See what you guys think, this is a work in progress and Im interested in your thoughts. Yes its a bit long but Americans need to do more reading anyway. US Tax Reform System The Basis: All people have the God given right to property ownership. In the Judeo-Christian tradition from which the United States springs, this is affirmed by the 6th commandment presented by Moses, Thou shall not steal. Depriving someone of their property without their consent is an offense against the person and their creator. Regardless of one's religious tradition, it is a basic human understanding that theft is wrong, corrosive to society, and undermining to the reciprocal exchanges that are the basis for all economies. Wages are property. When one enters into a contract whether verbal or written where work entitles one to a specified wage, depriving the worker of that wage is theft. The Status Quo: Contrary to the order what one would expect from a moral or religious society, taxes function on what one could call a theft model, as opposed to a wage and property model. The two largest forms of taxes are income and property taxes. Taxing in this way is making the abhorrent statement that because a person owns something, the government is entitled to part of its value. Worse yet, because a person worked for wages, the government must take part of the wages from them. To justify this, philosophers such as Rousseau in his, Social Contract theory state that all citizens have in essence, made a contract with the government to perform specific services for them. In exchange, the government is allowed to tax in order to fund these services. Here are the problems with this idea: (1) Becoming a citizen happens at birth where no person can make a conscious choice to enter or not enter any type of contract, making the contract void. (2) If the person at some point attempts to not be under this contract which they were thrust into at birth, they must leave the country, change citizenship and make a home somewhere else. Doing this requires leaving all friends and family, traveling great distances, moving through a lengthy legal process and will certainly involve a great sum of money to facilitate. If one does not wish to be under the contract and does not have the means to leave the country, taxes will still be charged against them and non-payment will eventually result in prison time. This is a clear cut example of a contract agreed to under duress. Any contract that is agreed to under severe penalties such as mentioned previously is null and void in any legal tradition on the planet. (3) Due to the whims of popular demand, representatives have been chosen to form the contract to which you must adhere. The tax rate that was negotiated for an individual was not determined by any significant impact by the individual. In essence, not only are people not free to avoid entrance into the contract, but they may not make any changes to the contract. *The idea that a legally binding contract can be made by a majority vote of anonymous persons on behalf of an unwilling party with no negotiating power and under severe duress in the event of non-conformity is legally laughable, morally despicable, and yet somehow, currently implemented. It is important to note that the Social Contract Theory is much more robust in its position on adhering to laws preventing harm to citizens. The arguments above in no way justify anarchy. A detailed place for the discussion of this differentiation does not exist in this document. To put the differences between the social contract relating to taxes and that relating to criminal law succinctly: Taxes of the current system are in violation of basic human rights The current system mandates this continued violation. The government is in opposition to human rights in this regard. However Rights to Life, Liberty, and Property are in numerous other ways protected in our society under law. The current system mandates that those who violate these rights are held accountable and it seeks to prevent future harm to citizens. Government in this case is upholding human rights. Citizens must follow these laws. The Alternative: In the same way that it is wrong for a government to take wages and property from an individual without mutual consent, it is equally wrong for the individual to take these things from government. If the government provides a good or service that was requested by an individual, the government must be paid. Two types of goods and services are offered by a government, direct and indirect. An example of a direct good or service would be a when city provides water to a home. The government covered 100% of the cost of providing the service and desires 100% of the reimbursement for their labor and capital expenditures. An indirect example would be purchasing a new car. The car manufacturer is entitled to much of the money however, the government contributed goods and services throughout the supply chain to enable the vehicle to be produced. To name a few places where the government contributed value to the consumer: The consumer can be assured that the vehicles will meet safety and emissions standards. If the factories were in the US, OSHA ensured that the workers had a safe work environment. Transportation of all necessary materials were on government funded roads. The factory had no need of hiring private police and military units to ensure that their assets were secure. In the case of most direct goods and services, the consumer of these ought to pay for individual consumption, there is no need for taxes to cover this since only a single person benefits and the likelihood of use is 100%. There are cases however where direct services ought to be covered by broader taxes. An example would be the State department securing the release of a American from a foreign nation. The cost to cover this would be too great for most people but, the likelihood of this event occurring is slim. By covering the cost of these potential operations through the sale of passports for example, the government is providing an insurance service to all people who intend to travel abroad. When there is a sale of a private sector good or service, the government must make the most accurate possible estimation of its own contribution and collect this sum from the sale. The consumption tax makes the morally correct statement that because a person has agreed to purchase and consume a product, all of those that used their property or labor in its creation are deserving their agreed upon portion of the purchase price. In this way, no one is forced into a contract of any type. Taxes have become voluntary. If an individual lives self sufficiently on land they own, why should they pay taxes for living there to a government giving them nothing? If a person chooses to save the majority of their money, why have they had to pay income tax if the money they have been paid in no way reflects the goods and services they have consumed? Under the current system these people pay the same amount as those that are consuming monumentally more products and drawing down the resources of the government substantially more. Implementation: Many have proposed a sales tax at the retail level for all goods and services. This would be orders of magnitude better that the current system but it is not ideal. There are two main issues with this method: 1. Most economists agree that any sales tax above 10% generates a black market for the goods and services. 2. Collecting the tax at the retail level makes it much more difficult to apply the correct tax rate to individual products to reflect the contributions of the public sector. A modified VAT tax is the best option. Unlike the sales tax, this is added along the supply chain and paid by companies who in turn pass the cost on to the consumers. By its very structure it has natural checks and balances to ensure honest reporting by businesses. This type of tax would not create a black market. To examine the natural check and balance of the VAT system, imagine that it takes three companies, Ford, US Steel and SW Iron to form the supply chain for a new car. Ford's processes will be examined and due to the public costs that each car represents and the balance of positive and negative externalities the tax rate is 30%. The Tax rate for US Steel is 10% and 20% for SW Iron. When the US comes to collect taxes, it finds that Ford sold a car for $30,000, before credits it owes $10,000. However, it declares that it purchased $20,000 from US Steel. Its basis is now $10,000 and it's tax liability is $3,000. Likewise, US Steel's tax basis before credits is $20,000 with a liability of $2,000. However, they have a credit for purchasing $10,000 from SW Iron making their basis 10,000 and tax due $1,000. Imagine next that Ford wishes to cheat the system and declare that the amount purchased from US Steel is $25,000 lowering their basis to $5,000. US Steel will then declare that the amount was 20,000 and it becomes clear that one of them are lying. Naturally in the vast majority of cases, the company in Fords position would be the lier since the supplier has no incentive to declare a higher selling price, as this would increase their cost basis. Investigations would show that US Steel has had a payment from Ford of $20,000 not $25,000. Furthermore, US steel can show the receipts from SW Iron and the receipt for taxes and justify this information with profit made in that quarter and the 20,000 payment from Ford. To illustrate the advantage the VAT has over the sales tax as it relates to the second point, imagine that plastic bottled water in grocery stores is being taxed at 30% due to their high public costs of recycling, collection, BPA related public health issues, and other negative externalities. Yet, some of the companies are actually using highly biodegradable bottles, others are using half the quantity of plastic per bottle, some are using safer compounds, others pay for their own recycling program, and some are transitioning different processes and materials with a fraction of their bottles made one way, and the rest made in others. 30% VAT does not accurately fit all of these situations and it would be virtually impossible and thoroughly impractical to flesh out what the tax differences would be. Even if one did do this, the complexity of getting all retailers to apply the changes to each individual good and service would be crushing. Where as the Sales tax must individually examine billions of ever changing products with unlimited permutations in their potential final forms, VAT looks at a vastly smaller group. Here is how a VAT would classify and tax. Plastic companies that made safe plastics for food use have a lower tax rate than those who don't. This difference is linked to future public health costs. Likewise, plastic manufactures that make more environmentally friendly consumer plastics pay less in taxes. Bottle making companies who purchase the plastics now encounter the real cost of the plastics with the cost of the negative externalities already included. Currently, value is not accurately matched with price. Without price reflecting value accurately it is impossible to have an efficient economy. The Soviet Union did a great job of illustrating this point with their economic implosion that most economists directly link to the failure of accurate prices due to the absence of a market system to generate them according to supply and demand. Suppliers of the plastics will now have an incentive to prove that their processes merit the lowest taxes. They will begin to seek the lowest total cost for their product and start to see things like lower smog emissions as having a direct influence on the bottom line with investments in this area competing with internal rate of return standards. They will now be in competition with other producers when making their case before the government. The result of this tax structure is that all suppliers of all goods and services are actively seeking to best balance of the resulting positive and negative externalities and potential public costs resulting from their products. Across every step of every supply chain, prices will reflect value closer than ever before allowing smarter choices at every stage of production for every product. Companies will quickly and voluntarily seek to adopt and promote the newest and best practices for producing goods and services with the lowest cost to sociality. There is no possible way to create a system more competitive, efficient and self regulating then this. The part of Government is to match taxes collected to real costs. For instance, if a tax is levied on a commercial fishing establishment due to their environmental impact off of the coasts, moneys raised need to be used to offset this impact. To offset the impact the government could purchase large protected coastal areas or fund research into renewable fishing techniques. If taxes are taken from a trucking company for their wear on public highways, funds need to be used to cover highway repair, construction and financing. Answering Objections: 1. Question: Won't this dramatically increase the cost of everything such that normal people couldn't afford things? Answer: Initially prices will rise however, when the new tax system goes into effect, all other taxes will be eliminated. Take home wages will jump up a corresponding amount since people will take home their whole paycheck for the first time. Over the long term, prices will normalize since the money supply has stayed the same. Currently, taxes are paid on the back end when a company purchases labor. In the new system it is paid at the front end when a product is sold. The market is adjusted for the former and a switch to the later will take time for the market to correct for. 2. Question: While the market is Correcting won't this hurt people on fixed incomes? Answer: Yes, it would. This is not a problem with the VAT tax system it is a problem with having used the broken and unfair tax plan that preexisted it. One way to avoid this problem is to slowly transition to the new system on a 15 year plan that will give the market time to adjust. Costs of consumer goods need to be carefully monitored and if honest people are being hurt by the change, the government must foot the bill for their assistance. It is wrong to change the rules of the game and make retirees the losers. Covering the cost of assisting this group during the transition period is a pittance compared to the benefits that will be realized over the life of the nation. 3. Question: Under this system will the Rich be paying their fair share ? Answer: There are three types of rich people: The kind who give The kind who invest The kind who spend. The Wealthiest 1% of Americans give a larger proportion of their wealth away then any other wealthy class in the world. However there is a jungle of taxes, regulations, limits and filing standards that plague the process and hinder giving. This tax plan allows the flood gates of giving to be open with no restrictions in any way. As is obvious, wealthier people give to poorer people, meaning this is a voluntary redistribution helping to support the lowest classes and unburden social welfare programs. When people invest, the funds are used to create jobs, purchase assets needed in production and fund research and development. Having a large investment class is providing the propellant for further economic growth. This growth helps all people. This money is not taxed whatsoever meaning the impetus to invest will never be higher. The wealthy people who spend have every right to do so. It is their money and they are entitled to do with it as they please. However, for every dollar spent there are expenses that must be reimbursed to the government for their labor and resources used along the stages of production. In this way they are paying exactly their fair share. It is foolish to think that all wealthy people should be treated the same. Why should a elderly lady who has saved and invested all her life and wishes to give her millions to her grandchildren be taxed at all, or viewed in the same light as a person of equivalent net worth who is busy spending money and consuming public resources? The fair share of these two individuals are poles apart. 4. Question: What about the poor? Won't they be hurt by this? Answer: Not even close. In addition to being hit by the wave of charitable giving that is currently sequestered up river of the needy, they will greatly benefit from a substantially stronger economy. They will have no need of filing taxes and will receive their full paychecks for the first time. The basic things they need like a place to stay and food to eat have very positive externalities and will be taxed lightly. Furthermore, prices for healthy foods for example will be much more competitive in price with poor quality choices with negative externalities and high future public costs. Currently, Hotpockets and broccoli suppliers both have to pay workers enough so that even after taxes have been pulled from their paychecks they still want to come to work. Consequentially, the cost of payroll taxes are currently passed onto the consumer in the price of both products. Under the new system, the brocolli will drop in price since taxes passed to the consumer are markedly less then the current system. 5. Question: How will this effect imports and exports? Answer: Back to the Ford example, if Ford buys from China steel it will still receive the same credit and have the difference between supplier cost and sales as a tax basis. When China steel makes the sale to Ford the US will then apply a tax to them. If they have only foreign suppliers then they have no credits with which to reduce their tax liability. If they purchased iron from SW Iron then they could present the receipt as a credit. Just like US suppliers they must present a case why their goods and services deserve a given tax rate. Unlike a US supplier they have not degraded any of our infrastructure in their product's production since it was made in china therefore they do not owe taxes to the US related goods and services and it would be wrong to charge them for this. Unlike US companies they have a deplorable human rights and environmental impact problems. We would look at the cost of mitigating related impacts in the United states first and then across the globe and match the costs to the tax charged the Chinese company. The Chinese company will have to weigh whether it wants to sell cheaper products with a higher tax rate due to it's negative global impact or sell slightly more expensive products after trimming negative externalities and meriting a lower tax rate. This make a level and fair playing field for all products from all countries while providing an incentive for global suppliers to reduce wasteful, inefficient, unsafe, environmentally unsound or illegal practices. This system will boost exports since a good or service used in another nation will have a lower tax rate. For example If a Ford car is produced in the US some of the tax applied to the car is due to its creation costs and part is from its expected future use costs. If it is used only in another nation, it is only deserving of taxes matched to its cost of creation. 6. Question: Ok, I'm convinced. Are there any other benefits to this plan? Answer: So glad you asked, of course there are: Current cost per capita for tax evasion, collection fees and non-payment amounts to $2,500 per year. This would end. According to a study in England, the VAT is one of the very lowest cost taxes to administer. The tax code is vastly more simple No individual tax filing. An estimated 7% of the economy is dedicated to dealing with taxes. In other words 7% of the economy is doing something producing no value. These people could be used to make the economy 7% more productive instead of 7% more wasteful. This is a savings of 1.17 trillion dollars With no corporate income taxes the Trillions of dollars kept offshore would come home fast. Businesses would love to relocate to the US where there is no tax on corporation income or investments. Money would come from around the world to park on US shores. 7. Question: Hold on, what about all the displaced tax workers, accountants, tax lawyers and other professionals aren't they loosing their jobs? Answer: Displaced labor is the measure of efficiency. Scribes lost jobs with the invention of the printing press. Farmers lost jobs with the invention of the tractor. Miners lost jobs with the invention of the steam shovel. This is how wealth is build. This is what efficiency means. The way to lift the economy is to give all participants a larger lever with which to leverage their labor. That said, just like in the case of the retirees that played by the rules and expected that their fixed income would support them, we can't just change the rules and make 7% of the economy into losers. The 15 year transition period will help them too but if that is not enough the government must foot the bill to extend unemployment, fund retraining and assist in placement back into the workforce. This is a one time cost that is nothing compared to the benefits of changing from the broken and backwards wreck that is the current system. 8. Question: Is this a Democratic or Republican plan? Answer: Democrats and Republicans alike contributed to the current broken system. This plan is non-partisan, the structure favors no particular parties agenda only the national agenda. What the tax rates ought to be and what ways the revenue should be spent will become fiercely partisan. This plan does not seek to get into those details it seeks to set up the game board, draw up the rules, and allow the players to play as they please within an system that actually makes sense. 9. Question: What if a producer and a supplier are in collusion and agree to shift tax liability to the company that has the lower tax rate to cheat the system? Answer: If the Companies are separately owned then it is hard to believe that one company would consent to be the losing party in this deal. If they were paid but under a separate transfer to avoid taxes then this is black market activity and will have criminal penalties. Furthermore, any such large and recurring payments not linked to the delivery of goods and services seems very odd form an accounting standpoint and would be easy to sniff out in an investigation. If the companies are owned by the same group, then the business is assigned a tax rate to cover the whole operation. For example, if the same company owned Ford and US steel the VAT will be an average between the two for the purposes of buying and selling to one another. 10. Question: How will this effect small business? Answer: Small businesses will operate by the same rules as the big companies however unlike the current rules, these are simple and straightforward. Time and expense will be dramatically reduced and many tasks will be eliminated. 11. Question: How could this type of tax fund entitlements like social security since it would be difficult to determine an individuals total tax paid over their lifetime? Answer: These entitlements are direct goods and ought to be paid for almost exclusively by the individual, not by a broad tax. This question begins to stray from the taxation issue itself as it is answered more fully in the document on entitlements, minimum wage, and unemployment. In short baring those who seek an exemption, each individual will have a portion of their income withheld. This money is theres and theres alone and will be used to save for retirement, cover medical expenses, offer as collateral for large purchases such as a house or an education and provide funds during unemployment. 12. Question: Would a VAT tax as described be as stable of a revenue stream as property or income taxes? Answer: Firstly, as mentioned before, taxes ought to be collected to match real expenses. If there is less consumption then either those taxes move down accordingly or due to dis-economies of scale, the tax rate would then have to be adjusted. In essence since the revenue collected is based on the expenses incured it doesn't mater if revenues changed. Nevertheless, if one compares the volatility of the US GDP which would be the basis for the VAT to the volatility of income or especially property, it is much lower. In 2008 the average house dropped $100,000 in value meanwhile the GDP dropped 0.3%. 13. Question: Is it fair to have regular people pay the total tax bill for the nation and let companies off the hook? Answer: Taxing companies taxes individuals. Taxing a company has one or more of the following effects: 1. Causes the company to become unprofitable and fail 2. Forces the company to raise prices 3. Lowers the return on investment for owners The first case isn't good for anyone. The second case is still a tax passed onto the consumer but carries none of the benefits that a VAT does. The third case is a tax on investors which has the same moral and practical issues as covered at the beginning of the paper. Companies are simply a group of people contributing assets and labor to create value for society. Taxing them is directly discouraging economic growth.