Monday, April 16, 2012

Revisit of Flat Asset Tax

I recently discussed my Flat Asset tax idea on line and some people pointed out what they thought were major problems.  I want to reply to some of the major objections they came up with:

Wrong Claim #1) You are taxing wealth, so no one becomes wealthy.   My reply is, the current system taxes income, so no one works.    It's kind of like saying "I don't want you to cut off my finger, I'd rather you cut off my leg."  We have to tax one of three things - income/work, spending/necessities, or wealth/luxuries.   What is the difference between necessities and luxuries?  The poor spend almost all of their money on necessities and almost no luxuries, while the wealthy spend almost all their money on luxuries and almost nothing on necessities. Those are the ONLY 3 things we have found to tax and the best of the bunch is to tax the wealth/luxuries.   

Wrong Claim #2)  You end up spending more on taxes on something than it cost to buy it.   Wrong.  First of all, this is not necessarily a problem. If you own a house in New Jersey, you pay about a property tax of about 1.89% each year.  Assuming no growth in value, in 26 years, you have paid more in tax than it's worth.   No big deal.    Why?   For the same reason that you don't care if you pay more to dry clean a shirt then you paid to buy it (assuming you paid $60 for a shirt, and $2 a shirt to dry clean it, if you wear it once a week, by the end of the year you have paid $100 to dry clean).  In fact, using Income Tax, right now, many middle class people pay more than 5% of their total assets in tax.  So no big deal if we make it explicit that we are taxing assets.

But for most property, this won't happen.  Most things depreciate, usually at a fairly high rate.  Cars for example lose about 9% of value the second you drive them off the lot, and an additional 10% each year.  As 10% is > than 5% (the highest of the Flat Asset Taxe rates I proposed), then you will never pay more taxes than 45% of the original value - even assuming you hold it for a thousand years.

Things that don't depreciate, tend to appreciate (i.e. stocks).   A measly old 5% return is not worth much, so your appreciation should generally exceed the taxes you pay.  A few assets, such as bonds and homes, do not have strong appreciation/depreciation.  Which is one of the reasons why I suggested homes and IRA's should be excluded.

Wrong Claim #3)  I gave generous allowances for things like a home, and IRA, which you don't do in 'true flat tax'.  It is true that a 'True flat tax' has no deductions and exemptions.   But many flat tax plans are actually "Marginal Flat Tax plans, which is what you call it when you allow limited deductions/exemptions.  In Marginal Flat Tax plans, the tax rate for any money above and beyond the deductions and exemptions is flat, unlike our current graduated income tax.  The common deductions and exemptions in most Marginal tax systems are charity, home mortgage (= to my home deduction)  and IRAs (because we don't want to screw over the people with a Roth IRA that paid taxes on their income previously in exchange for future tax deductions.)  My marginal flat asset tax plan is in line with most of the existing flat tax plans that are actually considered.  To my knowledge NO ONE is seriously advocating a "true flat tax", as people don't wont to screw over the Roth IRA hold overs.

Wrong Claim #4)  That a 5% Flat asset tax can't possibly generate enough income because all the math says a flat tax has to be at least 17%, with 20% being more likely.

Percentages are not stand alone things.   They are percent of something else.  As Total American Yearly Income is about 1/4 Total American Wealth.  That is, a man that earns 100k a year might own 400k worth of goods.   20% of 100k = 20k.  5% of 400k = 20k.  It's basic math, not that hard to do.

Wrong Claim #5)  That it will be easy for the wealthy to violate the law.  Again, this ignores the current situation.  You don't look at this in a vacuum, you compare to the existing system.  The existing system has people move assets overseas to hide income.   Yes, people that move assets over seas will still do that - now to hide the assets.  The question is not can thieves still steal, but instead, does my system make it EASIER to steal than the current system.

And the answer to that is no, it makes it harder.  Right now, you can move all your income producing assets over seas, and keep your wealth here.  Now you have to move all your WEALTH over seas, not just your income producing assets.  No more owning twenty cars with no taxes.

For example, a common practice right now is to offset income with deductions - usually business expenses.  The equivalent technique for an asset tax would be to incorporate, then create a fake loan on the record books, claiming that your company, while owning 1 million dollars, also has a debt of 1 million dollars.   Fine, then show us where the 1 million loan went to.   Can't do that?   OK, you stole 1 million dollars from the company AND failed to report it for taxes.  You have now committed two crimes, not just one.

More importantly, it is much harder to hide where that money went.   We don't need to prove you kept the $1 million, the fact that   A simpler tax structure with simpler rules makes it harder to lie and cheat.

Wrong Claim #6)  That I am taxing just the rich and we need to save them because they pay more income taxes.  This assumes it is OK to ignore FICA and other taxes because "we are talking about federal income taxes".   NO. We are talking about the total taxes people pay, NOT just their income tax.  Yes, I am altering just the income tax, but only to counter your ridiculous plan to screw over the poor.  If you want to 'make taxes fair', then you start FIRST with the taxes the poor people pay - FICA, sales and property tax.  THEN after you have made those fair - so the wealthy people pay the same percentage of their total income, you can start trying to make the tax the wealthy pay fair.   Until you fix FICA, sales and property tax, you can NOT reduce the only tax that the wealthy pay more than the poor do.  

One final thing. There is a hidden benefit of my flat asset tax idea.
It encourages spending on services as opposed to material goods.

That is, when you buy a diamond, it becomes a tax burden for the rest of your life.  But when you buy a $600 dinner you pay no taxes on that item.  This is an incredibly good thing.  Why?

Because you can't outsource the meal.  Most of the service money gets spent in the United States, and more importantly, STAYS in the USA.  Yes, when you buy a vacation abroad, that money leaves, the US, but it always did.   Currently, pretty much any physical asset you buy except for land has a large percentage of foreign content.  Clothing?  All foreign.   Cars?  American made means 75% built in America.   The number 1 and number two American made cars are owned by TOYOTA and HONDA.   (source)

More important, most studies show people get more fun out of experiences than they do out of things.  (Study)

An asset tax would be good for this country by encouraging people to spend more money on things they like that are made in America, as opposed to foreign goods they grow to regret.

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