Tuesday, January 15, 2013

The Consumption Tax and Social Justice

I have a philosophy about taxes.  That philosophy is that taxation should be levied off of excess and luxury if possible. Every person in this nation has a minimum amount of income necessary for them to survive and provide for their basic needs.  In most areas, that income threshold is about $20,000/year for an individual, and about $3,550 more per dependent child.  This provides for the shelter, basic food needs, basic levels of clothing, utility, and transportation needs.

Currently in this nation, we have a system of taxation that is horribly lopsided in favor of the wealthiest members of our society.  Many economists contend that tax policy should favor the wealthy since, in theory, they create the jobs for everyone else.  While this is true in one context, it's also deceptive.  Currently, the wealthy already get a tax deduction for starting a business.  A business's inventory, investment, and payroll are all deductible from their their personal income taxes already.  When filing as an S-Corporation, your business and your personal incomes are combined into a single return, making it easier for you to file your taxes.  So there is already a huge personal benefit to owning a business from a tax perspective.  If your investment is at risk, it is deducted from your earned income, and left untaxed.  Many people would agree that the income tax is by far the most fair tax that one can levy.  Gallop did a public opinion poll about taxes and asked if they are satisfied with the tax rates they pay.  The numbers are split pretty evenly with 47% saying they are happy with the current rates, while 46% say they are to high.

Income taxes work like this:  In a nutshell, you get a set amount of money the government doesn't tax, along with that you also get a fixed amount of money that is exempt from taxation.  You also, if filing jointly, are allowed to claim your spouse's deduction, as well as your children and other dependent adults if you meet certain criteria.  Then the government goes "Ok, after all this, let's see how much you have left."  This is your "adjusted gross income" meaning, income you've earned minus all the standard deductions that you're permitted to claim.  Then, you take that income number, look at a chart the IRS provides, and match it to the amount of taxes owed.  So the government, in providing these deductions, the exemption, personal deduction, children and dependent adults deductions...is saying to you "This is how much money we believe you need to survive" (which I would argue is very inaccurate) and whatever's remaining is taxed at the percentage rate of that income range.  So, in theory, the income tax is designed to shave a little off your excess income to fund government operations.  Now people may note we do have other forms of taxation such as the Social Security Tax, Medicare tax, and other forms of user-fee-ish taxes, but those are designed to fund specific government programs, not the general operations of the government.  Furthermore, states have their own individual tax systems, such as Washington State.

Washington State's tax system is unique compared to most states.  Washington has no income tax.  The income tax was ruled unconstitutional for the state to collect due to a provision in the state's constitution requiring that taxes be levied on physical commodities and objects.  This has meant that Washington has had to create a whole new tax system which includes the following taxes:

The Use Tax:  Highly controversial because of how broad the tax's scope is.  It is literally a tax on the use of any physical object in the state, meaning if you buy a product out of state, you have to pay a tax for the right to use it.  This tax is exempted if you pay sales tax on the object.  It's 7.9%

The Sales Tax: A fixed tax on the final purchase of a good or service.  In Washington, it's 7.9%.  This rate can be increased by cities and localities to fund their operations as prescribed by law.

The Business and Occupation Tax: A percentage tax based on two criteria: Gross receipts for a given year, and the sector of economic activity which the business is engaged.  The rate charged is determined on the type of business, but ranges from 0.01% to 3% of gross receipts.

The Property Tax: This tax is pretty common, and varies widely across the state.  The State itself levies a Constitutionally-mandated maximum of 1% on all real non-exempted property.  Counties and cities may raise that rate by special levies to fund schools and other local operations.

The above taxes are the primary sources of revenue for The State's budget, and most of them are highly regressive.  You may ask, "What do I mean by Regressive?"  By regressive, I mean that it fails to take income into account when applying the tax against you.  So for example, a person making $40,000 per year will usually pay a higher effective tax rate on their income then someone making $160,000 per year.  This is because flat rate taxes are paid equally regardless of gross income.  So say the $40k earner goes to buy a $1,000.00 computer.  On that computer, a Washington resident would pay $79.00 tax for that purchase.  The same is true of the person making $160k per year.  The two incomes are sharply different, but the person making $160k a year pays a much lower rate of tax as a percentage of income than the person making $40k per year.

The same is true of the B&O Tax, which taxes gross receipts.  Revenue does not equal profit.  Revenue is money earned before bills are paid.  In business, you cannot function if you do not earn money after your expenses.  The B&O tax fails to take into consideration businesses who post losses each year.  If a business loses money, why should they pay taxes.  Furthermore, a consumption tax can actually cause losses in business income if the profit margin is narrow.  For example, say a company has gross receipts of $10,000 in a given year, but a profit margin of 2%, meaning of that $10,000, it earns $200 in profit.  Let's say a 3.4% B&O tax is applied, so $340.00 is paid in taxes, resulting in a loss of $160.00.  How fair is it for a company to pay any taxes when they are losing money.  It's not.  Plain and simple.  No business owner should ever be subjected to taxes when they are continually losing money.  Such a problem is deeply offensive, as it spits in the faces of hard working businessmen who toil and work and build, only to have what little they do make stripped by a regressive, backward, and dysfunctional tax method.  A business tax in the example above should tax the $200.00 in profit the company made, taking their 3.4% cut or whatever system of tax we elect to use.  But that $200 in profit should be the target of our taxation...not the $10,000.

Tax policy should be crafted to fairly collect revenue that is the least disruptive and the most beneficial.  Fixed, transaction or consumption taxes cause exponential markups on goods and services, while also hurting employers' abilities to expand and grow.  Incomes and profits are the least impacted most beneficial sources of tax revenue being the easiest and safest source of funds to draw upon.  Furthermore, it creates an disproportionate tax burden for the poor and middle class, who often pay a larger percentage of their income annually than that of the more affluent members of society.  The argument that the sales tax is optional is a myth.  There is no "optional" tax in most circumstances.  The sales tax is something everyone pays whether directly or indirectly.  The increased costs resulting from a sales tax is passed on to you in markups, reduced wages, smaller profits, and slower business growth.  To successfully and fairly tax, we must look at the standard of living, and use that as our guide when crafting any tax to ensure it will not harm the least and lowest members so they can have the opportunity to rise to new standings. In addition, this also ensures that employers are fairly taxed based on the money they make after their costs, not before.  This also ensures employers have the money necessary to reinvest in their businesses.

No comments:

Post a Comment