Airfoil Tax Comparisons

Went to give a presentation today. Turned out to be informal and more of a Q & A . Though I would make a blog of it.

First I would like to thank you for your time and consideration.

I have had trouble connecting with people on the subject of my book, part of it has been the dryness and the passive voice in which I presented it. So today I am trying a new approach.

Most of the ideas in my book are built not on numbers and statistics but based on concepts  I believe these concepts are similar to those of fluid mechanics, and aerodynamics. The CUT Tax which in an acronym for the Currency Use Tax.  was envisioned in my mind on concepts of competition and exploiting the basic theories of fluid mechanics.  

The competition part is simple to explain. People will pay whichever they see as less. That is simple human nature. So, if you can exploit a deduction in the tax code, you will seek it out. If a CPA promises to save you thousands of dollars, you will enlist their services. You will pay which ever you see as less. If the cost of avoiding the tax exceeds the tax you will just pay the tax and move on. Simple competition. I think this is something people forget when they want to tax the rich. They usually don't get rich by overpaying. And the rich generally understand that money does act as a fluid, and treat it as such.

Now, the fluid dynamic portion is a little harder. So I will try.

Imagine if the United state was a ship. This ship would look more like the Schooners, Cog, or maybe a ship of the Line. With the sails furled. And the sails would represent our tax code.

We have three sails on our ship. The Corporate, personal, and nonprofit. Now the Nonprofit does not really have a sail. It is just there to enforce the government definitions of nonprofit. It is there to control the nonprofits. If you are religious, don’t act political, if your political don’t act religious. Fail these tests and we will tax you as a corporation. And the corporate tax was not designed to handle nonprofits, and is very punitive to the nonprofit.

When we instituted the Income Tax code we where a growing economic power. All the trade winds and economic currents favored us. So we used these massive sails to collect the money, and push the ship of America along. Soon politicians realized that they could acquire power by cutting holes in the sail to allow certain monies to flow through, and manipulate behavior . This started the growth to a 75,000 page tax code.

Now the tax code is so full of holes that they realize it is inefficient and unworkable. Their solution is to put up brand new sails, This will enable them to again start cutting holes to allow money through. I say it is time to modernize the Tax Code.

In the Mid 90’s Neil Boortz and John Lender wrote a book call the Fair Tax. And this changed my thinking on taxes.  Sure most states have had sales taxes, But this lead me to think of the tax structure not as a sail, but as an air foil.

Now an airfoil is more versatile and efficient than a sail. The fixed nature of the sail does not lend itself to the wider range of motion provided by an airfoil. Captains of old  managed manipulated the sail expertly to tack against the wind. By doing this they were attempting to manipulating the sail to mimic an airfoil. But the sail was primarily designed to perform its best with the wind behind it. It was designed as a drag sail. And The Fair Tax had the possibility to perform like an airfoil.  

First I have to show you the similarities, between an airfoil and taxes.

Now there are four components that determine the efficiency of an airfoil. You have thrust the forward direction, which I will call the economy, You have lift generated by the airfoil that I will call revenue, Counter to the revenue pulling down you have gravity, this I will call reluctance. For the person's natural inclination to avoid taxes. Today, our fear of federal prison and financial ruin help the government overcome our reluctance to taxes . I feel this is unnecessary.  And counter to the economy or thrust if you will is drag.  This I will call embedded taxes.  Now the fair tax claims that by removing the taxes and compliance cost from business, you will remove the embedded nature of taxes. And I agree with this to a point. Business don’t really pay taxes,  Taxes are just another expense to cover in the process, so the tax is passed on in the final price of the item.

But removing the tax on business and creating a higher end user tax on the consumer and calling it an end user tax is also a fallacy. By calling it that you have stated that the tax ends there. It is no longer part of the economy. Walla it vanished. Unrecoverable. I will tell you a secret. There has not been an end user tax since the abolition of slavery. Only a slave is forced to accept what is given, and cannot ask for a wage that exceeds all of his or her living expenses. And taxes are included in the cost of living. People wish seek compensation above their basic living expenses. So all taxes will become embedded  into the cost of goods. You cannot really remove taxes from the economic model.  All they removed was compliance cost and company matches. Now that is substantial, but not enough.  This is my biggest problem with the Fair Tax.

The fair tax split the airfoil and air stream in half. Then said the top of the airfoil is unimportant and discarded it. They in effect used it as a sail to capture the wind from the consumer. This is a very inefficient use of the airfoil.

By doing this they had to increased the angle of attack required to achieve lift. It is about a 23% rate. This is a steep angle of attack and requires a stronger amount of thrust from the economy to maintain the lift.

The top half of the airfoil is the most important part of the airfoil from an efficiency standpoint. The bottom half is just a flat line for the higher air pressure to push against. The camber of the wing allows a an area of low pressure. This low pressure draws the air from the lower portion up. So instead of hitting the bottom of the wing from hitting at a steep angle the air can strike at a lower angle, thus not having to expend energy by changing directions.. That is seeking the low pressure system created by the camber of the top portion. This maximizes the amount of lift generated. The higher the angle of attack the more drag you generate. Air striking the bottom of the plane becomes dead air, and this air disrupts the flow of air behind it. Part of the energy from the incoming airflow has to be diverted to push the deader air out of the way. The way this would be exhibited in the Fair tax is sticker shock. You may be more reluctant to the higher rate. To minimize this differential You try have more air strike the bottom but at shallower angles. That way dead air does not build up under the wing. And in the economic model, that dead air becomes embedded taxes.

That brings me to the mechanics of The CUT Tax. The Currency Use tax is designed to act like an airfoil. It does not want to obstruct the flow of money, over or under the wing.

It’s only extract a smaller percentage from all financial activity that passes around it, on all individuals, or organizations. It is design with very limited exclusions, the biggest would be the exclusion of principle, Governmental accounts, and social security deposits.

It will have no enforcement mechanisms.

The rate would be flat for every individual or organization.

There would be no maximum or minimum requirement.

Nonprofits would not be excluded from the tax. (I believe that  the tax will be lower than the cost to comply with tax free status. So they will not be disadvantaged.

Their would be no personal audits.

Cash and direct barter will be excluded from this tax. However, Cash deposited into account will  still be treated as a taxable event.

The Cash exclusion is for conscientious objectors.

And if you think living on cash only is easy, have you tried it lately. Most people have gone to the convenience of debit cards, and online banking. It is hard to get paid in cash anymore.

Since it would be handled at the financial level, by computer protocol any discrepancies would either be intentional or accidental. Intentional would be  criminal fraud, and can be handled by the various law enforcement branches. Accidental would be human error, or software issue. These issues could be handled by  technical monitoring services and in house audit by the financial institution.. No need of a large tax collecting bureaucracy.

The Cut Tax works this way. You would Deposit your money in a financial institution. At that point a computer protocol would determine if the transaction originated from someone other than the owner of the account. If the origin was not an account linked to the owner, the protocol would then determine if it was from a small group of exempt sources. After running through the protocol, If it determined the deposit was taxable, It would deposit the funds and debit the tax from the account. This tax would then be deposited into a holding account at the bank. At the designated time, the bank would transfer the taxes collected from the previous month to an account specified by the treasury. The government would receive this deposit only knowing the source bank, It would not have any individual transaction details. The government would not know how much was in your account, or how much tax any unique individual paid.

Well not by the CUT Tax plan anyway. I am pretty sure, that they have all access to this information already. We just pretend they don’t.

One final item. I take the pyramiding critique seriously, even if I believe all taxes become embedded. So I ran a few simple  spreadsheets, and was pleasantly surprised by the results.

Although these where only baseline test. I developed them to maximize the pyramiding effect.

The first page are ranges built on what I though the maximum initial tax would be on the left, with what I believe the true initial tax would be on right. From top to bottom the first show that if a product was sold at each step in the process. This guaranteed maximum tax exposure. The price doubles at each step in the first set. The second shows 50% increase in price, third is on the second page with a 25% and forth 13%.

Then on the last page, I simulated a little more realistic look at a simple item from manufacture to final sale. This I included various additional expenses with the worst modifiers possible, a factor of one, and a 10 percent gross profit margin plus the base tax.  Even the 5.5% fell under the 23% fair tax rate at 19.67%, and the 3.8% finished out at 14.21% embedded tax. I may not be an economist, However, I believe that this deserves some serious consideration by economist. So yes I would prefer my tax system over any other proposed. Including a 23% end user tax

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With the cut tax system we may be able to get beyond the class warfare rhetoric and onto the real problems of inefficiencies in the system.