Tuesday, April 15, 2014

Civic Involvement in Taxation

America does not have a tax problem. We have a spending problem.

The US is running a 17.6 trillion dollar deficit because our leaders borrow against future tax revenue.

Politicians spend every penny they can and more. Raising taxes would not reduce the deficit because politicians would spend every penny of the tax increase. Even worse, they are likely to use the increased revenue to justify more deficit spending.

Now, it is likely that tax reform will be a big issue in the upcoming elections. However, we cannot let the tax reform debate hide the fact that the United States doesn't have a tax problem. We have a spending problem.

The reason our tax code is becoming so onerous and problematic is not because we have taxation wrong. The reason our tax system is becoming more and more problematic is because our leaders are engaged in unprincipled spending that is driving us into debtor nation status.

Unfortunately, we can't fix the spending problem from the taxation side.

What we can do from the tax side is to create a tax structure that educates the public on the growing spending and taxation crisis.

The current withholding system (and FAIR Tax for that matter) does a terrible job at informing the populace on the cost of taxation. With the withholding system, the government collects taxes from employers. Withholdings are rigged so that most people file a return and get money back from the government.

Employers see this tax simply part of the cost of hiring employees. Since employees don't pay their taxes directly, most employees do not recognize income tax as a tax taken from them. They just see a check coming from the government each April.

The Object Tax replaces the withholding system with a new entity called a Tax Aware Account. The Tax Aware Account records all of the information relevant to paying taxes such as the number of exemptions, standard deductions, etc.. Employers will deposit the entire check for an employee into a tax aware account. When the employee goes to withdraw money, the tax aware account will calculate and withdraw taxes in real time.

Unlike the Fair Tax which will create massive social and financial disruption, The Object Tax transform the current withholding tax into a consumption tax without causing financial or social disruption. Rather than having your employer withhold taxes, your paycheck will go into a Tax Aware Account. You will pay taxes when you withdraw the money for spending.

This minor change in the point of collection will result in greater civic involvement in the tax collection process.

The reason that I created the Object Tax was precisely to encourage greater civic involvement in their governance.

I strongly believe that a free democratic form of government requires strong civic involvement. I contend that a qualifying point for any proposed tax reform is the impact that the reform has on civic involvement.

A direct tax increases civic involvement, while an indirect tax decreased civic involvement.

The current withholding process uses an indirect path for taxation that discourages civic involvement. Our employers collect the tax and send it to the IRS. People file a yearly return and get money back. This convoluted path for taxation creates a disassociation between governance and the cost of governance.

The proposed FAIR Tax is even worse. The FAIR Tax places the entire burden of taxation on retailers and small business. People get a weird prebate from the government and have to pay higher prices for all goods and services, creating a complete disassociation between taxation and the government.

Anyway, I wish everyone a happy tax day. I am still working on my tax return. Sadly, I don't have to pay any taxes this year because my income has fallen precipitously. I envy those of you who have to pay taxes.

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