A New Tax System: Summary

If you’re still with me you might be familiar with my last few posts describing my idea of a simplified tax system. Basically, we tax transactions of money in exchange for goods and services, between two tax paying entities . The tax consists of two components:

  1. An across-the-board base rate to pay for managing the contribution to the economy and for infrastructure;
  2. A Discouragement Factor to essentially control demand for various products and services.

Technology allows easy processing of tax and communication with the public regarding current tax rates. There are no questionable exceptions to the rules, no special cases. Just various D-factors applied to the different products, services and categories of such. Such a system will greatly simplify the calculation and collection of taxation for the government and provide a fairer basis across all levels of society, resulting in less resentment, a reduction in the rich-poor gap and generally less crime and therefore a more stable society.

Try it!

Recapping the specifics:

  1. The Theory
  2. In Practice
  3. Integration & Transition
  4. Selecting D-Factors
  5. Possible Scenarios
  6. Problems and Pitfalls

A New tax System: Problems and Pitfalls

Despite all the brilliant-ness of this tax system, it has some shortcomings. Here I will try to cover all the problems I can think of before anyone else points them out!

The Rich are not singled out

One is that there is still argument that the rate at which the rich pay tax should be higher than for lower income people. This system does not address that except by allowing for a higher D-Factor on transations favoured by the rich.

How to Tax Composite items

Another is the complexity in the tax payable on composite items. Everything these days is made of both raw and recycled materials. Under this scheme all the ingredients for a given product will be taxable at different rates, by their differing D-Factors. It might be difficult to calculate the cost of an item off the cuff. Bad luck, use your app to work it out. It shouldn’t be that hard.

Take the example of a piece of furniture made of freshly felled timber and coverings made of recycled materials. Let’s say the timber is hardwood – not easily regrown and is considered, at least for this exercise, non-renewable and attracts a high D-Factor. The recycled stuff on the other hand has a low D-Factor. This is payable on the purchase by the manufacturer at their repsective rates and contribute to the pre-tax cost price of the furniture. The furniture itself might have a neutral D-Factor only because it’s furniture, not because of the combination of high and low D-Factor components. Unlike today’s tax system (at least in Australia) the manufacturer would not be entitled to input credits. None of that rubbish in this system, remember! Every transaction is taxed according to its D-Factor and what the product or service is, regardless of its final use.

Misrepresentation of products and services

There may be temptation by businesses to sell things under a different identity in order to use a lower D-Factor and avoid paying the correct tax. This would be highly illegal and may result in finger-lopping.

This is a Federal Tax

Another problem is that this is a tax at the federal level. It makes no provision for state government income. State governments typically earn most of their revenue from speeding fines, with a little bit from stamp duty on things like houses, loans and car registration transfers. Oh, and some federal GST revenue.

Perhaps it’s too Easy to Change the Parameters

It may be too easy to change the rates of tax simply because the D- and G-Factors are techincally very easy to change. However, there are acts of parliament that need to be passed/changed in order to alter any taxation laws. To prevent the government fiddling with D-Factors willy-nilly, these laws would have to apply to the alteration of D-Factors. Would there need to be separate acts for certain categories of product and service? I don’t know. I write software, not legislation.

A New Tax System: Possible Scenarios

Previously I discussed the selection of appropriate D-Factor values. In this post I will go over in more detal some of the unusual types of payments we make and explain how this tax system applies to those payments. I won’t talk about the standard payment for goods and services as they are straight-forward enough.

Loans

Loans are paid for by interest. The tax (G x D) would apply to the interest each time it is paid.

Investments

Shares

Sale of shares

Shares can be considered a tangible product which can vary in value over time, like anything else. Tax is payable with an appropriate D-Factor at the time of sale. This means tax is still payable on shares that have dropped in value. Compare this with taxing the profits on the sale of shares and the difficulty of taxing a loss.

Dividends

If shares are considered colateral for a loan, then dividends are basically bonuses paid by the company to the shareholder and are treated as interest repayment for the loan. Tax is applied to the dividends with an appropriate D-Factor. This obviously applies no matter how many times the shares change hands.

Bonds

Treated the same as shares.

Incentives

Welfare

Welfare is considered a transaction for which nothing is expected in return. Therefore it shouldn’t be taxable. D = 0.

Grants

Business and community grants are considered welfare and are not taxable. D = 0. Business grants may provided with the expectation of receiving something in return. TBD.

Transport

Just another service. D-Factor applies.

Cars

Purchase of the car itself is just like any other product type with its own D-Factor.

Fuel

This is a good example where an environmental approach to determining D-Factors, versus an industry friendly approach can lead to big differences in D-Factors. Otherwise it’s just a product. Except that a distinction should be made between renewable and non-renewable energy sources in order to assign appropriate D-Factors.

Servicing

Just another service. D-Factor applies to costs.

Public transport

Just another service. Again, environment versus industry for appropriate D-Factors.

Demand Control

The government could temporarily adjust demand when industry doesn’t, by fiddling the D-Factor for specific products, services or categories. I imagine the use of this should be rare. This could be an alternative to adjusting interest rates for controlling spending.

Fines

Usually issued by the government agencies and attracts no tax. D = 0. But maybe…

Council rates

Usually issued by a local government and attracts no tax. D = 0. Unless the rates are considered payment for services provided by local council… but wait, that’s exactly what they are. Tax may apply. But local government is already a form of government that would be collecting tax for another form of government. I don’t know. You decide.

Employer/employee

This is what is traditionally the wages-for-labour relationship which attracted income tax. In this system it is simply another transation: One entity (the business) buying a service (the work of the individual). It could be that this type of transaction has a standard D-Factor across the board. Alternatively, different types of labour might attract different D-Factors. Rather than tax people with higher incomes at higher rates, apply higher D-Factors to labour transactions that required greater discouragement. Conversely for jobs where encouragement is needed.

Typically the low-paid jobs such as cleaners, emergency workers, etc. are the ones that are essential so these may have low D-Factors to encourage people into those jobs.

Contractor/subcontractor

Same as Employer/Employee. Identical, in fact. It’s the same transaction: money for labour. If a company hires an individual on a full time basis it’s the same as hiring another company or business to do the work. Of course the subcontracting company will have a similar relationship with the people it employs to do that work.

Superannuation

Super is an investment. It is a loan from the employee to the companies in which the money is invested in the case of shares and bonds. If Super is invested in property, the tax would apply to the purchase price in the same way as any other purchase of property. Essentially there is no difference, tax-wise, between investments made as part of a Super scheme or as a regular investment. Does there need to be a difference? If consessions are required for superannuation investments, perhaps this is another case for a grant.

Discourage Decriminalised Goods

The D-Factor tax system could be used to control the purchase of questionable goods that may be decriminalised to prevent black market distribution.

Sale of a Business

Selling a business is the same as selling anything. Tax with appropriate D-Factor applies to the purchase price.

How to Make the Rich Contribute More Tax

This is always a contentious issue. The 90-odd percent of citizens who resent the fact that the rich seem to pay little tax would love to see these people pay their fair share. How can this be imposed with what is essentially a transaction tax? The rich might just be tempted to stash their cash under the bed and not spend anything.

Basically the amount of tax paid is dependent on how much people spend as opposed to a large chunk dependent on earnings. One way to make the rich pay more is to apply higher D-Factors to services that the wealthy traditionally occupy. Maybe a high D-Factor for executive services, financial control services, company director services, politicians, etc. would be desirable.

Other ways might be just to let nature take its course. The rich will spend or invest the money they have and earn more simply by charging more for their services.

Have I missed anything?

A New Tax System: Selecting D-Factors

As I mentioned earlier, the system would allow for presets. A complete set of D-Factors could be defined that was friendly to a particular sector of society. Different presets could apply when economic conditions demand or allow them.

For example there should be an environment-friendly preset where all D-Factors discourage non-renewable fuels, waste disposal and environment-damaging activities. Recycling should be encouraged with lower D-Factors. (In fact this tax system would gel well with a circular economy where waste is sold for recycling, creating a closed loop. More on that another time.) All other aspects not related to the environment might have more neutral D-Factors.

Similarly there might be a community-friendly preset where more emphasis is placed on charity and donations, community and family support services, education and health. Again, non-related D-Factors would be more neutral.

You get the idea. Other types of presets, and perhaps undesireable ones might favour industry and the rich would also be possible but frowned-upon by most people, much like the economy today where the rich seem able to avoid paying tax. With this system this would be no more.

Of course presets are not mandatory. D-Factors may be changed independently, subject to parliamentary approval, of course.

A New tax System: Transitioning from Old to New

I have now described the theory and practice of this new tax system. Here I will clarify how we can integrate the system seamlessly with the old system.

Whenever there are changes to the tax system, you always find people who say “We’re worse off now than before!” Yeah well, you can’t please everybody all the time. And that’s usually because the changes are too abrupt. The government decides to tax him less and her more after July 1, so the changes will be sudden and potentially disruptive.

But it doesn’t have to be. As I touched on in the previous section, with a system like this we should be able to smooth out the sudden changes to the economy by varying the change slowly over time. All we need to do is pick a date to roll over to the new system, prepare the database with 20 billion products and services, — and/or half a million product/service types, whatever you feel like — set a G value, and at the last minute before change over, set the thing to calculate a D-Factor for every product (or type) such that the price including tax will be exactly the same as it was yesterday, taking into account all the existing taxes that will simultaneously be removed.

Then over time, slowly adjust the D-Factors on a daily/weekly/monthly/whatever basis to more appropriate values so that people don’t feel the pinch all of a sudden. D-Factors would be publicised widely so everyone knows exactly what rate of tax they paid on things.

What could go wrong?

How to change the D-Factor

D-Factors can be fixed and released on any date. Normally while fixed, a D-Factor remains at that value. If a D-Factor is determined to need adjusting smoothly over, say, six months to prevent bill shock, for example, a release date will be specified for that product’s (or category’s) D-Factor, followed by a fix date six months later. While the system is between a release date and a fix date it can calculate the D-Factor based on how far along the ramp we are between the two dates.

For example, the government decides to increase the D-Factor of cigarettes from 10 to 15 over a 6 month period starting on July 1. The system would figure out that on September 30 the D-Factor would be 12.5. On the next day it would be slightly higher. In fact the system could make the adjustments at any interval over the larger period. It could change daily over six months. It may change weekly over 12 months.

Of course, if an abrupt change is desired then the Release date and subsequent Fix date would be just one day apart. Sunday the D-Facfor is 10, Monday it’s 15. It’s all possible.

Publicly displayed D-Factors and mobile apps would inform everyone of the current values, past histories and even future projections.

Fix and Release dates for all D-Factor categories would be stored for historical purposes and tax auditing.

A New Tax System: In Practice

Previously I wrote about the theory of a simple tax system. This time I’ll talk about the practical details and provide examples of the transactions to which the tax system can apply. It’s simple so there aren’t a lot of them.

The Implementation

The government would maintain a simple but large database looking a little like the following table. It contains examples of a D-Factor from each range defined in the previous post:

Product

Product Type/Category

D-Factor

Fresh unprocessed food, water, medical care, etc.

0

Wind generated electricity

Fuel (Sustainable)

1

Others

Fuel (Sustainable)

1

Financial Loans

1

Labour

1

Cigarettes, reality TV

35

Coal generated electricity

Fuel (non-sustainable)

10

Alcoholic beverages

2

Processed food

2

Train, bus, tram

Public Transport

0.25

Taxi

Public Transport

0.75

Aircraft

Public Transport

0.5

Clothes

0.5

Charity donations

-0.1

Human powered bicycle

-1

Health Insurance

-3

Specific medicine

Expensive medicines (PBS)

Necessarily large negative

The column titled “Product Type/Category” covers a broad range of similar products with a common D-Factor. Specific products listed under the Products column may have a D-Factor different to its parent category. This field will usually be blank except in the case where a specific product or service in a category may require a different D-Factor.

Businesses and other tax payers would access the database via the internet to keep synchronised with the latest D-Factors in order to charge the correct tax rate at any time (D-Factors may change. More on that later). Cash payment systems could be always online or, if necessary, work offline and alert users (eg. shop owners) when the local D-Factor records become out of date beyond a confgurable time limit. D-Factors would be displayed at the point of sale for retailers and published as appropriate for all other types of tax payers. Everyone could essentially look up any product or type to see the current D-Factor. No doubt there will be a variety of mobile device apps to provide live cost calculators.

Invoicing systems would be required to record the D-Factors of any particular date in order to charge correctly.

The Tax Collector

One small issue is who acts as tax collector. It could be either party. In practice the answer is probably the entity most equipped to do so and that would be the business, in the case of standard consumer-business transactions. Similar to how it currently works. For business-business transactions, it would likely be the entity that ends up with the money at the end of the day. Again, same as the current system.

Having said that, this model will make no distinction between either party in any transaction. An individual buying bread and milk is the same as the supermarket for tax pruposes. Same as the employee/employer relationship. Services go one way, money goes the other, tax goes to the government.

Variations to D-Factor

The above table is obviously very simplistic. In reality it should allow for changes to the D-Factor, either on an individual product basis or category basis and also for smooth changes from one set of D-Factors to another over a period of time. It should allow the D-Factors for different products and categories to smoothly change over different periods during a change-over.

There shall be provisions for presets of D-Factors that favour different aspects of the economy. For example, presets for industry, community, family, environment, etc.

Connectivity

With today’s ubiquitous connectivity there should be no reason why businesses cannot periodically download relevant sections of the D-Factor database to keep their total tax-inclusive prices up to date. Or even operate live. These D-Factors would be widely available for public perusal. Even for variable D-Factors within, say, a transition period, D-Factors would always be up to date and people would know exactly what to pay for things.

Restrictions and security

Of course, a tax system that provides such ease of modification needs some sort of protection against willy-nilly changes. Changes to any D-Factor (or the G value for that matter) would still have to go through parliament. From a technical point of view there would be levels of authorisation and checking in place to verify that any attempted changes are logged and auditable.

If the database is to be publicly accessible it will require security features equivalent to the best the IT security industry can offer, in the same way sensitive data is managed elsewhere today.

In the next instalment I will talk about transitioning from the old system to the new.

A New Tax System: The Theory

Last time I introduced the need for a fairer and simpler tax system and explained the benefits of an idea of mine. In this post I’ll explain how it works.

We start with a clean slate. Get rid of all existing taxes. GST, excises, stamp duties, FBT, income tax, company tax, superannuation tax, payroll tax, everything. Wipe it clean and disinfect it while we’re there… because it’s really dirty!

Now, charge a flat rate for the “costs of managing the contribution to the economy” for each and every financial transaction made in exchange for goods/services at all levels of the economy. The focus is on taxing the transaction rather than a company or individual.

Tax = Cost of Goods & Services x Government’s Take

Or

T = C x G

A good example of G to work with is the Australian Government’s current GST of 10 percent or 0.1.

However, not all things are created equal. The purchase of some things should be discouraged more than others. Introducing:

The D-Factor.

T = C x G x D

Where:

  • D = 1 for neutral dis/encouragement; no change to G (most stuff)
  • D > 1 for more discouragement (stuff that Big Brother – that’s the Government, for all you young reality TV buffs – on behalf of the voters/society, thinks we shouldn’t have as much.)
    • Zero < D < 1 for more encouragement (These things should be easier to afford.)
    • D = zero for full encouragement, cancels out G, ie. no tax.
  • D < zero for a rebate. Government actually pays you to buy these things, like the private health insurance in Australia which currently has a 30% rebate. It’s kind of like a bribe.

The total price paid is then:

P = C + T

Or

P = C + (C x G x D)

That’s it.

Next time I will explore the implementation; how we can build this friendly little beast of a system.