Friday, January 07, 2005

Tax code

Finally, Bush started to talk about simplifying the horribly complicated U.S. tax code. The tax code is too convoluted in many countries and the U.S. are certainly no exception. There are various ambitious proposals in the U.S., for example
that intends to abolish the income tax and the IRS altogether, so that all the revenue would come from a (higher) sales tax. While many details have to be worked out, I think that this idea in general is a step in the right direction.



Also, the idea of a flat tax is a very good idea. Recently, Mr. Dzurinda's right-wing Slovak government introduced a flat 19 percent tax in that post-socialist country. It's a huge success. The revenue is 10 percent higher than the expectations. Moreover, Slovakia is one of the fastest growing countries in Europe today.

Similar success stories of the flat tax can also be found in Estonia and, in fact, also in Russia. What I find most irritating is the huge number of various tax deductions and other loopholes - that are used especially by those who have the stomach to study the 3,000 or 60,000 pages (depending on how you count it) of the tax code in order to generate personal profit (or who can afford to hire a tax adviser). For example, home mortgage tax deductions. All these things look like unfair rules incorporated to the tax code by various interest groups. Most of these ad hoc things should be cancelled kind of immediately, I think. Hundreds of pages of the tax code that allow these loopholes could simply be thrown to the garbage bin. The tax code would get simplified; good people would save their time and nerves by avoiding hundreds of pages of useless code; the people who prefer to earn money by making tricks instead of doing something useful would have to do something more useful; the budget deficit would shrink.

26 comments:

  1. They Fair Tax is the most productive option for several reasons. It taxes spending rather than production, saving and investment. This alone will allow the economy to grow. But, isn't this a regressive tax that would hit the poor? No. Every single household in America will get a monthly rebate (including for every child in the household) up to the poverty line. This will ineffect untax the poor if they don't spend money on luxuries (in theory). America is sending most of it's manufacturing jobs to China because of labor costs, taxes and regulation. A Fair Tax would make it more profitable to manufacture in America. In effect, removing 20-30% of the price of a good by the time it hits the end user. With a 23% percent sales tax then you can call it a wash (in theory). Finally, it forces transparency on the government. They will no longer be able to be able to increase spending through schemes without it being obvious to the people. I am a big fan. Great post.

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  2. Hi Gindy, that's a very illuminating comment, thanks! Lubos

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  3. By the way, Romania just decided to institute a 16% flat tax. Isn't it odd that all of these former Eastern block (I think that is the correct term) counties are going away from the old socialist model and opting for a freer system of taxation while we are still struggling with an unproductive progressive tax.

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  4. A reason is that the USA have seen nothing disastrous about the progressive and complex tax system. The USA have enjoyed a relatively mild system in comparison with the Eastern bloc (this is spelled without k).

    The taxation in socialism was effectively 100 percent, which is also a rather simple system. ;-) Except that it must be supplemented by a convoluted mechanism to plan and control the whole society so that at least something is moving ahead. 100 percent is a high enough percentage so that many people understand that this system itself is certainly a part of the reason why the East was behind.

    Of course that low, not-too-progressive, and simple taxes may eventually turn out to be an important factor that will decide which countries will be called prosperous in 2020, for example.

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  5. But, isn't this a regressive tax that would hit the poor? No. Every single household in America will get a monthly rebate (including for every child in the household) up to the poverty line.
    So then it's a regressive tax on the "just over the poverty line" poor.

    America is sending most of it's manufacturing jobs to China because of labor costs, taxes and regulation.
    Yes. God forbid businesses be forced to pay a decent wage, and provid a safe working environment.

    In effect, removing 20-30% of the price of a good by the time it hits the end user. With a 23% percent sales tax then you can call it a wash (in theory).
    Yes, that's right, in theory. In practice, how much you wanna bet that business would keep prices the same, and just pocket the savings?

    Finally, it forces transparency on the government. They will no longer be able to be able to increase spending through schemes without it being obvious to the people.
    How does this follow? Personal taxes aren't the only way the government raises money. Many of the "schemes" used are moving existing money from one place to another.

    we are still struggling with an unproductive progressive tax.
    Funny, lots of other countries seem to have progressive tax systems and don't seem to be struggling. Norway, for example, has a very high standard of living, and a fairly sharp progressive tax system.

    and one for Lubos

    the budget deficit would shrink
    Okay, seriously, *everything* else Bush has done in term one increased the budget deficit. What on earth makes you think that this particular proposal will shrink the deficit?

    All this being said, you're right, the tax code is long overdue for an overhaul. However, I suspect that the way I'd overhaul it is much different than what'd you (or Bush) would do.

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  6. Hi Matthew,

    http://www.norway.org.uk/policy/news/perkristianfoss.htm

    "Norway's tax system is based on a tax reform from 1992. Its objectives are to broaden tax bases, lower tax rates, reduce tax-induced distortions and to protect internationally mobile tax bases. The introduction of dual income tax means low flat tax on capital income and progressive tax on labour income."

    Well, unchallenged security, long-term capitalism and a lot of Norwegian natural resources help, too.

    I agree that so far Bush has not made too much success in keeping the surpluses (or at least reducing the deficits) - but you know it's not really his fault, rather a fault of internet bubblers, Osama bin Laden, Enron, Iraqi insurgents, and others. And this failure does not mean that the deficit will keep growing.

    Best
    Lubos

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  8. but you know it's not really his fault, rather a fault of internet bubblers, Osama bin Laden, Enron, Iraqi insurgents, and others.
    Well. I'll give him Enron, Osama bin Laden and the internet bubble. But Iraq is his fault. There was no need to invade Iraq.

    And there was something about a huge tax cut in there somewhere.

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  9. Reforming the tax code has nothing to do with controlling government deficit spending. Government spending is currently going up with income taxes currently going down. Why would it be any different with a sales tax & no income tax?

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  10. Slovakia: Nov 2004 :
    http://www.nbs.sk/INDEXA.HTM
    Year-on-year inflation: 6.3%
    Year-on-year GDB growth : 5.4%
    http://www.interfax.com/com?id=5767511&item=Slov
    Tax revenues up 4.8%

    How do we know Slovakia is climbing up the Laffer curve?
    -Snowball

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  11. Hi Snowball! That growth 5.5 is the real GDP growth, where the inflation has been substracted already. The nominal growth would be above 10%.

    The main change in Slovakia was a conceptual one - the taxes were designed to collect as much as the previous year. You can't really see the effect of the Laffer curve immediately on the increased tax revenue. You see it on the GDP growth which will imply a higher revenue next year. It has some inertia.

    Laffer certainly did not claim that if you reduce the taxes to one half of the rate now, you will immediately get a higher revenue: sure that in the short term you will get one half of the previous revenue. But the point is that a reduced tax rate allows the subjects to be more active, grow, and pay more taxes next year or tomorrow.

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  12. Mathew,

    I respect you concerns on switching to the Fair Tax. It would be a radical change indeed. Therefore, worthy of a full airing out.

    As to the regressive part of the tax. The rebate should cover (again in theory)the taxes on all necessities. Because there will be a 20-30% reduction in the cost of goods, the impact should be minimal if at all.

    You say(sorry I don't know how to do the Italics)
    "Yes. God forbid businesses be forced to pay a decent wage, and provid a safe working environment."

    Well that is fine. But, then we can't complain about outsourcing. Because that is a direct result of labor cost and overly (in some cases) burdensome regulation and high taxes. Thousands of jobs are being forced out of this country. Those jobs aren't providing any wage, living wage or other, because they are in China.

    "Yes, that's right, in theory. In practice, how much you wanna bet that business would keep prices the same, and just pocket the savings?"

    That's the beauty of competition. That is why so many products are being force to China. Competition. I'll tell you what. You go ahead and creat a $10 widget and try and sell for $50. I will creat my own and sell it for $13.50. That is until a new person on the block creates their own and decides to sell it for $13.00 forcing me to compete and lower my price.

    "How does this follow? Personal taxes aren't the only way the government raises money. Many of the "schemes" used are moving existing money from one place to another. "

    I think I know what you are refering to here but am not sure. Moving money around with the Fair Tax won't do any good. It is a sales tax that replaces the income tax, death tax, social security tax (I may be missing something). It is important to remember that this tax will also capture the black and grey markets. It will also capture taxes from the rich that avoid it now with different shelters.

    "Funny, lots of other countries seem to have progressive tax systems and don't seem to be struggling. Norway, for example, has a very high standard of living, and a fairly sharp progressive tax system."

    Germany, France, Canada. While I our economy is growing, theirs is stagnant due to over taxation. Germany (and I think France) have nearly twice the Unemployment rate America has. 5.5 versus 10 and change.

    But, I appreciate your concerns and they are worth considering. Thanks.

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  13. Well, Lumo, whatever else you may say about the Left, you have to admire their ingenuity in bending the language to suit themselves. "Progressive" taxation just sounds so.....progressive, doesn't it? And Matthew only has to mention the dreaded word "regressive" to make anyone who opposes "progressive" taxation sound like a troglodyte. If they didn't have archaic political theories built into the language for them, they might have to think through the question: precisely *why* should prosperous people pay more tax than the poor?

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  14. Well, yes, the left-wing guys often build on these words that may "sound" good. I think that one must be pretty simple to be affected by such easily created labels. The liberals usually protest against being called liberals; the conservatives, on the other hand, are not ashamed to say that they're conservatives.

    I am not ashamed to support "flat tax" even though "flat" sounds so boring. Well, the word "regressive" already sounds as a disease - almost like retarded :-) - but as long as we know what we're talking about, we should not be afraid to be associated with these words.

    The word "progressive" may sound sexy, but in the political debate, when it's clear that it really means a kind of "watermelon" (green on the surface, and a red like a communist inside), there's nothing terribly attractive about this adjective, I think and I feel. ;-)

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  15. Anonymous genius said - The ideal tax system would be to have zero taxes of any form (ie. no import duties, no sales tax, no VAT, etc ...), along with no protectionistic barriers of any sort. The size of the government should be reduced to almost nothing.
    For sure Tony Soprano would like that. Of course he might institutes some taxes of his own.

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  16. Simplified taxes would be a boon to most people - but not to lobbyists and the politicians who live off of them. Any kind of dramatic tax change would have temporarily wrenching effects on the economy though.

    Re: "progressive" Why is it that wingnuts interpret everything in terms of politics? When applied to taxation it just means "increasing with income."

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  17. If the mortage interest deduction is lost, then the US housing market goes down the tubes, and it is the current driver of the economy. To get to a flat tax we may have to, at least for a while, pay higher taxes.

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  18. A few comments on "Fair Tax."

    In order to raise amounts comparable to what governments now spend, a sales tax would need to be quite high, high enough to create a significant incentive to cheating, e.g. by barter or black marketeering.

    Sales taxes are taxes on commerce, and hence discourage commerce. Since commerce is the whole basis of the modern economy, is this a good idea?

    These kinds of taxes also encourage the kind of "hidden income" that is already a mainstay of the rich. Example: Senior executives and a few movie stars have the use of corporate jets, ostensibly for business reasons, but often as a form of untaxed compensation. When one of these guys takes his family or girlfriend to a vacation spot on the corporate jet he pays the company at the standard coach class fare rate (or the company pays him a taxable fringe benefit at the same rate). The real cost to the company and economy is dozens of times as large of course, so said executive or star has engaged in a huge amount of untaxed consumption (or, currently, received a lot of untaxed income). Current law and most sales tax schemes charge all this spending as investment rather than consumption, so it's untaxed.

    Finally - and probably most to the point of the "Fair Taxers," in established democracies (not counting the Johnny come latelies of Eastern Europe), income taxation has long had a dual purpose - funding the government and limiting the establishment and power of hereditary aristocracies. Since the fair taxers main objective is opposite - they want to establish a hereditary aristocracy - they naturally consider the second objective unfair. That having been said, the current US tax system is not only effective in promoting a hereditary aristocracy but also manifestly absurd, arbitrary, and monumentally inefficient, so maybe "fair tax" wouldn't be any worse.

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  19. The liberals usually protest against being called liberals
    Just so there's no confusion, I'm happy to call myself a liberal. Hell, I even voted for the NDP.

    That's the beauty of competition. That is why so many products are being force to China. Competition. I'll tell you what. You go ahead and creat a $10 widget and try and sell for $50. I will creat my own and sell it for $13.50. That is until a new person on the block creates their own and decides to sell it for $13.00 forcing me to compete and lower my price.
    You're kidding right? You seriously think that if tax rates on (for example) all the major auto makers went down, they'd actually pass the savings on to consumers? Competition works great in markets that are full of small companies competeing. It's not such a great thing in a market dominated by a few big companies.

    Germany, France, Canada. While I our economy is growing, theirs is stagnant due to over taxation.
    Well I can't speak to Europe, you're dead wrong about Canada. We've had a strong economy for many years now, and it keeps growing. The books are balanced, the government is running a surplus, the (Canadian) dollar is gaining ground against the US dollar.

    And the taxation thing is, at least for middle income earners such as myself, a myth. I pay as much tax here in NY state then I did in Canada. More if you count the fact that here I have to pay for my health care on top of the tax and the cost of utilities is way higher (thanks to the "miracle" of deregulation).

    Well that is fine. But, then we can't complain about outsourcing. Because that is a direct result of labor cost and overly (in some cases) burdensome regulation and high taxes. Thousands of jobs are being forced out of this country. Those jobs aren't providing any wage, living wage or other, because they are in China.
    We can refuse to import goods from China, which we should be doing anyway because of their abominable human rights record. We can stop giving companies tax breaks to outsource jobs. And outsourcing is *not* a result of labour cost, it's a result of profitable corperations wanting to make *more* money. For example, Microsoft moved its call centres to India, not because they were losing money, but because they make more money this way.

    precisely *why* should prosperous people pay more tax than the poor?
    Umm, because the poor are poor largely because of the actions of the rich?

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  20. An anonymous wingnut said: precisely *why* should prosperous people pay more tax than the poor? -

    First a practical reason: They have the money.

    Second, a fairness reason: They get vastly more benefit from the government than the poor. Property in the modern sense is a purely governmental creation. Bill Gates, for example, is immensely wealthy only because we have a system of police and courts that protect his exclusive right to sell these little plastic discs that cost 20 cents to make for hundreds or thousands of dollars apiece. In primitive societies, a man's only property is his wife and what he can carry with him, and those can (and regularly are) stolen by anybody stronger or better at ambush. A more detailed version of this argument and the libertarialn fallacy in general will be discussed in a forthcoming post on my blog (button on my name at top).

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  21. The sarcastically names CapitalistImperialistPig said: First a practical reason: They have the money.Yes they do. And, for the overwhelmingly vast majority of them, they got that money legally by themselves - no lotteries, no huge inheritance, no gov't giveaway . . .

    Second, a fairness reason: They get vastly more benefit from the government than the poor. Property in the modern sense is a purely governmental creation. Bill Gates, for example, is immensely wealthy only because we have a system of police and courts that protect his exclusive right to sell these little plastic discs that cost 20 cents to make for hundreds or thousands of dollars apiece. In primitive societies, a man's only property is his wife and what he can carry with him, and those can (and regularly are) stolen by anybody stronger or better at ambush. A more detailed version of this argument and the libertarialn fallacy in general will be discussed in a forthcoming post on my blog (button on my name at top).You're kidding right? With all the benefits given to those who pay no taxes whatsoever? Is their life as opulent as Gates'? No. But to say that he "is the recipient of more benefits from the gov't" is contrafactual.

    He is wealthy because 1) he had the business sense to have a product millions of people want and 2) because society as a whole has deemed it right that he be allowed such protection as you describe.

    You are partially correct: without such protection, a person may own only that which s/he personally can protect. Thousands of years ago people figured out that this was a bad arrangement and produced laws to prevent theft, coercion, etc.

    Without such protection, even for such evil monsters [/sarcasm] as Gates, you would be asking that the entire concept of private property be abolished. SocialistComrade, is that where you are going with this?

    J at TAotB
    The Art of the Blog

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  22. Mathew you say:
    "You're kidding right? You seriously think that if tax rates on (for example) all the major auto makers went down, they'd actually pass the savings on to consumers? Competition works great in markets that are full of small companies competeing. It's not such a great thing in a market dominated by a few big companies."

    I will throw it right back at you. You are kidding me, right. That is exactly what I am saying. Are you telling me that competition does't lower prices and force the increase of efficency. I can tell you from experience that is exactly what happens. Have you ever bought a cell phone? Are you telling me you will spend .30 cents a minute when you can spend .10 a minute. Are you telling me that cell phone minutes aren't a fraction of the price it was 10 years ago. Why do you think that the prices have dropped so much? Because cell phone companies care about you? No. Competition forced the prices down. That is exactly why.

    "Well I can't speak to Europe, you're dead wrong about Canada. We've had a strong economy for many years now, and it keeps growing. The books are balanced, the government is running a surplus, the (Canadian) dollar is gaining ground against the US dollar."

    Fair enough. I know more about France and Germany and that is why I quoted those numbers. But my guess, and I will look into it, is that Canada does not have as strong an economy as the United States. But, I will have to look into it.

    "And the taxation thing is, at least for middle income earners such as myself, a myth. I pay as much tax here in NY state then I did in Canada. More if you count the fact that here I have to pay for my health care on top of the tax and the cost of utilities is way higher (thanks to the "miracle" of deregulation)."

    True enough. But, you happened to choose one of the hightest taxed states in the nation. Go to Florida and pay 0 state income tax. You don't even have to file which is why Florida is growing.

    "We can refuse to import goods from China, which we should be doing anyway because of their abominable human rights record. We can stop giving companies tax breaks to outsource jobs. And outsourcing is *not* a result of labour cost, it's a result of profitable corperations wanting to make *more* money. For example, Microsoft moved its call centres to India, not because they were losing money, but because they make more money this way."

    I am a big fan of free trade. I agree about the humanitarian issues which leaves a dilema. But, based upon economics alone if we want to sell to countries in the E.U. and asia we need to be able to produce our products at competitive prices. We can't do that if we make everything in the United States. Also, I don't think I singled out labor as the sole cause of outsourcing. I believe I mentioned labor cost, increased regulation, high taxes as the causes.

    "Umm, because the poor are poor largely because of the actions of the rich?"

    This must be a response to someone elses comment. But, it sounds like rhetoric to me. The question is not should the rich pay more. It is should they pay a higher percentage of their income. They will definetly pay more with either the Fair Tax or the Flat Tax.

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  23. Well, Matthew does not believe that competition works - and moreover, he believes that there is no competition in the auto industry. Matthew, with your ideals, they should definitely hire you as the CEO of Ford, for example - all their problems would be gone! :-) Gindy, it seems that Matthew's perspective is a pretty advanced viewpoint that we're unlikely to change. ;-)

    Well, Canada is a great country. Still, the 2003 GDP per capita was 37,000 USD in the USA and 26,000 USD in Canada. You know, Canada works fine - there's not too much difference in its system from the USA after all. But it could do much better because it's a tremendously rich country with a lot of natural resources etc. etc.

    But of course, the total wealth is not the only issue. If they want to pay something for being more socialist, I have no problems with that. More generally, I feel a bit uneasy to trash various Western countries for not being sufficiently capitalist. They're still 100 times more free market than what I saw around as a kid.

    Also, it seems kind of partially true that Bill Gates probably uses the services of the government more than others - the police must probably work harder to protect his security and assets, for example. ;-) But he also pays more. I certainly don't believe that he needs more services from the government than what proportionally corresponds to what he pays. In other words, he's not getting more services from the government per 1 dollar he pays than other people get for their 1 tax dollar.

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  24. Anonymous J almost gets it: He is wealthy because 1) he had the business sense to have a product millions of people want and 2) because society as a whole has deemed it right that he be allowed such protection as you describe. ... but alas, not quite.

    Quite right. Gates gets to own a lot courtesy of a societal contract. I approve of the contract because I value the stuff society provides, and because I, in my own small way, am also a capitalist - I own stocks, bonds, real-estate, etc. I believe that Gates and many other rich men also recognize the other side of that contract, the obligation to pay a proportionate share toward the maintenance of the society that has allowed them to accumulate so much. Warrent Buffett and Gates' father have been prominent spokesmen for that idea.

    This social contract hasn't been the case for most of human history. For most peoples in most times, a usually hereditary aristocracy or tyranny enslaved the great mass of people and bled them for all they could get. That is still the case in many countries, and many in the US would like it to be more the case here as well. That's why a few of the very wealthy fund The Cato Institute, Grover Nordquist's Americans for Tax Reform, and other propaganda organs that want to end taxation of the rentier class.

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  25. Thanks for the Canadian numbers. I haven't had a chance to look it up yet.

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  26. ... and the best was someone who said

    "Mobile phone radiation is harmless and I cant prove it" I like this guy... there are tons on junk articles in the newspapers having all sorts of claims and its difficult to believe such research.

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