The Spectre of Pyramiding Taxes

On this blog I thought I would discuss the frightening prospect of pyramiding taxes.

I acknowledge that this tax pyramids in the economic model. Since the abolition of slavery, I concede that all taxes embed in the economic mode. It is like the broken window analogy. Yes, a broken window for the shopkeeper, does cause more commerce for the glazer, and their downstream suppliers.  However, it may take away from the monies the shopkeeper may have wanted to spend on a new display case or hire a new employee. So, it was just a realignment of resources. I see taxes in the same vein. Taxes in a civilized country may be necessary. However, they have to be paid for. If you don’t pay for them today, you pay for them tomorrow with inflated money or a promissory note on future productivity.

The standard model for economist is the theory that taxes are necessary but bad for certain sectors in an economy. They feel the best way to handle this problem is to try to minimize the burden on necessary or positive spending, and focusing on taxing excess or surplus income. I may agree to some points on this philosophy of taxation if the government would work the same as a business. However, it does not. Government spends money, regardless of the revenue provided to it. And shaping tax laws add compliance costs to the economic model. The only governor on governmental spending is political pressure. Taxation is just a diversionary tactic to move the focus off of spending, and interject emotion. They even point to models that support this. I have no argument with Keynesian Economics or supply side economics. From a common sense perspective, it makes sense. You build up reserves in the boom time, and spend to stimulate in the down times. This would work if you had more or even equal surplus years than deficit years. However, if you look at a graph of spending versus revenue, surplus years are the anomaly, deficits are the norm. These anomalies of surplus arose mainly from revenues to the treasury outpacing the spending patterns, so largely due to the economy outpacing spending, not any planned structure.  I believe that governmental spending is the area America needs to focus on. That is why I have explored this tax.

The chart from above is a simulation of this tax for 5.5%, 4%, and 3.8% rates. It is a simple simulation to show that the effects of this tax are not as detrimental as the opponents to this tax claim. I concede it does embed and that the tax adds to the overall cost of an item. Just like any expense chain, and removal of this tax does reduce the overall cost of an item. However in most cases you will be placing a higher end user tax onto the final price of the item. This percentage is exacerbated by the need to minimize the effects of the larger tax on the poor. In essence try to tax excess spending only. There are concerns that I will address in future blogs, on the effects of the rates on individuals, compared to organizations. However, I do acknowledge that the higher the tax the more detrimental to organizations. It is a balance that must be maintain for the overall health of the economy.

I have included a link to the google doc spreadsheet I created. https://docs.google.com/spreadsheets/d/1FLTGEOi7PYSwFcWv15kbtzhcCQ1gm2MtJEKRGOuVNaQ/edit?usp=sharing

To explain it. It is a simple extrapolation to add all embedded taxes in this model. These spreadsheets were compiled on an expense factor of 1 with the embedded taxes cumulating. And a 10% markup to determine final sale price at each change of ownership for the item. I have chose these factors to maximize the final percentage.  Any changes in values affect the final percentage. Usually the higher input values of costs will reduce the final percentage. It may not be a real world model, however, most real world models should outperform the simulations. I used the 23% of the Fair Tax as the baseline to measure it against.

This is why I like The CUT Tax better than any model available. It makes the model more efficient, and does not create protected classes. I also agree with the concept that businesses do not pay taxes, just collect them for the government. So, it is an pass through expense. The end user ultimately pays the tax.

Cash or Credit?

Cash or Credit?

I have been having problems on explaining the idea on a Currency Use Tax (CUT Tax). There are many concepts within this system. These concepts require a lot of unpacking in order to explain the overall dynamic. People seem to get hung up on the various spectres that present themselves. And most of them are nothing more than spectres. Scary emotional ideas that lose most of their substance upon closer scrutiny. This is an attempt to dispel one of them. This spectre is the compliance spectre. I contend, you may already may be complying to a 3% tax even if it is not called a tax.

I have been searching for a functional model to study. A model that functionally operates the same as this tax, and I have found one. I will tell you at the end of this article. However, many of you will figure it out early, if not already.

The CUT Tax is, is a system of taxation based on the use of all electronic transactions. This would be a replacement for all Federal withholding taxes, and would be voluntary. This is how it works. When you deposit any funds into a financial account, a computer protocol will process the deposit to determine any exclusions from taxation, if none apply, then withdraws a 4% tax (a close estimate, and a good demonstrational example). Now there are many ways to avoid this tax, use cash only, open up an account overseas, and direct barter, all these are technically possible. Why would you pay the tax if it is completely avoidable? After all, what are the motivations to pay the Federal income tax now?

Mainly, you have no choice because non compliance could lead to seizure of cash and assets, and you may have to trade your home for a 10 by 10 semiprivate room in Leavenworth. These are very strong motivators for compliance. However, I offer no  penalties for non compliance.

All my compliance factors are convenience, social pressure, personal ethics, and a sense of civic duty. Not a lot of pressure there. At this point most people's eyes will glaze over and I have lost them.They don’t want to hear anything I say about the cost of handling hard currency, convenience, risk, security, inflations, investing, and ethics. They have already discounted the idea. However, this noncompliance only affects short term deposits. A kind of sticker shock. Not the long term handling of money. Eventually, most people will accept this idea and use American financial institutions to deposit their money into, and continue about their life. Especially, if you remove the income tax code and all of it’s compliance cost. If you need a threat to encourage compliance. Don’t abolish the 16th Amendment to the Constitution, and you just keep the income tax code around as a threat to reintroduce if this form of taxation fails. This spectre would be enough to scare me into compliance.

Now this is all predicated on an acceptable level of taxation. As the tax increases, compliance can decrease, and vice versa. All these factor and more change continuously to determine the optimum tax that could be assessed. Thus, a natural limit on the ability for a government to spend. In light of past performance this may be wishful thinking. However, this could redefine the relationship between individuals and government. Hopefully to concentrate on the intangible services government provides. They do provide services, some needed, some redundant, and some inappropriate, and all inefficient. We should concentrate on the proper role of government, not the Robin Hood myth taxes are portrayed as.   

Back to the model I am comparing this too.  I said many of you are probably paying a voluntary 3% tax today. This is more of an embedded fee. Let say you are a responsible consumer and I offer to give you a $1000.00 to spend in a month, at the end of the month you pay me back the $1000.00, however, if you do not pay the full amount, I start charging you a hefty interest rate on your remaining balance. To entice your use of my product, I give you an incentive, say airline miles, points to save for future purchases, or actual cash back. These incentives on average pay you 1-2%. Now, if you always pay your balance off monthly, you are effectively getting a 2% return, or roughly $20.00 on every $1000.00 spent. Pretty sweet deal. You are called a deadbeat user (wink and a nod) by me. The mark of a good salesman is that you think you have the upper hand. It keeps you coming back, and enforces your spending patterns. Meanwhile, I am charging 3% to the retailer at the other end. That gives me a 1% avg. monthly net revenue stream on the $1000.00 Since it is basically the same $1000.00 every month I will realize around $360.00 gross return per annum, or a 36% gross annual  return, less overhead and rebates, I will probably net around a 9% ROI. (Past performance does not guarantee future performance, and all the usual disclaimers.). And there is alway the possibility that you will fall behind and start carrying a balance. But, I prefer the deadbeat, i’ll take 9% at a low risk. That touches on the pyramiding spectre, another future blog. That spectre is easier to dispel than you would imagine.

And why does the retailer accept this 3% charge that they have to cover to accept use of this product? Same reasons as I stated earlier. Cost of handling hard currency, convenience, security, risk, and efficiency. The electronic model provides them with a service, it is not just taking money without any intrinsic value returned. Sure there is complaining and attempts to get the government and public opinion, to force the rates down. However, if anyone really think they are being gouged, they could drop the service. Consider this, not to long ago there was a cash, and a credit price to gasolene. I can not find a cash priced pump anywhere, so I have to pay the higher credit price, even if I want to pay in cash. That margin is more significant now, than it was ten years ago.

You still think this form of taxation is unrealistic. Sure, you can find hundreds of problems with it, or thinks this is not the right course of action for America. That it only has value as a theoretical research study. These are acceptable and honest responses. However, do not tell me it is completely without merit, and has no possible value. This form of taxation will come in one form or another. A targeted form has debuted in South America. These alternative forms will be to target specific activities, groups, and organizations. I believe this system only has merit as a holistic system, not as a piecemealed attempt to grab wealth and power.

There is a historical myth that the Island of Manhattan was bought for $24 worth of beads. I will play on this myth, and I will make the privacy spectre a little more solid by giving the taxpayer the voluntary option of collecting transferable, non expirable “beads” in exchange for compliance within the CUT Tax. If we need to sell this tax or fee, then why not offer a point system on compliance? Give a point for every dollar deposited, with an intrinsic value of say .25 of a cent. These points will add up over time, and can be used in an array of interesting items. Like other point systems, some will never be used, so I see it as a positive addition. These transferable points could be used, transferred or donated to any person or organization if you wish.  In exchange for these points, you would give up valuable information that I wanted to make confidential with this tax structure. However, it would be by your choice. Baubles, or privacy?

And larger companies could be compelled into reasonable compliance through social pressure. Publicly owned companies records would be available through the SEC, If found to abuse external financial institutions in an attempt to avoid the tax, public pressure could be applied. I do not fear cash hoarding, other than cash needed for the daily drawer pulls. The logistics become too expensive and risky.  Private companies are harder to monitor. However, I feel they would still want to maintain image. Many would choose to accumulate tax points, then transfer the points to charitable organizations for positive public relations.  

So, if credit cards can generate massive amounts of revenue by providing an electronic use on currency, Why can’t the US Government do the same with the dollar. They already have the consumer function of a credit card down pat, with over 17 trillion dollars of accumulated debt.  It is time to teach them the business end of credit card use. The side that money is made from. They already have the constitutional authority to coin, regulate, set value, and appropriate fees. Given this, I would accept The CUT Tax over an arbitrary and adversarial tax system designed to control individual behaviour, consolidate wealth into politically motivated organizations, and create animosity between the social classes.