Some thoughts on taxation

  1. Being a bit fed up about current complex tax systems and the growing inequality, which is a big topic nowadays, I read about a few suggestions on alternate tax systems (in the USA) a while back.

    I primarily read about so-called flat tax and fair tax. They both promise a tax model as simple as possible, based on simple rules of a flat tax rate, either as an income tax or as a spending tax. I found the ideas very intriguing, but I have eventually come to the conclusion that they are very bad. They all proclaim a more fair system, but they are in fact not fair, and downright dangerous to implement, at least in the world we live in today.

    I have found three typical types of taxation:

    A) Income tax

    This is a safe, reliable way to ensure tax income, as long as the government strive for employment and other types of income generation. On the downside, it's more or less static and short-term. Workers get raises every now and then, but all in all that's mostly to compensate for smaller inequalities and inflation. Overall increases in income only follow relative growth and strength of the economy in an international setting. It's short-term in the sense that people might lose their income fairly quickly.

    There are several possible models for an income tax. Often, citizens that are richer tend to benefit simply by the fact that they are more resourceful when it comes to taking advantage of loop-holes or other faults in the system. One such fault can be a differentiation of specific sources of income. For fairness' sake, all kinds of income should be treated as equally as possible. Another fault could be a complex, and possibly unfair, system of tax deductions. Tax deductions should primarily exist to alleviate tax pressure on the weak, and it should not reward particular types of economical behavior too much.

    Tax rates can basically either be fixed (flat tax) or progressive. Arguments of fairness can be made for the first since everyone pays the same relative rate, but only as long as no one gets significant advantages like mentioned above. And, more critically, for the argument to truly hold, also the net economic power must be relative, but as we know, prices are typically far from relative to income. A progressive model tries to remedy this to a certain degree, by increasing taxation on the richer. It's naturally not so popular among the richer. It is important, of course, with a certain encouragement to try to increase one's income, so it's unwise to tax the richer too much.

    B) Spending tax

    Spending is dynamic in nature, following the ups and downs in the economy, but generally long-term in nature. Citizens always spend money. On the down-side, spending tax discourages additional spending and thus limiting economic growth.

    C) Wealth tax

    Wealth is the left-overs that aren't spent and is a fairly reliable source of tax income. This is capital which is more or less inactive and long-term in nature. Wealth increases during good times in the economy while it decreases during bad times. Taxing wealth does little short-term, but discourages long-term saving and investing. It is possible to differentiate saving from investing to remedy this somewhat. A wealth tax affect the richer more.

    Thoughts

    I believe it's wisest with a balanced combination of all these types of taxation, because it's desirable that people have income, spend and save/invest. It's unwise to not have a lid on any of the three. It becomes especially apparent in an international setting, as people will move their income, spending or saving/investments elsewhere, where it might not be taxed so much. The globalization that is happening, and has happened, makes decisions about a nation's economy and taxation model extra difficult, as you increasingly have to compete against other nations. It means, sadly, that the government has a limited say in the matter.

    I would like to point out one dilemma, which is the effect of taxing the richer more, through progressive tax, wealth tax, or a combination of the two. Advocates against such models, might claim that more income causes more spending and investing. They call it "trickle-down" economics, but it has been proven to not work. They forget that spending has it's limits, even for the richest, and that growing wealth is not as beneficial as spending. In the best case, most of the capital is trickling down to the slightly less rich, but even then it's less that the estimated return.

    Another topic that interests me, is that of economic growth. I strongly believe, that the kind of economic growth that is expected today is unsustainable, and a big cause of the inequalities we see. Taxation is one tool in controlling growth.