Saturday, April 01, 2006

Finite dollar amounts in tax regulations

The dollar does not have constant purchasing power. Some government and commercial activity already considers this and express indexed rather than finite dollar amounts. Most use a Cost/Price Index, (CPI) published by the U.S. Bureau of Labor Statistics as an authoritative index.

To the extent that the purchasing power of the U.S. dollar changes, the intended extent and/or purpose of laws and regulations with expressed finite dollars are similarly modified. IMO any finite dollar amounts mentioned in any government laws or regulations should be indexed U.S. dollars.

This is the cause of our “creeping” or “stealth” tax increases occur due to finite dollar amounts of deductions, credits, alternate income taxes, and income brackets within or tax laws and regulations.

Expressing dollars as indexed rather than finite amounts ultimately would induce tax cuts that both liberals and conservatives can agree upon.

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Wednesday, March 15, 2006

An advantage of multi tax sources

Proponents of a “fair” tax are almost all firmly opposed to the income tax. They insist that the USA should transfer our revenue sources in a single step. Even if they are correct, IMO the U.S. Congress would never imprudently attempt to accomplish it in one step. If advocates will not accept a multi-step transfer, they thus determine that their should never be a federal sales tax.

The USA could attempt a multi-step transfer, each year shifting a portion of our revenue source from income tax to sales tax. It’s possible that we could completely transfer our revenue source. IMO we will not complete the transfer. If advocate’s estimate of a 23% sales tax could replace our income taxes, IMO our nation would find that rate unacceptable. (Bear in mind many states and local governments now depend upon a general sales tax. In some places a 23% federal tax would be a total sales tax of over 30%). That does not mean there are not advantages to shifting a substantial portion of income tax to a sales tax.

Tax evasion is induced by benefit/cost determinations. Risk, the probability and penalty of detection are major factors of cost to the tax evaders. It’s been speculated that when income taxes were higher, our tax evasion rate was 20%. Greater tax rates grant greater benefits to tax evaders.

The administration and enforcement of income taxes are complex and expensive. The administration and enforcement of a general sales taxes is less so, but they are by no means free of costs. It’s particularly expensive when applied to taxing of services. IMO it’s not feasible for sales taxes to be limited to goods and exempt services. All billing of “mixed” invoices would then exaggerate the value of services and under-estimate that of goods. Fewer invoices would be for transactions of only goods. If sales taxes were applied to stock-in-trade (goods for resale), there would be almost no “pure” sales invoices.

IMO the “value added tax”, (VAT) is superior to other sales tax methods. When comparing all sales tax methods, VAT’s friendlier to commerce, no more expensive to consumers, and harvests more government revenue. Businesses deduct the taxes they've paid prior to delivering the taxes they've collected to the government. Those involved with transactions between businesses and other enterprises that are not the ultimate beneficiaries of goods and services have little inducement to seek or request the evasion of taxes. VAT’s government revenue/expense ratio is greater than that of conventional sales tax.

The total administration and policing expense of both income tax and Vat combined is not much more that of income tax alone. That’s because they share so much data, require similar tasks and they augment each other. We now are almost completely dependent upon income tax’s revenue. That dependency and Bush’s tax cuts made it difficult if not impossible for his tax panel to make any acceptable and revenue neutral recommendations. For all of these reasons, government’s revenue/expense ratio of the combined taxes at lower rates, is much greater than that of just one tax at a higher rate. The aggregate cost to taxpayers is certainly not greater.

Tuesday, March 14, 2006

Tax bracketing

I’m not opposed to bracketing, (progressive) taxes out of principle, but because it induces increasing complexity and unanticipated inequities. Each real or perceived inequity induces another tax exception or additional loop hole. That’s a significant cause of our tax complexity and inequities. If we could, a flat tax rate for all types of income tax is preferable.

Each instance to “fix” a specific inequity, generally results in the creation of new inequities. Tax regulations should be drafted with a “broad brush”. Minute micro-fixes don’t work. When congress heeds the lobbyist’s pleas to alleviate their client’s tax burden that they perceive as excessive, the “fix” is an inequity upon another lobbyist’s client. Lower income taxpayers are not large contributors of political funds. Congress is not amiable to the pleas of non-contributors that are not organized into strong voting blocks.

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Monday, March 13, 2006

Income tax regulations regarding depenents

The income tax deduction is approximatelt $3,200 per dependent. Dependent upon their taxable income, the deduction may be worth very little, or nothing, or $320 to $1,120 to a taxpayer.

This is an example of additional inequality due to “tax bracketing”. This is in addition to the mischief and (I hope) inadvertent results due to the lack of dollar indexing. Indexing would consider the change of the dollar's value due to inflation over years.

IMO the function of dependent tax deductions should be primarily to assist the working poor. Presently our tax regulations grant working poor families less benefits and wealthier families more benefits per dependent.

IMO the amount per dependent should be a tax credit rather than a deduction per dependent. The savings per dependent should be the same for all taxpayers. The amount should be indexed, (as should be all finite dollar amounts in tax regulations). I would prefer an indexed tax CREDIT amount of at least $800 per dependent rather than our present finite $3,200 DEDUCTION.

Sunday, March 12, 2006

Taxation of dividend income

To decrease double taxation, we granted dividend a lower tax rate. Had we simply permitted corporations to deduct dividends paid from their taxable income, they could have paid more dividends at no additional cost.

A good portion, if not the majority of investors are not the actual owners of the stock. These individuals invested their retirement funds into tax deferred accounts. They receive little if any benefit from the reduced tax rate of dividends. Their dividend income is not subject to taxes.

Rather than drafting a law that would benefit all stock holders, we were able to grant a much greater tax rate deduction for the wealthiest tax payers, a lesser rate deduction for the less wealthy tax payers, and managed to provide the middle income earners with little or no tax rate deduction.

This devious inequity is simply ingenious. We've managed to reduce our government’s tax revenue, but limit tax relief to only the wealthier investors.