Wednesday, February 1, 2017

Border adjustment tax and natural (cashflow) taxation

Republican House of Representatives are proposing the key element of a tax policy I've developed on this blog, and also framing it under the same philosophy of cashflow taxation principles.  This proposal should be supported by progressives, humanists, economists, and international trading partners, even if it is flawed for failing to fully adopt natural taxation principles.

Reasons to support
  • Border adjustments or cashflow taxation allows any jurisdiction in the world to unilaterally set their tax rates treating domestic and foreign production equally.
  • Higher tax rates subsidize production/investment and exports more than lower tax rates, thereby funding Universal basic income or refundable tax credits, and increasing jurisdictional competitiveness.
  • The alternative to cashflow taxation or border adjustments, to meet pissface's policy promises, would be tariffs.  These are supplementary taxes paid by consumers instead of tax reform.
  • Reciprocal policies by global jurisdictions will mean minimal disruption, if it is through tax reform rather than supplementary tarriffs.
  • It permits greater jurisdictional autonomy within economic and state unions.
  • It eliminates the roots of all tax avoidance strategies.
  • Retailer/importer/consumer punishment scaremongering is false.  Because other countries will copy the system in some fashion, importers /consumers will face similar pricing as foreign tax system subsidizes their exports.  US Retailer lobbying is entirely related to keeping their advantage for cross border shoppers who face a VAT/GST at home.
Natural/cashflow taxation
The best paper on the subject is I think easy to read and thorough, but still summarized as:

  • Business tax rate based on jurisdictional cashflow.  All spending and receipts is taxable to the receiver and refundable to the payer in the jurisdiction it (where the payer is) occurs.  Investment inflows (such as loans or share purchases) are taxable to the business receiving funds, and investment repayments such as dividends are tax deductible to the business paying them.
  • A flat personal rate equal to 0% to 10% higher than the Business tax  rate applies to personal income.  Progressive taxation is achieved through a flat universal refundable tax credit (UBI) which creates negative taxes payable for low and middle income individuals.
  • A personal investment surtax 0% to 10% above the personal income tax rate applies to investment profits.  This includes interest and dividends received, and may apply to rental profits.
Border adjustment tax differences
A decent overview of the republican proposal though with the usual media negativity slant on it. The proposal:
  • immediate tax deductibility of capital investments is a partial though principal move towards cashflow taxation.  The partiality causes incoherent elements in the plan such as not allowing interest payment deductibility.
  • Retaining payroll taxes is an unhealthy and unfair penalty on employment vs. other income.  It unnecessarily discourages employment from both the employer and employee sides. 
  • Its wrong to seek additional social revenue by forbidding interest deductibility as this uselessly depresses demand for capital.  The investment profits surtax is an appropriate means of enhancing social revenue because capital can always voluntarily choose to be kept under a mattress to both avoid investment profits and their tax consequences.
  • The export "tax freeness" and  import "non-deductibility" is not as disruptive as feared.  Reciprocity of some sort by other nations, preferably through pure natural/cashflow taxation is going to mean that US exports are taxed overseas, and there is likely to be some reciprocal subsidy of exports that limits significant change in consumer prices.
  • Violation of WTO rules is unimportant.  The WTO system sanctions the corrupt transfer pricing model, offshore sheltering, and tax inversion system.  The US violating the WTO, gives the remedy of everyone else abandoning it for a fair system.  Natural taxation does not violate the main WTO principle that domestic and foreign companies be treated equally.

The rest of this paper is going to detail why full cashflow taxation is better than border adjustments or tariffs.

BPI: 3 tax rates
(B)usiness, (P)ersonal, and (I)nvestment flat tax rates are used.   Each is greater or equal than the last.

Business tax policy has always been that of near 0 collections
Since businesses all end in eventual bankrupty, lifetime tax credits equal lifetime taxes paid less dividends paid which are often undertaxed at the individual level.  The tax code is complex only to allow difficulty in converting tax credits into cash refunds for businesses, but the complexity generates minimal social revenue.

Under natural taxation, business income tax revenue is 0 regardless of the tax rate
Since all business outlays are a tax refund to the spender, and an equal tax obligation to the receiver, net social revenue from business income taxes are 0.  Social revenue comes from:

  1. Private sector Salaries and wages generate P-B
  2. Government salaries and wages generate P
  3. Government and consumer purchases from  business generate B
  4. Personal Investment profits generate I
A 0% or low business tax rate is a bad idea
Even if it were to provide extreme reporting simplicity, and the same social revenue (assuming end user purchases taxed with a sales tax to cover point 3 above) as a higher business income, having both sides of a business transaction  account for tax effects has important motivational factors:

  1.  Higher tax rates encourage spending and investment (to avoid paying taxes) and significantly reduces the risk of business spending and investment (because of the certain tax rebate no matter the investment outcome) compared to lower tax rates.
  2. An incentive to repay shareholders since that provides a tax reduction.  It would not at 0 tax rates.  The incentive generates social revenue at rate I.
  3. A 0% business tax would raise 0 revenue from consumer purchases
  4.  Less disruption to price levels,  Somewhat minor, but a 0 rate would be slightly deflationary rewarding the wealthy/prior savers on purchases.  Though the business tax on consumer purchases may appear similar to a sales tax, the net price is the same as would be under current income taxes.  The cost base of goods can be modeled as being after input cost tax rebates, and so the after tax break even prices are the same under all models and tax rates.
  5. Having input credits and sales taxes allows for timing adjustments.  For instance the tax bill and deduction for investments could be applied over 2 years under the assumption that not all of it will be spent right away.  Limits on the percentage of personal (non investment return) income that is available to be deducted in any one year might apply.

Job creation policies require high business taxes
Lower taxes can motivate you to invest more of your time, but higher taxes motivate the investment of your capital/money for the simple reason that the investment provides a certain tax reduction.  This exists under existing income tax system for the most part, but exists perfectly, and is clearly obvious, under natural taxation.

In the case of time investment, the only rational consideration is the after tax expected income of a venture.  Lower tax rates reduce the incentive to hire you at all, and so there can be downward pressure on the wage offered you.  Higher tax rates reduce the importance of the wage, and the time/labour supplier can adjust their demands upwards to meet their after tax needs.

Why are pervasive lies in favour of  lower taxes perpetuated to be an economic/social benefit ?
Large successful businesses operate a profitable formula where nearly all investments are sure things that will lead to higher profits.  Tax rates don't affect whether McDonalds will open a new store.  The science of demographics and past experience, lets them confidently pursue new locations.

Large successful companies have a profit momentum from investment made 2 to 50 years ago.  Lower tax rates provide them with the opportunity to harvest profits instead of innovating and growing.  Lower tax rates also discourage upstart competitors from the risky investments that might challenge their dominance.

Companies have zero concern for general economic growth and sustainability, but politicians and demons whore themselves out to advocate for their selfishness.

Another important benefit of natural taxation is that companies obtain the natural tax avoidance process of repaying investors for a tax reduction instead of tieing up money offshore or through other avoidance schemes.  Business profits are taxed in investor hands.

Higher tax rates on a border tax system or natural taxation encourage domestic production
If it costs $100 (pretax) to make a phone in California and Alabama, and California has a 50% business tax rate, while Alabama's is 20% then:

  • After tax cost to make in California is $50.  In Alabama it is $80.
  • If the company wants to make $10 after tax on each phone, then it sells it for $60+tax from California, or $90+tax from Alabama.  
  • The California phone would sell for $120 in California or $75 in Alabama.
  • The Alabama phone would sell for $180 in California or $112.50 in Alabama.
Every company's production is advantaged by being located in the higher tax state.  There is no basis for trade disputes as each nation or state can just raise their tax rates to be more competitive.

Reasons to lower tax rates
To invite retail tourism (or discourage foreign state tourism) is a main one.  In above example people would visit Alabama to purchase their phone.  If no one would hire your population no matter how high the tax rates/incentives, then lower tax rates would lower cost of living.

The other reason to favour low taxes is to create misery and desperation so that it can be exploited for competitiveness.  Often with an export context, but also to subsidize conflict: police, prisons, and military career choice.  If Alabamans can be oppressed sufficiently to drive down the production cost (pretax) of the phone to $62.50, then it can be sold for the same price and profit in the Alabama and California markets as the California phone.

What to do with all of the tax revenue
The only valid criticism of income taxes is what they are used for.  An authoritarian deciding what's good for you.  Basic income and social dividends is the best governance organization because it allows market solutions for everything, without poverty, and including a fair labour market where participants are not coerced by starvation or healthcare into submitting to the first offer made.

Crude border tax system is close enough
It is better to replace the entire tax system than the limited border tax system which still maintains avoidance opportunities.  But border tax adjustments achieve the main benefits.  The white house's warming to this idea has focused on accusing Germany of leveraging its VAT system.  This is better than VAT as it is not separate from the income tax system.  Both have the advantage of unilateral settings, and total self reliance and responsibility for the economic results.

Payment processors as tax collectors
International/online retailing is already prominent and rapidly growing.  International adoption of this tax system will let online retailers price tax free, and payment processors including bitcoin options will simply add the tax based on the shipping address.

Natural tax allows tax rates customized to postal code
A 1 person UN department can maintain the system of tax rate updates.  Postal code individualization may be too narrow, but there is no technical or even political reason not to allow it.  Where narrowly customized tax policy makes sense is as part of a tributary tax system where sub regions contribute to larger associations

California Secession alternatives
Pissface is threatening the withholding of federal funds to California unless they form immigrant lynch mobs, and to prevent its rights to create regulation in addition to federal ones, specifically targeting its vehicle emission standards which would force Californians to burn more Oklahoma oil and cover the state in smog.

Secession is a human right.  It must be an option to participate in a democratic union, because if it is not, then there is a complete absence of democratic voice by the enslaved possessed colony.  Marriage without the option of divorce is slavery.  The United States, when formed, created the appearance of a voluntary union.

Secession does not need to be isolationist.  If in fact it is used in order to re-form a new voluntary union, then an alternative is to reform the existing union.  Polarized politics in a powerful empire with slave possessions creates a risk of fascism, but always unnecessary unhappiness.  Certainly, distinct red and blue Americas should be an alternative to forcing tolerance of opposing views.

A constitutional convention could explore a wide variety of issues that many states are open to:
  • State rights:  gun rights and abortion laws are polarising national political issues.  It is a small price to pay to let Kansas make the wrong choices in exercising their freedom if you are also allowed to exercise your own.
  • Interstate commerce and federal highway program:  is a source of unnecessary leverage over state rights (state funding is often threatened over it).  The highway system is already built.  Transferring ownership of the highways to the states, and letting them fund them.  New interstate infrastructure can be sponsored/negotiated by the affected states.
  • Tributary and border/natural tax system: A concession to poorer red states is to codify that richer states will contribute more taxes to the common union.  Ideally union contributions are spent almost entirely as a social dividend, but no matter how the federal/union surplus is spent, richer states would be contributing to union harmony where others success contributes to one's own success, though the only way for the stupid to grasp the obviousness, is through cash dividend entitlements.  Using tributary funds as a social dividend also puts upward pressure on oppressed state's wages, which simultaneously maintains rich state competitiveness and popular support/harmony for the union.
  • dissolution of the union:  The main appeal to most states would be to eliminate federal debt. obligations.  But this doesn't have to be the objective of the convention.  Rather, it can focus all stakeholders on the concerns states may have with the union.
 Even if the goal is secession or dissolution of the union, a constitutional convention where discontent states offer nazi republican states permanent freedom and subsidized support as part of decentralization initiatives is the right opening move, is constructive, and may produce tangilbe solutions that pacify secessionists, but also address the discontent that sympathises with secessionist motivation, but fears unknown change.

A constructive and concessional constitutional convention process pacifies any strong reaction against secession or federal tax non compliance, and is a path to compromise.

All immigration is economically constructive, and unless ALL of the immigrants admitted directly compete for your job, increase your employment prospects.   More people means more construction, teachers, medical, retail, and food production.  More of those jobs leads to auto and yacht production, as wealth trickles up the capitalist hierarchy.  Not all of these new jobs will go to immigrants.

That some states or societies wish to restrict immigration enriches the states and societies that won't.  There is no need to argue economics against hate if the enlightened and hateful can both get the outcomes they want.  The EU's surprising economic growth for 2015 and 2016 can be attributed to its large refugee influx.

European Union
Right wing stupidity threatens the union somewhat.  Natural taxation's international competitiveness focused based on higher taxation rather than current available manipulations to send capital/profits to lower taxes jurisidictions allows a system based on race to the top rather than race to the bottom.

Still, within the union, allowing poorer members to have a tax advantage (higher) in order to mitigate trade imbalances, and supporting union wide basic income is helpful harmonious policy.  The main reason for the EU to lead on natural taxation though is that the US is threatening trade wars.  Be proactive not reactive, EU first.... and any other slogans they use are all appropriate rhethoric.  A natural taxation approach offers a better, though similar enough, alternative to border taxation.  Since there is some necessary policy response to US action, the EU should both embrace and lead on natural taxation.

Basic income can be implemented with nationalist citizen-advantages/privileges.

Natural taxation and tribute-funded union wide basic income/dividend is  an ultra powerful and flexible policy tool that strongly promotes union membership and cohesion.  There's no longer any complaints about Brussels controlling everything, if Brussels just pays all EU citizens for being part of the union.  EU members with trade surpluses can let other members have higher taxes to help with both their fiscal problems, and trade/employment disgruntlements.

Climate change and pollution
The only possible successful action on climate change and carbon emmissions is a carbon tax.  To ensure popularity of the measure, proceeds from the tax should be distributed as dividend, and it empowers citizens to use the dividend proceeds to make better energy decisions that let them avoid the carbon tax.   A carbon dividend further mitigates other funding sources towards a basic income.

The Paris climate agreement is insufficient in that it relies on future carbon sequestration technology.  No matter how awesome that technology turns out to be, it will involve a cost (without monetizable benefit) per ton of co2 to remove, and so eventually a carbon tax will need to be diverted to equal the sequestration cost.  A dividend is useful to prime basic income, mitigate emmissions, and so buy time for technology magic to be developed.

Without a carbon tax, nationalist impulse to destroy the planet for immediate profit doesn't go away.  Denial is a human response of aligning beliefs with pocketbook interests.  A carbon tarriff has been brought up as a response to the US withdrawing form its Paris agreement commitments, and it is an appropriate response to willful subsidy for planet destruction.  Still, seriousness towards the Paris agreement goals requires carbon taxes.

Inter state harmony and happiness is not a universal goal.  Gun manufacturers thrive on misery, but more generally, destabilizing neighbour states through crime or armed government opposition, can be seen as competitive strengthening of neighbours.  This is easily done through subsidizing gun access in the target jurisdiction.

Basic income is a key policy in offering people with better life choices than engaging in gun violence, but anti-harmonious forces may still strive to disrupt your state.  Cash for guns programs are likely great investment for protecting harmony.  If the target is sure that its neighbour states are not doing a sufficient job in reducing the flow of guns in the destabilization attack, it can leverage its newly generated gun stockpile for cooperation under the implied threat of sponsoring a guns for toddlers program in their state.

The main key to interstate harmony is basic income, but alliances and treaties can replace an all powerful overlord guaranteeing safety from state sponsored conflict./aggression.   A large enough alliance is in fact equivalent to a protective dictatorial overlord, but alliance membership