Tax Reform

Tommy Potter

The basis of the power of capital is property, which is currently growing. So we have to reduce wealth inequality to a size acceptable to society - by means of tax and anti-trust legislation (and not through rude expropriation of property).

Tax structure

The main taxes are:

labor taxes (income, pension, health-social-unemployment insurance etc.)
consumption taxes (VAT, sales tax, excise-dutys)
taxes on capital (corporate tax, property tax, inheritance, dividends)

In OECD countries, taxes on labor represent about 17% of GDP, taxes on goods and services 11% of GDP, and capital taxes just over 3% of GDP.

Although the share of capital in tax revenue is small, the share of capital in GDP is much higher than that of labour. And the capital intensity of the economy is constantly increasing, while labor intensity is decreasing. In the extreme case, with full robotization, labor will not be needed, accordingly, there will be no taxes on labor.

Since tax revenues today depend mainly on labour, governments are interested in increasing employment, even in useless (e.g. bureaucratic) work. But automation cuts jobs and tax revenues...

It follows from these arguments that in order to stimulate progress and free people from unnecessary labour, it is necessary to increase the taxation of capital and reduce the tax burden on labour!

Unfortunately, since the 1970s the process has been reversed. Since capital can be easily moved from one country to another, governments reduce or eliminate taxes on capital. Labour cannot be moved so easily, and governments exploit this. But high taxes on labour lead to lower employment and slower economic growth.

Consumption taxes

Value added taxes (VAT) and sales taxes are regressive, which means that the rich pay less of their incomes in these taxes than the poor. From the point of view of social justice, these taxes should be abolished. (However, some UBI advocates consider consumption taxes to be the main source of funding for UBI, which is illogical ...)

Confiscatory top-rate progressive tax

A progressive tax is one where the tax rate is lower on small incomes than on large ones. There is often an exemption from paying tax up to a certain minimum amount (tax deduction). In the United States, the personal income tax deduction is known as the "standard deduction". It is set at $12,550 for single persons ($25,100 for married couples, $18,800 for households with children). In Germany, there are different tax brackets with different deductions and rates depending on marital status and number of children.

For very high incomes, the maximum rate may be set very high, such as 90% or more. Such a high rate is called a confiscatory rate. The confiscatory rate was applied to income taxes in most developed countries in the middle of the last century. For example, in the United States in the 1950s and 1960s, the top income tax rate reached 91% for incomes over $200,000. By the way, $200,000 back then is about $1,900,000 today. Just think, only about two million! Today, billionaires can have much higher incomes and pay microscopic taxes!

Consider, for example, our version of a progressive inheritance tax. Inheritances up to 0.1 million are not taxed. For inheritances from 0.1 to 1 million, we set a rate of 5%; from 1 to 10, a rate of 20%; from 10 to 100 million - 40%; from 0.1 to 1 billion - 60%; over 1 billion - 90%.

Let's not deny ourselves the pleasure of calculating how many millions inheritance tax is, for example, for a fortune of 3 billion.
5% × 0.9 = 0.045;
20% x 9 = 1.8;
40% x 90 = 36;
60% x 900 = 540;
90% x 2000 = 1800;
Total 2377,845 millions;
The effective tax rate is 79%! (2377.845/3000 = 0.7926).

Personal Property and Capital

Currently, about 10% of the richest people consume more than half of the Earth's resources. A significant part of the economy serves the parasitic consumption of the richest. To reduce this parasitic consumption, personal property should be taxed more heavily than capital. The maximum confiscatory rate of a progressive personal capital tax should apply to large estates, such as 1 billion, and the confiscatory rate of a personal property tax should apply to relatively small personal estates, such as 1 million.

Capital is defined as anything used to generate income (or used to preserve or accumulate wealth) - equipment, land, property and all 'financial instruments'. All of this should be aggregated and subject to personal capital tax. Similarly, personal property is calculated as the value of one's family home, holiday home, car or yacht...

The division of wealth into capital and personal property will limit the parasitic consumption of the rich more effectively than all sorts of bans (for example, a ban on the use of personal aircraft for environmental reasons is currently being discussed). With such taxation, even the richest will not be able to afford a private jet! At the same time, the high confiscation threshold for personal capital leaves room for entrepreneurial activity.

Income tax

A progressive income tax (with tax deduction and confiscation rates) is levied on the amount of all income such as wages, royalties and all passive incomes such as gifts, income from real estate investments, shares, bonds and other financial instruments, income from rents, copyrights and licences, and income from pension contributions and insurances.

Taxation of large companies

Large companies have a competitive advantage, so consolidation and mergers continue. At the same time, the capital of companies should be smaller than that of the state. Otherwise the political influence of corporations will be too great. It is desirable that there should be no international corporations, because this kills competition. But since they already exist, let them pay taxes directly to the UN!

Corporate Capital tax

In most countries, there is no tax on Corporate Capital. This is unfair, since the entire tax burden falls on labor.

Corporate income tax rate

In 1980, the average corporate tax rate in the world was around 40%. Now is it about 25%. According to what is written above, the tax on corporate income should be raised once again.

Taxes in times of rapid change

Tax systems have evolved in times of rather slow social changes. In our time, people may experience several different socio-political formations. In such circumstances, inheritance tax may become meaningless. Or property may be destroyed as a result of war or revolution. It is therefore logical to abolish inheritance tax or to reduce it to a minimum and to shift the lost tax revenue to the tax on personal capital.

Digital technologies can simplify tax reporting, especially for individuals. For example, by using a personal account on the tax office's website, where all the information (needed to prepare a tax return) is automatically collected. As the information is collected and processed automatically, the customer only needs to sign the form with his or her electronic signature. This practice will eliminate the profession of "tax advisor" and the possibility of tax evasion.

Simplification of the tax system

The economy of a modern country is complex, and the tax system cannot be very simple. But on the other hand, over the last half century, it has become unreasonably confusing. So confusing that some taxpayers have to hire accountants to prepare their annual tax returns. There may not be a single accountant who knows all the nuances of the tax law, let alone the average voter.

Under these conditions, voter control of the legislative process is impossible. Not only the voters, but the members of the German Bundestag themselves have only a very vague idea of the content of the multi-page bills they are voting on. In most cases, the text of the bills is drafted by the relevant ministry or even by lobbyists! And MPs are given a short explanatory note so that they can at least mumble something to their voters. The tax system needs to be simplified by drastically reducing the number of exemptions and special rules.

All developed countries have similar problems, but Germany seems to be the champion of obscuration. Why has this happened? Probably the main reason is that over the last half century there has been a gradual redistribution of the "national cake" in favour of the richest part of the population. In favour of business, which was supposed to lead to increased investment and economic growth, according to the bankrupt theory of "trickle down".

With almost every new Parliament, questions are usually raised about indexing household income and creating new benefits for business. And in the context of globalisation, it is necessary to attract companies with low taxes. So, on the one hand, it is necessary to index the income of certain categories of citizens and, on the other, to come up with various cuts in the social sphere. As a result of years of patching up, tax legislation has become a patchwork quilt.

In order to simplify recalculations due to inflation, it is proposed to link the monetary parameters of taxes and public sector salaries to the median income. The median income (MI) is the intermediate income where half of the population has an income above this value and half has an income below this value. Median income is calculated before taxes for the private (non-public) sector of the economy, industry, construction and services.

Statistics show average, not median, income. Like median income, average income is calculated before tax in the private (not public) sector of the economy. Average income is calculated as the sum of all earnings divided by the number of hours worked. In the case of perfect income equality, average and median incomes are equal. When there is inequality, the average income is always higher than the median because the contribution of the rich, which raises the average, is greater than the contribution of the poor, which lowers the average. The greater the inequality, the more the average income exceeds the median.

The median income (MI) better reflects what most citizens earn compared to the average income, but it is the average income that is included in the statistics. In 2023, the average income will be €30.30 per hour. With 160 hours per month, it will be 30.3 € × 160 hours = 4848 €/month. The data on median income are contradictory. Approximately, the monthly MI is 3300€ (1MI/month=3300€). Correspondingly, the MI per hour is 3300 € / 160 hours = 20.625 €/hour; the MI per year is 3300 € × 12 = 39600 €/year. (1MI = €20.625/hour = €3300/month = €39600/year).

The salary of a federal minister is 16,500€ per month. Accordingly, the salary of this minister is 16500 / 3300 = 5.00MI. The income tax exemption for a single worker is 9,744€ per year. So, this parameter is equal to 9744 / 39600 = 0.246MI.

It makes sense to set the salaries of civil servants and the parameters of taxes and social benefits in units of median income - MI. Then it will not be necessary to recalculate all government salaries, benefits and taxes every year. It is enough to accept and publish only one value - MI. For example, next year the MI is expected to be 3500 € (increase 3500/3300 = 1.06, by 6%). This will allow many numerical values to be automatically recalculated on the basis of inflation. At the same time, it will reduce political manipulation and interference by lobbyists. For example, an attempt to increase a minister's salary from 5MI to 6MI will immediately attract public attention... Tying the salaries of civil servants and elected officials to the incomes of ordinary citizens should improve the quality of governance.

Tom Piketty's tax reform

In his bestseller "Capital and Ideology", Thomas Piketty proposes a tax system which is shown in the table below. It is proposed that every citizen be given a capital gift (presumably 120 000€) on their 25th birthday, financed by inheritance tax. Everyone will receive an unconditional basic income (UBI) financed by a single progressive income tax.