How would you build the perfect tax system and how much would the state do?

So I had a discussion with a friend about how the best tax system would be and how much the state would do and bring in of the GDP. So i thought I would ask you. Furthermore how would the public pension system work, income based or flat amount? Anyway I would have a progressive income tax, social security contributions for public pension system, health insurance and unemployment insurance. Furthermore a VAT with two different rates. Government would bring in around 40% of GDP, similar to Germany problably. And yeah I am a socialist.

So how would you build your best tax system?

 

First, why are you a socialist?

Second, you have to determine what you want government to do. If government is doing the wrong things, then any method of taxation is worthless. Is the government doing a good enough job to deserve to spend almost $7T (twice what they spend now, and 3 times what they take in, in taxes?)?

Some rules for taxation:

1. Everyone has skin in the game. Shy of a very small portion of the population, safety nets only need to be nets, not hammocks.
2. No deficient spending. If something is worth doing, then it is worth paying for.
3. Taxes on individuals only, a Sales Tax (VAT) on all purchases. No tax on income - incentivize saving.
4. The percent of Sales Tax is determined by a 3/4's vote. No special favors by politicians for their favorite "campaign contributor". No easy change just because the political wind is blowing another way ("the people", not a politically active subset of the people).

 

A 'perfect' tax system is an absolute impossibility without having a 'perfect' form of government, which is an absolute impossibility itself.

It is my opinion that the founders produced in our Constitution the basis for the fairest means of taxation with the least imposition on the freedom of individuals. Until 1913, with the 16th and 17th amendments, along with the Federal Reserve act was passed. that is.
Our Federal government was founded with limited and enumerated powers, the source of which was to be by the consent of the governed. The Federal government was never intended to deal with problems of the people individually, leaving that to be a responsibility of the people individually, along with their State and local governments.

Essentially, the fairest tax system by which the Federal government acquires the revenues required for its' functions is one in which the States are taxed based on their proportion of the total population. It should be noted that such would mean greater responsibility being returned to both the States and the people, demanding of them to be more active in controlling the Federal governments actions and spending to remain within the means of their ability to tax their citizens.

The Federal government, except in rare instances, such as a war would be kept from spending more than the States and the citizens would be willing to allow the Federal government to spend, and except for the rare occasion of war the Federal government could budget without necessity of a deficit.

Government of a 'free' people should begin with the people, NOT with the Federal government, elected politicians, or appointed regulatory agency persons. Laws should be clear and concise, easily understandable by all, and equally applicable to all, with any elaboration done at the State and local levels of government as long as they remain within the constraints of the law. Federal laws should NOT require interpretation by lawyers to be understood by the people over whom they are imposed nor by the politicians who pass them, more often than not without even reading them or understanding them theirselves.

Not Amused - I can agree with much of what you wrote, and I'm hoping MicroMacroMania will respond explaining 'why' he/she is a socialist.

 

In Italy it's not so different from Germany, generally continental European countries follow that model.

The tax system is directly connected with the way the government spends public money. It's evident that high public expenses require a high level of taxation.

Progressive taxation is the mechanism which gives more result, anyway from country to country the level of taxation can vary a lot [in Scandinavia the global taxation, direct and indirect, is above 40%, like in Italy].

And there is [as mentioned] the tool of the indirect taxation.

In Italy when a consumer buys a good paying it 2.22€ actually he pays 20€ to the seller and 2.22€ to the state [it's the VAT tax].

So, probably you are thinking to a "socialdemocrat" model [like in Italy, Germany, France, Scandinavia, Spain ... but also UK ...]

 

Yeah I am probably what you describe as a social-democrat. Anyway it sounds like you guys generally is far right wingers. You do not appear to believe that the government should do anything at all. Interesting to be honest - very different from the europe i live in

 

And you appear to have a closed mind. Why do you ask a question and when the answers don't meet your bias, you just make that old dismissive claim of "you are all far right wingers"?

I'll answer for you - in your socialist mindset, you can dismiss all dissent by labeling all diversity of opinion to ignorance and stupidity. Socialist cannot tolerate any dissent or deviation from the mandated path no matter how small. The specific dissent or question is irrelevant, there can be no dwelling on the merit of the question, all dissenters must be smeared and made the worst enemy. Hence your unfounded leap to claiming everyone here is an anarchist.

 

What each State would do would be determined by the citizens of each State.

 

There are two proposal I find interesting - and much better than the current system.

The Flat Tax where everybody, regardless of income, pay the same rate.

The Value Added Tax based upon what is bought and sold. Those who buy and use more pay more than those who buy and lose less.

In both cases, it does away with a need for a huge tax gathering institution, saving billions from an already bloated government.

 

a flat tax where everyone pays the same % for every dollar they earn over the poverty line

all income would need to be treated as income, no caps, everyone pays the same 35% across the board for every dollar earned over the poverty line

for inheritance we could say anything you receive over 5 million is taxed...


.

 

maybe incentivize saving.for the first 250k, above that they do not need an incentive to save anymore

 

It seems like you guys are all extreme right wingers, no social democrats here. Seems you all like flat taxes.

 

The smartest thing is a higher tax rate for the rich, reduce how the top 1% of Americans make 36% of the nations wealth.

 

Yeah finally a left winger!!

 

If you think about it the government gets all its revenue from the economy. The government should derive its revenue in a manner that does not favour one sector of the economy or one type of economic transaction or activity over another, it should be as economically neutral as possible.
Taxes on income and wealth do not fit this criteria, neither do sales or value added taxes. All favour one type of transaction or sector of the economy over another, intentionally or not.

The ideal would be for the government to collect its revenue from the total stream of economic activity. A uniform tax on all transactions would fit this criteria. In the past this was practically impossible because most transactions were cash and impossible for the government to account. These days most transactions are electronic and handled by just a few exchanges. While cash still accounts for a significant amount of daily economic transactions over 90% of cash transactions are accounted electronically.

It has been estimated that an electronic transaction tax of 0.002% collected at the exchanges would eliminate the need for all other taxes in the US, fully fund all government at the federal, state, county, city town, municipal and other levels and pay off all government debt within ten years and generate surpluses indefinitely.

In other words, if you paid a nickle tax on every $100 you spent on everything and anything you would be completely free of all other taxes forever and so would everyone else.

When this was first proposed in the 1990s by a few prominent economists who had gained access to gross transaction data from a few of the largest electronic transaction processors the only real objection was in a Wall Street Journal editorial that warned that the proposal would bring the entire world financial system to a screeching halt by imposing a $50,000 tax on $1Billion international bank transfers, which is entirely ridiculous.

 

unrealist - your post makes a lot of sense. But you and I both know the liberals/progressive will never go along with it. They're determined to tax those who make things work and provide jobs.

 

Take note that the extremeness you mention is relative to how far left you reside, and did you mean social liberals?
I've not proposed a flat tax, but taxation as originally intended by the Constitution, by the States, proportionate to their population of the whole, eliminating Federal redistribution, returning both powers and responsibilities to the people and their States, leaving the Federal government to do only what the people and the States allow it to do.

 

Actually, the biggest opposition is from wealthy conservatives because an unavoidable universal tax would eliminate their ability to use political influence to gain favourable tax treatment.

There was a proposal some years ago to institute a tiny tax on international money transfers in order to create a permanent method for funding long term economic development investments in the least developed nations. The proposed tax rate was $1 on every $10million that was transferred internationally. It was projected to raise around $5Billion a year, not much at all considering the need.
This generated a huge howl of protest from banks and currency traders, who threatened that it would bring all international trade to a screeching halt and destroy the world economy if it was imposed.

How greed obsessed do people have to be to threaten a worldwide calamity so they do not have to pay a penny tax on $100,000?

 

Taxation is immoral because it is theft. The "perfect" tax system is no tax at all and no government at all. Governments throughout all of history have only been about transferring wealth to the elite in society. End the State.

 

What about a tax on all electronic transactions, of around 1.5%? That would bring in around 40% of GDP.

 

I'm fine with a progressive tax system, but not NEARLY has steep as we have it now. The VAST majority of taxation would be done on the state level, and federal taxes would have specific roles, but would primarily go towards defense spending (which would be WAY lower than it is today), the justice system (FBI, courts, judges, etc.), and infrastructure (which would be a small portion of the budget since it is unfair to take money from one state and give it to another state for infrastructure...most infrastructure spending would be done within the states). I also don't mind the federal government collecting a few extra billion for whatever pet projects they may have, but I would make a constitutional amendment restricting federal taxation, and spending, to 25% of GDP. I'd also prefer the negative income tax for those below a certain wage level (similar to Friedman's idea of negative income tax). For those that don't know, basically, if you make below a certain level, say $20,000 for the sake of argument, you would be reimbursed 50% of the difference between what you made, and the level that was drawn. So if you made nothing, you would get $10,000 from the government ((20,000-0)/2 = 10,000). If you made $10,000, you would get $5,000 from the government ((20000-10000)/2 = 5000). This would always give people an incentive to work as opposed to simply sitting back and getting money. The exact percentage that they would get, and the poverty limit would be debatable, and preferably each state would have some control over both of those limits. Anybody over the poverty line would pay taxes, and there would be a slight progression for those that made over $100K, 200K and 300K. The highest tax rate would not be above 30%. These progressive tax rates would be at the state level, preferably, allowing states to use taxes as a way to compete with each other for business.

I would also gut the majority of the federal tax code, which is basically 70,000 pages of loopholes that rich people pay for to get out of paying taxes. As for pensions, health insurance, and unemployment insurance, they would all be state run, as would the majority of taxation for anything, and the government would go back to the constitutional taxation which is appropriation among the states. Within 300 years of our constitution, we already have an amendment that directly contradicts the original constitution (the 16th amendment). The federal tax code would be MUCH more simple (maybe a few thousand pages...if that), and it would significantly reduce the amount of loopholes for people to avoid paying taxes with. As it is now, Americans spend about 6.1 billion hours PER YEAR doing taxes. That amounts to nearly 7,000 lifetimes of people doing nothing but deciphering the tax code (and that is lifetimes of 100 years...so every year, we have the equivalent of 7,000 people spending ever minute of every hour of every day of there life for 100 years, deciphering the tax code. This is asinine if you ask me).

For insurance, pensions, social security, etc. as I said, it would be state run with the exception of social security. With the states running it, again, it would be a way for them to compete to attract businesses, capital, and human capital to their state. If I was running the state, I would probably farm out a large part of the pensions and insurance plans to private insurers. I would have companies bid on running state pensions (for state employees), and I would allow them to do so with some government oversight to ensure the safety of the pensions themselves and the insurance. I WOULD NOT have the state running either healthcare or pensions completely. As somebody who is a studying actuary, the fact is, politicians and bureaucrats don't have the slightest clue how insurance works, which is fine because it isn't their job to insure people, it's to oversee how the state is running. I WOULD NOT have universal healthcare in my state, but I would make it attractive for companies to offer healthcare policies (by making them tax deductible...that can be part of my few thousand page tax code haha).

And yeah, I'm a capitalist

Also, this is NOT a "perfect" system, since those don't exist, but it is a hell of a lot better than what we have today...and the freedom that is given to the 50 states would allow each state to tailor their tax code to their needs and desires. It would also encourage innovation in the area of taxation, as states will be competing for capital, resources, human capital, and business. This is similar to how China does it, and they are one of the fastest growing economies in the world.

 

If we take the current federal government spending of $3.9 trillion and divide this by 315 million Americans, we get $12,380 for every American. And, this does not include local and state taxation. This is the 500lb gorilla...government spending is out of control! Perhaps 7/8's of Americans cannot afford to pay their fair share of taxes.

An example of how out of control this is, consider the average household income is $55K. If an average household has 4 people, their fair share of annual taxes would be (4) x $12,380 or $49,520. If the average income earners cannot afford to pay the average taxation, then IMO something is upside-down and inside-out!

The question becomes who is paying all the taxes? And the answer is the wealthier people, then by logic the wealthier people have the right to control the USA. But people cannot ask or demand the wealthier keep paying more because there comes a point when they seek other options and we have diminishing returns.

When we have 50-100 million Americans paying little to no federal income tax, these same people will refuse any new tax system which requires them to fork over some taxes, so all other tax ideas from the status quo are unlikely to ever be accepted by a majority of Americans...

 

A tax on all electronic transactions would need to be about 0.002%.
Think about this:
The average of daily retail electronic transactions in the US is less than $1Billion
The average of daily electronic transactions on the New York Stock Exchange is $20-30Billion
The average daily volume of all electronic transactions on all stock bond and commodity markets in the US is $100-200Billion
The average of daily volume of electronic transactions on the global currency exchanges is $5Trillion

Each of those electronic transactions triggers 4-10 more electronic transactions
The daily volume of all electronic transactions in the US is well over $2Trillion
A tax on all electronic transactions of 0.002% would be more than enough to fund the government at all levels, federal state and local, pay off all public debt and completely eliminate the need for all other taxes.

People need to stop thinking about taxes from money where it ends up and start thinking about taxes from the flow of money, which is so enormous that any tax on the flow of money can be very very small.

In the past the available technology was incapable so taxes were taken from places that could be accounted for but the flow of money is now accounted and thinking about taxation should move away from archaic and outdated models engendered by past constraints on technology.

 

First I would abolish all spending, then I would abolish all taxation.

Doesn't get much more simple than that.

 

Not everybody live in the world of electronic transactions. Abolish the IRS and outlaw income taxes. That encourages government to force us to give up our privacy and requires too much paperwork to enforce.

We need a Constitutionally limited sales tax of 10% with a balanced budget amendment. Groceries and medical care/medicine will be tax free, but nobody is exempt. This will limit government spending and also limit government power over individuals. The feds would have to scale back their programs and the states would have to pick up the slack by raising taxes or cutting spending. We would see the 10th amendment become more recognized. States that do well will be followed. States that do poorly will change their ways.

 

Actually almost no one does not live in the world of electronic transactions, especially in the US. Non-electronic transactions are a small fraction of the total daily transaction volume in the US, somewhere less than 1%, which is low enough to not worry about them, especially since the next move that that money makes is electronic.

Would the sales of stocks and bonds and commodities and all their derivatives be subject to the Federal sales tax?
A Federal sales tax is an invitations to the IRS to intrude even more into businesses, not less.

An electronic transaction tax would remove the IRS from businesses and people's lives since the tax would be collected by the transaction processor at the time of the transaction.