Our tax and welfare systems undermine the very concepts our society should stand for. Income taxes inherently punish creation, sales taxes punish the poor and tax complexity creates risk and undermines the experience of rest and peace in society. In addition, our welfare systems often trap people – undermining their creative drive or even punishing the disabled should they try to work. Finally, the curse of complexity undermines the effectiveness of these systems.
All that said, the complexity exists for a reason. There have been extensive attempts to balance wealth creation, the protection of those at risk and the need for enforcement. With a stew of bureaucrats, ideologues, politicians and antiquated ideas on taxation, the result has been a monstrous system. The result is a system dramatically curtails human potential. It sucks away the vitality of our lives in a subtle but very important way.
Electronic money can unlock a far better way forward.
Picture this. You receive a payment on your electronic system (it could be a phone or a smart credit card). The money you receive could be from a salary, a charitable gift or business revenue. It doesn’t really matter. It is taxed immediately, and at a high rate. You might receive $143 – but $43 would be taxed immediately. You are left with $100 in an unencumbered account. The tax rate is identical for all kinds of revenue and for all kinds of entities. The only exception is non-revenue transactions such as transfers from businesses to their owners; the business has already paid tax on its revenues so the cash is moved from their unencumbered account to the owners.
On its face, this tax seems quite high and harsh – especially since it is on revenue – but actually it isn’t.
The key is the spending side.
If you spend money on productive purposes (those intended to generate a cash flow – not financial investments) or on protective purposes (primarily charitable activities to help the poor and disabled) then your $100 spends like $143. In other words, you get back the money you paid in tax. Because of this, even income isn’t taxed so long as it is poured back into productive business. When it comes out the other end, it is taxed once again – but the investment cycle can be repeated. The case law we already have to determine business expenses could be used to determine whether expenses were properly characterized.
This tax would apply to everybody – lemonade stands, home daycare providers or multinational corporations. It is all equivalent. Effectively, the tax is on spending that isn’t productive or charitable.
In this system higher tax rates don’t discourage investment. They can actually drive it, at least until the point where the rates are high enough that people feel they aren’t earning money they can spend.
This system can also implement a very simple welfare system. It lacks the stepping that keeps people out of leading economically productive lives. Every month, every individual’s initial personal spending is subsidized. Their first $100 might spend like $400. Their next $50 like $100 and so on. Reasonably quickly, this subsidy would disappear. The subsidy would only apply to individuals.
This simple concept has a number of important impacts:
- First, even the poor and disabled would have to collect some revenue to realize their subsidy. This encourages the experience of productivity across society.
- Second, the poor and disabled can collect charity and have that money subsidized. This provides a seamless welfare and support system for people suffering from all sorts of physical and mental disabilities and life setbacks.
- Third, there doesn’t have to minimum wage. Wages are boosted through the subsidy. This applies brakes to our system of ever increasing automation, which is pricing labor out the market. High German labor costs drove Germany to be the world leader in automation. But if labor costs were low, automation would only be applied when such systems are cheaper than cheap people and thus preserve the self-fulfillment of work.
- Fourth, this would encourage individuals to come together to maximize the economic impact of their subsidies. The entire system of government-recognized families and tax impacts would fall away. If two people are co-dependents (they could call it a marriage or they could simply be siblings or old friends) they could share their subsidy. Their first $200 would then spend like $800. If you have a family of four – or a group of 4 people in a co-op, they can share their subsidy. Their first $400 would spend like $1600. This encourages sharing and connection.
- Fifth, this subsidy would apply to everybody, even millionaires. A poor person who makes $10,000 in a really good month doesn’t find themselves penalized for their good fortune. But their subsidy disappears pretty quickly if they start spending money like crazy. Any spending above the subsidy levels locks in the high-tax they paid to begin with. If they spend only $2000 one month, they will have lost the ability to spend that money tax free on productive or charitable purposes. They will essentially be paying a substantial tax on that spending.
- Finally, poor people – who most commonly do all-cash business – would be incentivized to report their revenues. They can’t have subsidies applied to money whose realization they didn’t report.
All of this represents a dramatically simplified system. The only deviation is the individual subsidy. All of corporate tax, individual tax, social security, tax incentives for saving etc…. etc…. are folded into one very simple (albeit different) system.
In this system, money becomes almost entirely digital. If you can spend $100 like $400 you can’t pull a C-note out of your pocket and turn it into $400. The person you’re buying from wants $400, not $100. And there’s no reason they should know how much you’ve spent that month. With your phone or smart card you can classify your expense (productive or charitable or personal) and see how much of your actual cash you’ll be spending to buy something. If it is the beginning of the month and you’re buying milk for your kids (personal), then your device can tell you that the $5 charge will only cost you $1.25. You then spend the money using your device and the store gets your $1.25 as well as the $3.75 in subsidy money from the government. Those transactions that cross the subsidy divide, such as rent, would be automatically and easily worked out.
The actual accounts could be managed by private banks with the ability to shop for the best providers.
Simple digital transactions, enabled by modern communications technology, are the great enabler.
This system eliminates annual reporting; the government can audit your classification of individual transactions – but you aren’t filing any annual return. It simplifies politics: there aren’t a gazillion exemptions for public officials and politicians to mess with. It simplifies economics: there aren’t economic distortions caused by benefits for this favored interest or that. And the system totally changes the traditional haggling over tax and spending as either disincentives to economic growth or as weights upon the poor. The distinction between business and non-business expenses remains, but the nature of creative activity is that you can’t classify it perfectly in advance.
This is a dramatic change, but we’ve had dramatic changes in tax policy before. For example, income taxes replaced tariffs when nations realized that trade barriers actually damaged them economically. The rise of the Internet could be leveraged to create even greater positive benefits by eliminating our antiquated and costly tax structures.
However, the best part of this system is its foundational principles. It encourages a productive and charitable society.
It helps create a society in which individuals can fully realize their potential.
To learn more of the details (like handling of dividends, capital gains etc… , see the FAQ.