustments are the wages paid out by the fed, which we assume to "fairly" rebalance themselves without need for increase since taxes on them will be eliminated. I was actually under the impression that Federal employees paid no Payroll tax, but I couldn't find any verification.

Military wages:

$ 102,294,000,000 - Office of Budget and Management, DoD Budget summary.

Civilian Wages:

Mean Govt Employee Income: $100,000 - Cato Institute

# of Govt. Employees (Non-military): 1,600,000 - Center for the Advocacy of Latinos in Government Jobs.

$ 160,000,000,000 - You'd think that OMB would have had this somewheres.

I suppose I should have checked for benefit programs as well, but let's not worry just now.

Net Federal Wages:
$ 262.3 Billion

Wages as % GDP ~ 2%

One more adjustment. Since the FairTax abolishes the Payroll Tax, all of the bonds in the Social Security Trust Fund can revert to the treasury, so the Debt is knocked down a notch, and the interest payments to it proportionatly. (We assume that the bonds issued into the trust fund have a mean interest rate proportional to the privately held bonds, but then we're assuming a lot.)

Da Debt: $8,694,902,769,091.18 - Bureau of the Public Debt

Da Trust Fund: $1,994,158,000 - Somewhere or others. Maybe the Social Security administration.

Debt Interest: $243.7 billion or 1.8% GDP - All glory to the Hypno-Wikipedia.

This is irrespective of any changes in the sales tax as

Debt Interest when Trust Fund reverts: $187.8 billion or 1.4% GDP

We will count the portion of the Federal Budget not affected by sales tax price increases as 7.8% GDP.

Since the total Federal Budget is $2.66 trillion, or 20% GDP, the portion subject to sales tax cost increases is 11.2%, but we need to hack off the interest payment reduction, making the total 10.8% GDP

We have all the variables accounted for, but there is one more outstanding item. The formula for GDP is:

consumption + investment + government spending + (exports − imports)

Consumption is what is being taxed, the trade deficit is too minor, proportionatly to be worthy of notice, but investment we haven't accounted for. Obviously, all consumed things are sold at some point or another, BUT not all investment takes place in terms of the direct purchase of capital goods. (Factory equipment, tractors, trucks, computers and so on.) A lot of our investment goes on in house, corporations producing their materials, internal software development. Tuition is also an investment. Housing construction is an investment. Is all of this passing through the sales tax at one point or another? If it IS, then we don't have to increase the tax rate on all other consumption to compensate, BUT we have increased the cost of investment in the same proportion, and investment is the component of the GDP that facillitates economic growth. If it ISN'T, investment costs are fixed, BUT the tax rate on all other consumption must go up in proportion. Furthermore, in the latter scenario, some deduction and reimbursement system must be put in place for Capital purchases, particularly for those items which can be either a business investment or a personal consumable. (ie most computers). And that is exactly the sort of thing the FairTax was intended to eliminate.

After some waffling, I have decided not to remove the Investment portion of the GDP, as I believe that the FairTax's patent unfairness will become clear even without the higher rate.

For reference:
US Investment (gross fixed): 16.6% of GDP ~ Our buddy the CIA World Fact Book.

There is one thing that must be removed from the taxable GDP, and that is the Government spending we have identified as not having been increased by the sales tax. You will have noticed that above. Since the definition of GDP includes Government Spending, I think you should see the logic of this.

r(GDP - FederalBudgetWagesandPayments) - ((r) * Cost of Living * Households) = (1 + r)FederalBudgetGoodsandServices + FederalBudgetWagesandPayments

With our numbers plugged in, the equation is as follows:

r(GDP - .078GDP) - ((r) * .25GDP) = (1 + r).108GDP + .078GDP

r.922GDP - r.25GDP = .108GDP + r.108GDP + .078GDP

(Just divide out GDP and sum the vars in one step.)

.564r = .186

r = 33% sales tax.

That's a smidge more then 23%, and I don't think it can go down.

Now let's use our handy dandy 1040 Tax Calculator and Payroll tax calculator to run some scenarios. For the sake of simplicity, we are ignoring all non-Federal taxes in this excercise.

Let's look at Mr. and Mrs. Poverty. They have 2 children and have a combined income of $10,000. Let us assume they have no disposable income. They need pay no Federal income tax, naturally.
BUT, they still have payroll to account for, and these net $765.

Their take home pay is $9,235, and assuming our poverty level is at 10,000, they possess -765 disposable income.

Switch over to FairTax. They no longer pay payroll tax, and receive a $3,300 prebate. New income is $13,300, but cost of living is now also $13,300. Consequently their net gain was $765, but Purchasing Power Parity with the pre sales tax dollar, they only made 575.19.

So Mr. and Mrs. Poverty are doing slightly better, but hardly enough for FairTax to be classed as radically more progressive.

Next we see Mr. and Mrs. Mean. They have a combined income of $40,000 and 2 children. We will assume that they have no disposable income after taxes. For simplicity's sake, Mrs. Mean doesn't work. They pay $2794.74 in Payroll taxes and $710 in Income Tax. The after tax income is therefore $36495.26 and their living expenses are the same.

Enter FairTax. $3,300 prebate makes their total income $43,300. Their living expenses become $48,538.70. Mr. and Mrs Mean are down nearly $5,200, ~3,900 in old purchasing power.!

Let's go to Duke Leto and his imaginary wife Lady Jenny. They have no children. He is paid $70,000 as a software developer and she makes $50,000 working in finance. Owing to a ridiculously discounted apartment owned by Leto's dad Old Duke Laertes, and a mutual disinclination to luxury, they live on only $50,000 a year. They have no children and a non-deductible cat. They have just paid her student loans and have no appreciable interest income.

Their pretax income is $120,000. Their payroll taxes come to $9179.82. Their Income Tax is $20,540.00. Less the living expenses, their disposable income, all of which will be invested or saved, is $40,280.18.

The FairTax cometh. Income ticks up to $123,300 after the increasingly irrelevant prebate. Their expenses go up to $66,500. This leaves a disposable income of $56,800, a seemingly significant improvement, except that the actual PPP value is $42,706.77, meaning they only gained the equivalent of $2,500 pre-FairTax dollars.

Change to Baron Harkonnen and his wife, a 12 year old boy. Identical pay setup, but no savings. (Not sure how the 12 year old makes $50,000, don't really want to know.) They spend $90,280.18 a year on various consumable crap. Fair tax hits, boom! $120,072.64 in expenses, meaning their slight gain in new income is almost equal to their prebate, and again only $2,500 in PPP.

Another step up the income ladder. Single income household, lawyer, makes $500,000, 3 kids. Spends $200,000 a year. $6,120.14 payroll, $144,646.00 income tax. $349,233.86 take home pay, $149,233.86 disposable.

Post FairTax, $503,300 income, spending of $266,000, $234,000 disposable. That being $175,939.85in PPP, the only group showing a significant gain of $26,705.99

Let's have Mr. Lawyer living hand to mouth. $350,000 spending becomes
$465,500. $503,300 - $465,500. $37,800 net and a gain of $28,421.05 after the PPP adjustment!

One more test case. Let's have a look a sickly elderly couple on Social Security and Medicare. They are each receiving $13,954.76 from Social Security. (The national average as shown above.) Each gets $9,392.86. from Medicare, which completely covers their medical bills. They have no other income and no savings, and live in an assisted living facility that was partly paid for by the sale of their house, with the $13,954.76 being spent as well.

Here is their income tax: $1,887 of $27,909.52. Leaving $26,022.52. Their expenses at assisted living are $20,000, and the combined Medical bills are $18,785.72. That means they can go out for trips to see the grandkids with their $6,022.52.

Revenge of the FairTax!

Their income is now $31,209.52, but the expenses have become $26,600. This means $4,609.52 in net disposable income, or $3465.80 in former purchasing power. You took money from the elderly! You bastards! Of course the medical bills went up to $24,985.00, but fortunatly I thought to make sure that medicare would go up in proportion, otherwise they'd have to beg their kids for money.

So what have we have we learned?

The Bad about FairTax

1) The FairTax does not function as advertised. It gives a minute benefit to the very poorest, but low income families lose a big chunk of their incomes, middle class families see little or no benefit and wealthier families reap the most gains. It is not progressive.

2) It does not encourage investment. It makes no difference in the investible income of the Middle Class after purchasing power adjustments are made. It is actually more beneficial for the non-savers in the upper classes.

3) It may actually retard investment by increasing the cost of capital goods, particularly if corporations were paying little income tax previously. It may further cut profitability if raw materials costs are not offset by decreases in corporate income tax.

4) It hits seniors very hard if an adjustment is not made for their Social Security benefits, and will be even more hurtful to retirees living off of pensions as well.

The Good

1) It does reduce the national debt by ~20% by cannibalizing the trust fund.

2) It may have the advantage of less GDP productivity being wasted in Tax administration. Whether the administration of the prebate and the distributed management costs of the sales tax will be significantly less is not clear.

That's it.

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 Post Posted: Mon Feb 05, 2007 5:13 am 
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Simon_Jester wrote:
Korandder wrote:
I think we should tax foreigners living in other countries.
That's called collecting tribute, and it only works if you are willing and able to fight them as often as necessary. Many nations have made it work, at least for short timespans.


(It's a Monty Python quote, Simon)

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 Post subject:
 Post Posted: Mon Feb 05, 2007 8:59 am 
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Duke, I notice something interesting about your result on the FairTax rate. 33% is pretty darn close (especially given the amount of assumptions you've made) to the calculations available on the FairTax website of the tax exclusive rate, which they decided was about 31.27%. Is it possible that you've calculated the exclusive rate? If so, your examples are exaggerated because the wrong rate was applied.

Otherwise... let's see.

Average household size is 2.69 people. Therefore poverty level is about 23,136. Average household income is (for 2004) $43,389.

Change just that (use 50% GDP instead of 25%) and you've jumped a full 10 percent points in your rate. Sure, it's up; but this means that your assumptions have the possibility to be way off.

Bedtime! More tomorrow.

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 Post Posted: Mon Feb 05, 2007 10:50 am 
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It won't help.

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 Post Posted: Mon Feb 05, 2007 12:32 pm 
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What about international taxes, to prevent capital flight to low-tax economies?

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 Post Posted: Mon Feb 05, 2007 1:31 pm 
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Why not conquer all low tax economies, and then tax them higher?

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