How are dividends handled?
When a business receives money, it immediately pays a percentage in tax. It then has remaining, unencumbered money. A business can transfer funds to its owners without incurring another taxable event. The ownership of the money has not actually changed so there is no revenue being realized.
How about capital gains, depreciation and other asset transactions?
A company might buy a piece of equipment for $100,000 with $70,000 from their private account. It is a clear investment so it is subsidized. However, it is expected to lose $10,000 a year in value due to wear and tear. The depreciation (or even an increase in value) might be related to income, but we aren’t taxing income, so it is irrelevant for this tax. When the asset is sold, the resulting monies are treated like any other revenues.
When a non-productive asset is purchased and then sold, the sale would not be treated as normal revenue. Because the seller exchanged the asset (for which they paid a full unsubsidized price) for cash, they didn’t make a large amount of revenue. Instead, they may or may not have made a profit. For this reason, the sale would be taxed on the difference between the sale price and the original cost of the asset. For example, an individual might buy a car for personal use. They would pay $50,000 and receive no subsidy. If they sold the car for $40,000, they would pay no tax. They were already taxed on the $50,000. This is not a business expense and no new revenues were realized. However, if they sold the car for $100,000 then they would pay tax on the $50,000 that was earned.
A more normal example of appreciation might be the purchase of a house. If it is bought for $200,000 and then sold for $150,000, there would be no tax collected on the sale. If, however, if it sold for $300,000 then there would be tax collected on the $100,000 in profit.
How is debt handled?
Currently, interest cost comes out of the measurement of income used to apply taxes. The Potentialist system doesn’t tax income, requiring a change in the handling of debt. The Potentialist system is not a big fan of debt. It is based on the concept of continual loss and destruction rather than positive opportunity. In addition, it can trap entire societies in poor and wasteful spending because people do not protect other’s assets enough.
Nonetheless, in the interests of consistency, the handling of debt should be entirely standard. Cash flows from borrowing should be taxed as regular revenues. If those cash flows are applied to productive purposes (not non-productive activities) by the borrower, then that spending would be subsidized. On the lender’s side, the loan is a productive application of funds so it would be subsidized. When the funds and interest are returned, the lender would need to pay tax on those revenues in the normal way.
This would discourage consumer finance. Because cash flows would not be applied to productive purposes, the borrower would immediately pay substantial tax and their purchase would not be subsidized. In order to repay the loan in full, the borrower would have to make enough money (after the tax) to cover the original bill and interest. This would make goods purchased with borrowed money substantially more expensive. Given the risks created by over-active consumer finance, this should be considered a positive feature.
How are employee benefits handled?
Let’s say a company buys a foosball table for their employees. It helps them work better so the company considers it an investment. But it is an investment in the same way that employee wages are – it is a transfer to the employee. So the spending is subsidized. It goes to the employee, where it is taxed. This works well for assets with easy to calculate values like company cars. The employee’s use of the asset represents a transfer to the employee on which the employee is taxed. Of course, if the employee uses the asset to generate cash flows then they can keep the value in their active account – and out of the tax one.
If the use of things is harder to value – like a million dollar painting on a CEO’s wall – then some sort of expert opinions might be needed to provide a value. You don’t ding the CEO for the full value of the million dollar painting; they don’t own it, they can’t sell it and they can’t bring it home. In essence, they are renters, but the company is paying their pill and so you tax them for the value of the usage of that item. This does put a damper on non-cash employee compensation.
As another example: If you put a nice painting on the wall – perhaps one worth a million dollars. It might be worth $10,000 a month as a rental. Of course, it has to stay in the office, so the employee benefit might reasonably be estimated at $5,000 a month. The CEO would thus owe tax on that $5,000 a month. Because the other $5,000 is considered inactive spending, that spending is not subsidized – leaving the company to pay the tax. Of course, the company could treat the entire $10,000 as a non-business expense and pay the tax themselves. The tax impact would end up being identical.
What about bling to close sales?
A company might argue the painting is actually there to wow clients and thus close deals. In this case, can their spending be subsidized? Or how about spending on tickets to sporting events or nice client dinners? After all, they are also used to close deals. As a guideline, I would go back to the root principle. We want to encourage productivity activity. We want to help people maximize their potential.
In this light, I’d suggest that such displays of bling are either transfers of money to clients (and thus taxable for those clients) or simply inactive spending that is not subsidized.
Would this kill consumption?
Modern economics are driven by the idea that consumption is inherently good. We seem to measure happiness by economic growth and growth by spending. It is almost like a drunk man looking for his eyes under the lamppost – we’ve decided spending is critical because that is what we can measure.
The emphasis on consumption often results in financial crisis. People are building things people don’t need with money nobody seems to have. You end up with the ghost cities of Spain and China – built on circles of credit that leaves families destroyed. Resources that could have been used for something real and useful ended up being squandered on uselessness.
Potentialism is built on the cycle of Creation, Connection and Protection. Ideally, people realize their productive potential and use some of the resources they’ve created to connect with timelessness. They thus bring fundamental meaning to their lives. Finally, by combating real-world risks, they enable others to join them in this cycle.
We can measure the creation of most resources by what people are willing to buy – in other words, value-added. But if people aren’t buying with their own resources – but are instead relying on debt – then the value being added will be fundamentally misrepresented. They will buy what they can get financing for. This Potentialist tax system would discourage discretionary spending, especially debt-funded discretionary spending. By doing so, it might actually protect the underlying economic fundamentals of society. When people buy, their appreciation for value will be enhanced. Perhaps more critically, we won’t chase after the totem of consumption – using it as shorthand for happiness.
People can, and have, led productive and happy lives in lesser economic circumstances. The key is to lead a meaningful life in which potentials – both material and spiritual – are maximized.
This tax system, combined with the cost-cutting and quality improving healthcare and education models, can help achieve that.
Would it slow the velocity of money?
Can money simply be parked in cash and then used in a subsidized fashion much later? Investment without productivity (e.g. sticking money in gold) doesn’t help the velocity of money. Nonetheless, if velocity if required there are possible method of encouraging the movement of funds. One concept is to have the operational spending subsidy expire after a set time period, like 5 years.
You receive revenues, you pay the tax. You can spend those revenues on productive activity for up to 5 years and have them subsidized, or you can have the subsidies expire. When the subsidies expire, the potential government liability would also expire.
Money would be treated (for subsidy purposes) as first-in first-out. In other words, if you bring in money in 2020 and the more money in 2021 – your 2020 balance is spent first, preserving the 2021 money.
There are some complexities here. The system would need to tie monies to their original taxation point. If you buy a bunch of gold and then sell it, no tax was incurred but the original timeline has not been updated. I would suggest that with the sale of major assets some data collection would need to be supplied indicating when the assets was purchased and thus providing a base time for the new money. Single assets made of multiple purchases (like a house with a remodel) would capture all of purchasing timelines and simply apply them evenly to the revenues received up to the value of the asset.
In no case would the personal subsidy on initial spending expire.
What about multi-jurisdictional tax & interaction with income tax schemes
Most of the world has VAT and Income tax systems. There are many rules for determining when VAT is due in a particular jurisdiction. Generally speaking, if the sale is made in a jurisdiction then the tax is due there. There are, of course, various ways of establishing this. Under the Potentialist system, if the revenues are received in a particular jurisdiction then tax must be paid on those revenues – even if they are brought in from outside that jurisdiction. So a company would be unable to transfer wealth to its shareholders – tax free – unless it had paid tax on the revenues it had received. There are various paths possible in this area so further thought is definitely required.
How do you balance the budget?
This page discusses various areas of spending (spending subsidy, healthcare, military and education). In seeking a balanced budget, it might be possible to have tax rates and subsidy rates automatically adjust to changing economic conditions. There would be other areas of spending (like various regulations, policing, transportation and overhead), but welface, healthcare and education represent very powerful budget and economic levers. There is a lot of uncertainty though – this mix of spending and taxation has never been tried. The first governments that try this should probably have sufficient financial resources to get through the initial humps.
Why not have a rule about what is productive?
Productive and creative activity is inherently new. It can be difficult to identify what it is by some hard rule because it constantly takes on different shapes. This is a good thing. We can’t build the perfect engine of society and we don’t want to. We want a system that encourages change and growth without creating open-ended opportunity for manipulation. The case law approach is superb at carrying out this sort of task.
Of course there will be some ‘off-line’ economy. There always is a gray economy and it is great that it exists. The gray economy is a brake against over-reaching by the regulators of the formal economy and it encourages the regulators of the formal system to deliver strong benefits for being formal.