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.

Tax Day Post

It's tax day! It's time for the annual tax reform post.

A few decades back, I created a tax reform proposal called "The Object Tax."

This proposal is named for the object oriented programming techniques used in software design. The goal of the reform is simply to use the same techniques used to design the Internet and modern software to streamline the tax collection process.

This reform is primarily about using technology to streamline tax collection. The reform itself is ideologically neutral and is likely to receive support from the right, left and center.

Essentially, the reform says: "Lets use the design techniques behind the Internet to make taxes easier!"

You may not know this but the Internet is actually an extremely complex system with billions of computers, routers, servers and other devices communicating in a relatively seamless manner. While a six year old can master a web browser, the actual technology behind the Internet is quite amazing. The technology appears easy to use because engineers designed the system for a quality user experience.

The beauty of object design is that it allows engineers to create an intuitive user interface for a complex system. For this reason, I will talk about the user interface before talking about the design.

The User Experience

Our current tax system is form-based. Taxpayers gather up all their scrappy little receipts and income statements throughout the year. They use this information to fill out complex forms that must be filed before April 15th. This tax system requires a great deal of paper shuffling. Employers must withhold taxes and fill out forms each pay cycle. Employees get a pile of forms each year that they must file and store each year.

The Object Tax is account-based. It eliminates the withholding process and the need for separate tax forms.

The reform creates an object called "A Tax Aware Account." The end user experience will be as follows:

An employer will deposit the entire payroll, no taxes withheld, into Tax Aware Accounts. The Tax Aware Accounts keep on file all of the information needed to calculate an employee's tax.

Employees will see their entire paycheck deposited into Tax Aware Account. The Tax Aware Accounts will collect taxes when employees withdraw money for spending.

Your experience might be as follows: Imagine that your progressive tax rate was 20% and you received a thousand dollar paycheck. This money will go into a Tax Aware Account. When you withdraw the money, the account will see that your rate is 20%. It will transfer $200 to an account held by the IRS and give you $800 for spending.

The reform creates an object called a Tax-Aware Account. This Tax Aware Account includes all of the information needed to calculate your taxes. Employees will have their entire paycheck deposited into a tax-aware account.

The object tax eliminates the payroll withholding process. The program will accurately calculate and pay your taxes each time you withdraw money. This will eliminate the need to file taxes on April 15th.

H2 A Personal Consumption Tax

The Object Tax essentially transforms our income tax system into a personal consumption tax. Workers receive their entire income into interest bearing Tax Aware Accounts. People pay their taxes when they withdraw the money for spen withdrawing the money for spending. This will encourage workers to budget their expenses improving their financial health.

Collecting taxes at a budgeting step between income and consumption does a better job of encouraging savings than a sales tax because the tax process encourages workers to develop sound budgeting habits.

The tax code would be designed so that it can be embedded in online budgeting software such as mvelopes or mint.com. The software could also be run by banks or other financial services programs. To understand this process we need to look at the design.

Object Oriented Design

Object oriented design is a programming technique used to create complex computer systems.

Object design dates back to the early days of computer programming when system engineers sought ways to break large programs into manageable independents programming units called objects.

Object Design became the de facto programming standard when software firms made the switch from the early text based monitors to Graphical User Interfaces found on Windows and Apple computers.

The design process starts by making a model of the existing system, then extends this model with new functionality.

The "Flat Tax" is a tax reform proposal that removes loopholes and lower rates. It is a popular reform idea that receives bipartisan support. Flat Tax proposals tend to fall apart as Congressmen start trading favors with lobbyists.

Many tax reform proposals, such as the FAIR Tax, start with a flat rate. The following Congresses begin trading special tax treatment for political favors, the rates begin to differentiate and we revert to a mess with different rates for different people.

The Object Tax is likely to lead to a flattening of the tax rate. Unfortunately, it is impossible to constrain future legislators. Like all tax reform proposals the flattening is likely to be temporary. The only way to create a permanent flat tax is to change the nature of man. I've given up on the idea that I can personally change the nature of man.

The Object Tax starts by making an object model of the current form-based tax code. The process then seeks ways to extend the current tax code as an account based system. During the design phase we will want to flatten and simplify the tax code. See Aside.

In this very first step, we create a new tax code that can be implemented either as the existing income tax system with tax-withholdings or as an account based system. This robust design gives businesses the choice of staying with the legacy tax code system with withholding taxes and an annual return, or adopting the new account based tax system.

It gets even better.

Please back up. In Step One, Congress created an Object Model for the tax code that could be implemented as the current withholding system or as an account based tax code. This model could be implemented by any information or financial firm.

In Step Two Congress would launch an open source software development initiative to write the code in to implement and test the implementations of the object tax.

This will be the largest open source development project in history. Every financial firm and a large number of independent software development firms will want in on the action because these firms know that getting in on the ground level of this new project will affect their ability to compete in upcoming years.

I threw in the word testing. Testing is a critical element of good software design. The Open Source Project will include both base code for implementing The Object Tax. It will also create rigorous testing and auditing procedures to assure that the software is calculating and processing the taxes correctly.

I guess I should mention that the creation of a huge open source project to rewrite the tax code would end up directly involving thousands of people and indirectly involving hundred of thousands of people who will scour the tax code looking for ways to simplify the code and who are likely to call out all of the special favors and cronyism built into the current tax code.

Open source development goes beyond the halls of power and would result in a period of intense scrutiny of the tax code and taxation process. The implementation of the Object Tax would create period of intense citizen involvement in their governance.

I am intentionally sparse on the details of the writing of the Object Tax because I am certain that the participants in this open source project will come up with ideas and observations that blow my ideas and observations away.

Step Three of the process is implementation and this is where the Object Tax will really shine.

In step one, Congress creates an object model for taxes that can be implemented as the current withholding/filing system. Step Two is an open source project that sets thousands of our best minds to writing software to implement and test the model.

Step Three is implementation.

Who will implement the code?

That's easy: Private business!

Financial firms including accountants, banks, financial advisers, law firms and information companies will all want to incorporate the tax collection as part of their business to attract customers.

Since the code was developed through an open source process, there will be a great deal of free software allowing small businesses to compete alongside big business in the implementation.

The Role of the IRS

The Fair Tax makes the absurd claim that their proposal will eliminate the IRS. This claim is absurd because there is no way to have tax collection without having tax collectors.

The Object Tax does not eliminate the IRS, but it does make substantial changes in the role of the IRS. The reform eliminates the need for payroll withholdings and filing annual returns. Instead financial firms will calculate and process a personal income tax as people transfer money between accounts.

Rather than interfacing directly with the people, workers at the IRS will spend most of their day scrutinizing the firms collecting taxes.

The IRS might still engage in direct personal audits to assure that people are processing their income through Tax Aware Accounts. Overall, there will be a substantial change in the functioning of the IRS.


The Object Tax is a fun approach to reforming the Tax Code. This project starts with a desire to use advanced system design techniques to streamline the tax collection process.

Politicians on both sides of the aisle want to simplify tax collection. The tax reform is likely to receive bipartisan support.

Reforming taxes through an open source project would invite thousands of independment minds to scrutinize the current tax code. This is likely to result in a flattening of the tax code and a temporary reduction in some cronyism involved in taxation.

The Object Tax is named for a design process. Object Technology is the design process behind the Internet, our smart phones and much of the wonderful technology of the Internet Age. This tax reform proposal does not starts with ideological ravings. It starts with a very simple idea: Let's use the advance design techniques from Silicone Valley to streamline our tax collection process.

The Tax Reform seeks to create an open source project that will create a tax code that can be implemented as the current withholding and filing system or through a system of Tax Aware Accounts.

The open source project will increase citizen involvement in the tax code. Since the tax can be collected either through the legacy withhold/filing system, the reform can be implemented with minimal disruption.