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The Income Tax Box

We need to think outside the income tax box.  When America says "tax reform," it generally means tweaking income tax brackets, or credits, or deductions.  That isn't reform.  It is rearranging the deck chairs on the Titanic to provide a better view for some.  Tax Reform means getting out of that small box, to genuine reform. The income tax is not the only tax, or the most desirable tax, or a just tax, or the only progressive tax. It is time for us to move beyond it, to get outside the box we've packed ourselves into.

 

Personal Income Tax
 Jeff Smith: What the Left Must Do: Share the Surplus

TAXING EARNINGS DOESN’T WORK
As taxing land spurs employment, taxing labor and capital does just the opposite. Taxing salaries makes it more expensive to hire people. Taxing earned profits makes it more expensive to invest in firms that hire people. If you want jobs, don’t tax them. Demanding jobs while taxing wages is irrational. When we tax (or in other ways reduce) one’s efforts, most people naturally produce less.  Less output not only shrinks private assets but also the formation of public assets downstream.

Unlike taxing earned incomes, which shrinks the pie, collecting rent grows the pie. While taxes on effort lessen the motivation to produce, charging people rent for what’s already been provided, by definition, does not diminish the motive to produce. Instead, recovering rent removes the private profit from speculating in land and resources. And once we redirect revenue from sweetheart deals (e.g., Pentagon contracts), tax breaks (e.g., depletion allowances), and subsidies (e.g., agri-business support) into a general dividend, then why bother currying favours from the state? Finding rent-seeking from both nature and the legislature less profitable, investors would turn to improving production: new technology and worker re-training, providing society more from less.  Read the whole article

Corporate Income Tax

Nic Tideman:  A Bill of Economic Rights and Obligations
Preamble Our nation was founded on the idea that we are all created equal, that we are endowed by our Creator with certain inalienable rights, and that among these are life, liberty, and the pursuit of happiness.

In living, expressing our liberty, and pursuing happiness we sometimes conflict with one another, so we need a shared understanding of the extent of the sphere of equal rights given to every person, and beyond that sphere our obligation to respect the rights of others. This Bill is concerned with the economic aspects of these rights and obligations.

Article 1: Each person has the right to decide whether and how to use his or her talents. Those who are self-employed have a right to the full economic product of their efforts. Those who are employed by others have a right to the full amount of the compensation that their employers agree to pay them. Thus Congress and state legislatures shall levy no tax on wages or interest or spending. ...

Article 3: All persons, in all generations, have equal rights to natural opportunities, such as the use of land, natural resources, and the frequency spectrum. Therefore Congress shall place levies on states to equalize among states the per capita annual value of access to natural opportunities, and to compensate for the harmful effects of activities in states on other states and on future generations. State legislatures shall place corresponding levies on their subdivisions. ...  Read the entire article


Mason Gaffney: The Taxable Surplus of Land: Measuring, Guarding and Gathering It
1. Common Property in Land is Compatible with the Market Economy.
2. The Net Product of Land is the Taxable Surplus
A. To socialize the taxable surplus, land rent, effectively, you must define and identify it carefully, and structure your taxes to home in on it.
B. Taxable surplus is also what you can tax without driving land into the wrong use.
C. To tax rent we must be sure there is rent to tax, and we must adopt public policies to husband and maximize it, and avoid policies that lower and dissipate it.
i. Avoid "perverse subsidies."
ii. Avoid letting lessees of public land conceal their revenues.
iii. Avoid letting lessees or taxpayers pad their costs to understate their net revenues.
iv. Avoid dissipating rent by allowing open access to resources like fisheries,
v. Avoid trying to distribute rents to consumers by capping prices below the market.
D. Raising output by removing tax bias
E. Maximizing public revenue.
F. Sustaining the tax base
3. Taxing the Net Product of Land Permits Untaxing Labor
4. Taxing the Net Product of Land Permits Untaxing Capital
5. Taxing the Net Product of Land Provides Ample Public Revenues: a Master Solution to Many Problems
A. Public revenues will support the ruble.
B. Your public credit will, of course, recover to AAA rating when lenders see that there is a strong flow of revenue to pay public debts.
C. Never again need you bend to any "advice" or commands from alien lenders, nor endure patronizing, humiliating homilies from alien bankers, nor beg any foreign power for aid.
D. If you again feel the need (as I hope you will not) to rebuild your military, you will of course require strong revenues.
E. Strong national revenues are required to unite Russia, and keep it one nation.
Summary

 There are many more possible tax types we might consider, taxes imposed on parts of C, but not all. A payroll tax is an example. This tax would discourage the use of labor on land, but not the use of capital, and so would have two biases: less labor use, with the same capital use, or even more capital use as capital substitutes for labor. We do not here pursue all such possibilities of bad tax policy, for they are too numerous. The major point is that taxes on any base other than N, the Net Product of land, bias the market against the best and fullest use of land.  ...
Taxing the Net Product of Land Permits Untaxing Labor

The IMF and its allies advise you to impose heavy taxes on the payrolls of labor, and on employers who hire labor, and on the goods labor must buy to survive and support families. Then they turn around and tell you that labor-intensive operations, like some of your coal mines, are inefficient because labor is so costly, even though the workers are getting very little after taxes. They advise you to downsize or close these operations, throwing labor out of work. They even lend you money for the purpose: not to develop and build up Russia, but to dismantle its industry, which they call "restructuring," and throw its workers onto welfare. In a few specific cases they may be right, but in general, this is a strange way to develop Russia's economy and living standards! It is enough to make one wonder whose welfare they have in mind.
 
To restructure your industry, first uplift incentives to build and man new plants; then let managers close old ones by their own free individual choice, as their workers leave for better jobs. We see from Table 1, and the analysis following it, that
  • a tax on labor artificially discourages labor-using land uses like A, in favor of labor-sparing uses like B, or even D, which uses no labor at all.
  • If, on the other hand, you untax labor, you lower its cost to employers. When you change the tax system to relieve labor, many lands will be shifted to the more intensive uses, soaking up your surplus labor and "restructuring" your industries in the most constructive, efficient ways. Employers will want to upsize, not downsize. Workers will move off welfare and produce more goods either for export, or for your own consumers, lowering your need to import. Both of those will strengthen the ruble: production is the key, in either case.
You will also collect more taxes, as shown, by shifting the tax base to the Net Product of land. Lower welfare costs, coupled with higher tax collections, will balance your budget and lead to the day when you can even run a surplus. With these new surplus funds you can pay off old debts, if you choose to. I take no position and offer no advice on whether you should pay off old debts from the Soviet era: that is a judgment call for you to make, based on your evaluation of the history of those debts, and how obligated you feel. I do know, though, that if you have good public revenues for the future, you will have good credit, regardless of the past. Lenders will seek you out, eager to become your creditors again. That is the clear lesson of U.S. history. We have had two centuries of experience in which many of our states and cities repudiated debts, many of them owed to foreigners, only to borrow from them again within a few years. Read the whole article

Mason Gaffney: The Property Tax is a Progressive Tax

The central question is, why rank by income at all -- any concept of income? When we do that we accept income-fundamentalism, a kind of philosophical imperialism where Adjusted Gross Income on Form 1040 is the basic reference datum against which to measure and judge everything. "Similar circumstances" mean similar AGI, and similar circumstances deserve similar taxes. In effect this means we judge the property tax on the basis of how closely it resembles the income tax, in every detail. Since nothing resembles the income tax so much as the income tax, the property tax looks inferior.

Again, the concept called "income-elasticity of demand for wealth" contains implicit income - Chauvinism. It implies one-way causation: income causes wealth. But wealth also causes income, and as Klein points out that changes the rules for relating them.88 No longer can income be the simple ranking variable.

If the property tax had no rationale of its own we would be forced to accept income fundamentalism. But if the property tax has a rationale, then it is legitimate to rank by wealth, and fault the income tax for failing to tax large properties adequately. Here is an outline rationale for the property tax.

1. "Ability-to-pay" derives from wealth as well as current income. James Tobin, Arnold Zellner, Taylor and Houthakker, Harold Somers, and others have stressed this lately. The old cliche that "taxes are paid out of income" is as empty as the one that we consume "out of income." We spend money, and it is not labelled.

2. The property tax asserts a public equity in land which was won and is defended by joint efforts, and whose value derives from public works and spillovers, not from the owners' efforts. It exempts human effort, thus rewarding service to the community and denying the state any equity in the bodies of its citizens whose freedom and dignity is thus enhanced in their capacity as human beings, as distinct from owners of wealth.

3. Property taxes reduce the differential effect of inherited wealth on the current generation. They strike directly at concentration of economic and other power based on wealth, promoting competition and equal opportunity. Property as collateral is a source of invisible income (credit rating). Taxing property reduces the differential advantage of the rich in credit rationing.

4. Property income of a given dollar value places the receiver on a higher welfare plane than labor income, because he needn't work for it. $10,000 a year received by dint of working long hours in a coal mine with black lung disease is not the same as $10,000 plus a life of ease.

5. The property tax is needed to plug loopholes in the income tax, which is inexorably devolving into a payroll tax.

If one finds that rationale compelling, then the proper approach is to rank by wealth. ...

On Defining Income and Wealth

Dick Netzer, like others, uses AGI as the reference standard against which to match the property tax and find it regressive.(40) A certain citizen in 1970 reported no AGI, but heavy property taxes, which might make the property tax quite regressive were it not Ronald Reagan. Yet he is not alone, and it seems harsh to select a measure that makes the property tax regressive because it is the only tax many rich men pay. General Oppenheimer has written a fine set of manuals on how to reach Zero AGI by losing money farming,(41) and they work so well that taxable farm income is down to about $3 billions while the USDA estimates farm income at $14 billions.(42) I do not think that AGI will do.

It is not just farming. Property is the paramount tax shelter. How does it cover thee? Let me count the ways. There is

  • expensing of intangibles and soil and water conservation,
  • percentage depletion,
  • capital gains rates,
  • deferred realization,
  • non-distribution of profits,
  • nonrealization,
  • conversion of interest into cost recovery by watered sales prices,
  • accelerated depreciation,
  • multiple depreciation,
  • de facto expensing of capital improvements,
  • deduction of interest,
  • covert write-off of undepreciated land value,
  • deferral of tax beyond date of sale, and many others.

At the same time, property is a large source of income that is not counted in AGI. Unrealized accruals and imputed income are the most obvious, and each is a huge item.

Thus the ownership of property tends on a large scale to reduce AGI and increase real income. When we rank by AGI, property owners move into lower brackets than they belong; non-owners move into higher brackets. Property tax payments move into the lower brackets, pre-ordaining a finding of regressivity which is totally illusory.

At least two studies have sought to correct for the Reagan Effect. Both corrected only partially, and with spectacular results. ...

Another common method is to define property tax payments as only the net burden after deducting payments from taxable income. This is to impute a regressive feature of the income tax to the property tax. That would be wrong at best, but more so when one is comparing the property tax with the income tax itself.

If one does choose to evaluate the two taxes jointly, he should note above all that the Federal Government has moved far toward abandoning the taxation of property income. That is the cumulative effect of a hundred loopholes, available to property but not to the poor stiff with his W-2 Form. Equity suggests that state and local treasuries move in on this unpreempted tax base.   Read the whole article

Mason Gaffney:  Sounding the Revenue Potential of Land: Fifteen Lost Elements

... The personal income tax base includes income from land. That’s what the 16th Amendment was all about.

      The personal income tax can be converted into a tax on land income in two steps.

A, Exempt wage and salary income from the tax, then raise the rates. (Corporate income is already net of payrolls, and we have taxed it from 1909).
B. Remove capital income from the base. This is done by “expensing”: letting investors write off what they spend on new capital, at or near the time they do it. Read the whole article

Lindy Davies: Ownership and the Law
President Bush's announcement of his vision for an "ownership society" met with thunderous cheers at the Republican Convention, and much eye-rolling elsewhere. The Bush Administration would like to start by encouraging private ownership of our retirement funds and our health-care decisions. They want to get the heavy hand of government out of such things and unleash the tremendous efficiency of millions upon millions of Self-Interested Individual Actors, the husky, brawling, broad-shouldered capitalism that made this country great. Prosperity depends on the security of private property and the potency of individual initiative! This is the self-evident truth that has been obscured by Hollywood Socialists, Democratic Girlie-men and purveyors of the Homosexual Agenda.

We should realize, however, that this is hardly a new initiative. It is really just the latest wave of an argument that has raged throughout the history of the United States, about just what -- if anything -- and on what basis -- if any -- the government can require us to surrender what we possess. There are some people out there -- and actually a fair number, after all -- who don't view the Bush Administration's privatization proposals as extremist at all -- but, rather, too soft. ...

Unfortunately, though, the law is not at all clear. Thomas Jefferson fudged the topic in the United States Declaration of Independence, inserting "the pursuit of happiness" where people expected the more loaded term "property". The Bill of Rights, however, is strong on property rights. It provides for security of "persons, houses, papers, and effects," that "private property shall not be taken for public use without just compensation" and that rights not specifically prohibited are reserved to the states or to the people. In fact, the US Constitution was so bullish on property that it provided for private property in human beings, a principle made explicit in Dred Scott vs. Sandford and many other cases.

Slavery was made unconstitutional by means of the 13th Amendment in 1865. This, however, left much to be resolved, and the Congress had a very difficult job -- perhaps, in strictly logical terms, an impossible job -- in drafting Amendment number fourteen.  ...

The 14th amendment reaffirms the rights of life, liberty and property, and binds the states to the same due process and equal protection restrictions as the federal government. However, it places the Constitution's first limit on the right of property, stating that the United States or any state shall not pay "any claim for the loss or emancipation of any slave". This could be seen as somewhat fishy in terms of the Fifth Amendment. After all the 13th amendment had taken the slaveholders' property three years before. Had not the Supreme Court ruled that slaves were property and had to be returned to their owners, even if they escaped to non-slaveholding states?

Although it would have been impracticable (to say the least) to enforce the Takings Clause to the tune of the market value of some four million human beings, that was what the Constitution required the government to do.  ...

The next amendment to the Constitution following the Reconstruction Amendments was another milestone in the debate over property rights. The 16th Amendment, ratified in 1913, allows Congress to “lay and collect taxes on incomes, from whatever source derived” -- contravening the restriction of this practice that had been laid out in Article I. The “from whatever source derived” part has been making people scream bloody murder ever since. ...

The original advocates of the income tax (many of them Single Taxers) sought to tax accumulation, not industry and initiative. They saw that the massive concentration of wealth among a privileged few was harmful to the nation, and they persuaded the states to accept a progressive tax that would compel robber barons to pay for public goods while letting entrepreneurs gain from their contributions to overall prosperity. And yet, over the years, a tax on income “from whatever source derived” came, one loophole at a time, to be a tax on exactly those productive, hardworking, middle-class people that it was designed to help. ...

In most people's minds, after all, land is the most solid and important kind of property; in fact, the word "property" in general conversation most often means "land". However, it has long been recognized that sometimes privately-held land must be taken for public purposes. The principle of eminent domain is not (particularly) controversial. If the state wants to put a highway through your house, it must pay you the fair market value of your property.  ...

This decision was important because it extended the Takings doctrine beyond physical seizure to the taking of value -- but it was also relatively uncontroversial in that the state legislature had removed all of the parcel's market value.  ...

If government were to be held liable for every single action that took away a portion of real estate value, it could scarcely do anything at all. That might be how some of the most strident militia-folk would like it. However, it would certainly not suit real estate owners in general -- who, while they might not enjoy paying for government, do benefit from the things that government does.

What the property-rights folks are forgetting (or disregarding) is that if a piece of land has a market value, that means that the net benefits conferred upon it by the community (which includes the government) are greater than the net costs. Location value is far and away the most important component of land value -- and location value is almost entirely the result of services and infrastructure that the government provides. ...

It's no accident that the issue of "regulatory takings" is such a stew of contradictions. Indeed, the terms of the argument deny the possibility of coherence (in much the same way as they did in 1868). Land is not the fruit of human labor, and its value is not the result of any actions taken by its owner. Therefore, private property in land is an entirely different sort of phenomenon than private property in the products of labor -- and as long as the law fails to recognize this fact, it cannot hope to make sense of the issue of "regulatory takings". ...

It could be suggested that "the conditions of the grant" could, without doing any violence to the secure right of private property, require the payment to the community of the land's rental value, to cover the cost of the community's expenses which, it turn, provide the land's value in the first place. That would, of course, require a clearer definition of the moral basis of property that the United States has ever been able to come to. Yet -- think of it for a moment -- what would have happened if the original Bill of Rights had articulated the individual's absolute right to property only in the products of labor -- and the community's right to the community-created value of the land?

It would have saved us an awful lot of trouble. True, the "slavery" states would have balked at joining the union under those rules. But under them, the nation would have been so prosperous that they would quite soon have seen the advantage of joining. We would have avoided the Civil War, and probably even World War I -- it is dazzling to think about how different -- and vastly better -- our history would have been, had the Framers taken the brave step of setting forth the moral basis of property along these lines.

It's interesting that we use the word "own" to mean two different things: the sense of possession, and the sense of personal acknowledgment, as in "owning up" to one's responsibilities. The relationship between the two was once closer than it now seems to be; the word "ought" is an archaic past participle of "owe". As we consider how to arrange our "ownership society", we'd do well to remember what we "ought" -- and bring the two senses of the word back together.   Read the whole article

Nic Tideman: Using Tax Policy to Promote Urban Growth
The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:
1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.

2. Payments for extractions of natural resources. Such payments should be set at levels that yield the greatest possible revenue of the resources, in present value terms.

3. Taxes on pollution. Every individual or enterprise that pollutes the air, water or ground should be required to pay the estimated cost of the pollution it generates. The effect of pollution on the rental value of surrounding land is one possible measure of its cost.

4. Taxes on any other activities that reduce the rental value of surrounding land.

5. Taxes on activities such as driving or parking in crowded streets, where one person's activities reduce opportunities for others. The administration of such charges may be so expensive that it is not worth implementing them, but if the administration can be handled sufficiently cheaply, these charges are efficient to the extent that they only charge people for costs imposed on others.

6. Taxes on activities, such as the consumption of alcohol, which impose costs on others (e.g., higher traffic fatalities).

7. Charges for local public services, such as water, electricity, sewer connections, etc. It is not generally desirable to make every service completely self-financing. Rather, what is desirable is that each user be required to pay the marginal cost of the service he receives. Extensions of service networks are efficient when they increase publicly collected land rents by enough to cover the costs not covered by user charges.

8. A self-assessed tax on permanent improvements to land, at a very low rate (perhaps 1/10 of 1% per year). With a self-assessed tax, each possessor of land names a price at which he would be willing to part with the land he possesses (and any immovable improvements). He pays a tax proportional to the value he names, and anyone who wishes to may take over possession at that price. The value of such a tax is that it makes it much easier to assemble land for redevelopment, and to identify appropriate compensation when land is taken for public purposes.

All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.

It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits....Read the whole article

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