Home > Investing, Money > The Magic of Tax Policy, Part II

The Magic of Tax Policy, Part II

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In the last post, we talked a little about the failure of either high-tax or low-tax camps to give us solid proof that their policies:

1) lead to growth

2) distribute wealth fairly

These are the admitted goals of both camps. I use “admitted” because the actual goals are much different. The actual motivation lies in greed and jealousy. So, if you notice the debate surrounding tax policy sounds like a bunch of kids arguing in a playground, there’s a reason for that; it’s because they are.

We also discovered that “tax efficiency” is the best approach to creating a tax policy that works. In other words, it’s not how many dollars you raise through taxation or even how you do it, it’s how that money is spent. This is no different from any company or household budget. Common sense, right?

There are obvious solutions.

We could investigate ways to measure tax efficiency in the government, the same way we create indicators around measuring performance of companies. Stock investors use these all the time.

We should demand that government lives within its means. Setting up a balanced budget should be a no-brainer. A simple way to create a budget to grow out of a deficit is to set a predicted GDP rate -1 percent.

We should use technology to guide budgetary decisions. Algorithms guide business purchasing decision, military moves, and stock market picks, there’s no reason that we can’t use technology to help guide our economic decisions and budget choices.

We could move away from progressive income taxes and rely on a flat tax, modified flat tax, sales tax, or a mix of both to raise the funds to carry out the necessary services of the government.

One model strips away all deductions and relies on a mix of a modified income tax — 10 percent, 15 percent and 20 percent brackets — on all income. Taxing income is anti-growth and hurts all of us eventually, even if we feel we’re sticking it to the rich. In this model, we can target consumption and risk by adding a small luxury sales tax and a tax on higher-risk financial decisions, such as high interest credit card purchases and buying stocks on margin. While this would raise billions for the government, we should keep this funding away from bureaucrats and distribute it directly to  non-government workers and, perhaps, to fund retirement accounts. With new technology, the government’s role as a distributor of wealth is no longer needed and, as we have seen, it usually just acts as a sponge for wealth, soaking up most, and inefficiently distributing the remainder.

So, why don’t we just do it?

The problem is huge industries have grown up around the current system.

Lawyers work every day shuffling money into and out of tax deductions. Tax preparation services are a billion-dollar industry. Politicians spend billions reinforcing the current system, too. The whole political process is now built on the tax-the-rich, I-wanna-be-rich dichotomy. It’s not the recipe for a functional political process.

We’re to blame, as well. Actually, we’re totally to blame. Until we get our own financial ships in order, it’s doubtful that we can ever shake our reliance on governments and corporations.

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