Tax Reform Again

This news letter from Simon Black is a good short review on competingtaxation regimes from around the globe and shows us again that the Laffer curveis continuing to perform.

I have long since come to theconclusion that the best tax regime is to simply tax every transaction at tenpercent, including interest payments.  Iwould even make the farmers charge the tax for goods produced and sold.  This surcharge on every trade is offset onlyby paid taxes on appropriate costs.  Thewhole economy then becomes naturally frugal and wealth assembling.

There would be plenty ofadjustments, but the result would be a naturally operating system, escaped onlythrough barter for individual avoidance. It still requires the maintenance of records, but those serve a purposenatural to the enterprise anyway.

What it does not do is produce anavoidance culture in parallel to the record keeping culture..

Reporting From: Vina del Mar, Chile

Date: April 12, 2011 

Did you ever see Minority Report? It's one of Steven Spielberg's oftenforgotten about movies based on the short story by Philip K. Dick.  In themovie, pre-couch Tom Cruise plays a police officer in the year 2054 who worksfor the highly specialized 'pre-crime' division.

Using a bizarre array of technology and metaphysics, the pre-crime divisionsees into the future and stops criminals in their tracks, arresting them beforethey commit a crime... sometimes before they even think about committing acrime. 

This very elaborate and morally ambiguous law enforcement system is predicatedon the government determining what your actions and intentions will be, oftenbefore you do.  It's not all science fiction.

A number of politicians and bureaucrats in Washington D.C.are seeking to step up the Internal Revenue Service's powers, and technology,to essentially audit taxpayers before returns are even filed.

In remarks to the National Press Club last week, an IRS spokesman unveiled theagency's vision for the "look forward" model in which most of thepertinent reporting information for the average taxpayer (W2, 1099, mortgageinterest etc.) would be submitted to the IRS well in advance of the individualdeadline.

After a massive upgrade in technology, the IRS would be able to pre-calculatewhat it expects to receive in taxes and instantly reject any return thatdoesn't comply with its determination.

This may work fine and well for some wage earners... but start throwing in afew investment accounts, small business income, private partnerships, etc. andthings can quickly diverge from the IRS estimates.  

Imagine you start a new business on the side of your usual employment this yearand take an initial loss due to ancillary startup costs.  This wouldn'tfactor into the machine's pre-calculations of your tax liability, so you wouldbe immediately rejected and flagged for additional scrutiny. 

Makes you want to run out and start a business, or invest your capital insomeone else's, right? Not exactly. 

Deep down, I think these people simply want to try and make things moreefficient. Pre-crime is not the way to go.  There are a number ofcountries that have incredibly successful tax codes, and there are commonthemes in all of them:

1) Keep it short. The Baltic countries are a great example of this-- theentire Estonian tax code is about 70 pages, roughly 1/1000th the size of the US tax code(which is still prone to so much interpretation). It takes about 15 minutes tofill out an Estonian return, and you can do it online.  In the Maldives, it'seven easier.

2) Keep it simple. When you have a tax code that's so complex it has given riseto a multi-billion dollar preparation industry, you have a problem. There aredozens of different forms at the IRS, and over 20 versions for the 1099 alone!This is a system that is prone to massive flaws and a great deal ofcontradiction. 

Hong Kong is a great example of a simplesystem. Taxes are levied at a flat rate of 15% based on the "territorialprincipal" that only income derived from Hong Kongis taxed. There is no capital gains tax, no VAT, no estate tax, etc. And yet,the biggest problem the Hong Kong governmentfaces regarding taxes is how to give away their massive surplus. 

3) Keep it low.  When you make it easy and painless for people to paytaxes, it removes most of the incentives for them to cheat. In Singapore, taxrates are among the lowest in the world with a maximum rate of 20%. The capitalgains rate is zero. The corporate rate varies from 0% to 17% (and keepsfalling). 

Under these circumstances, why cheat? By keeping rates low, the government isremoving any incentive to engage in complicated (and costly) tax avoidancetechniques. From a cost/benefit perspective, it's much easier to comply whenrates are low.

4) Keep it friendly. Creating an adversarial relationship with taxpayersdoesn't do anyone any favors. One of the key themes of the world's mostsuccessful tax regimes is that they do not operate like a police agency that'sout to get people. This is a massive hurdle for the IRS to overcome.

Perhaps the polar opposite of this is Switzerland, where tax evasion isconsidered a civil matter, not a criminal matter. In Switzerland, the local cantonal taxauthorities actually compete with each other for your business, rather thansticking you up for cash under penalty of imprisonment.

The USgovernment is now searching for answers. Behind close doors, politicians arelikely admitting to each other that the kitty is empty and they're completelybankrupt. They don't have to look far for solutions-- the best models in theworld are already in practice and have been successfully implemented.

Rather than making things easier, less painful, friendlier, and simpler, the USgovernment seems to be taking the opposite approach-- hiring more agents tosniff out 'suspicious' activity (defined in their sole discretion), raisingtaxes, and relying on fear and intimidation.

I suspect this path will have the opposite effect-- instead of raising moremoney for a bankrupt government, it will continue to chase out productivepeople. More on that in a future letter.

Until tomorrow, 

Simon Black 

Senior Editor, SovereignMan.com 

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