Wednesday, November 15, 2006

Keep It Simple, Simplifiers

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There are two kinds of people in the world, Simplifiers and Complicaters.

I can hear you Complicaters screaming right now that there are grades of simplification and complication, and each subset must be described and named, and that the differences between each subset are so subtle as to make categorization meaningless, and therefore it is impossible to make any generalizations involving simplicity and complexity.

To that I say, you’re simply wrong. A Simplifier can simply do it, and a Complicater can’t, and never the twain shall meet.

Politics is a simple activity, carried on by very simple people, who then make it very complicated, and then can’t get anything right.

Taxation is a perfect example. The purpose of taxation is to raise revenue to fund government operations. Simple.

Too simple to satisfy politicians. Politicians noticed that taxpayers will respond to different forms of taxation in order to increase tax benefits or reduce negative consequences. For example, Alice and I decided to delay retirement until we reached 55 in order to save taxes using the once-in-a-lifetime exemption for over 55-year olds on the sale of our primary home. In 1997 when we turned 55, the law was changed too, to allow anyone to exempt the gain on the sale of their primary home from taxes each time they sell a home they have lived in for at least two years of a five-year period.

Alice and I think the new law is a vast improvement over the old, but why did it take so long to change it?

Why is income taxed? Income taxation is complicated, expensive, wasteful, and encourages taxpayers to cheat. The tax code itself fills an entire wall of long shelves, and both the government side and the taxpaying side employ huge armies of high-priced lawyers and accountants to either find or fill tax loopholes. Since it is more lucrative to be the lawyer and/or accountant who shares in taxes saved than it is to be the salaried tax agent for the government, the government always finds itself playing an expensive game of catch up.

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At the same time, income taxation law motivates taxpayers to do things they would only do because of the tax consequences, such as timing the sale of assets or selecting the method of payment or the way assets are held.

Sometimes the best laid plans of mousy accountants and leonine lawyers are not enough, and successful and traditional family businesses must be sold to pay the death taxes. Liberals say this doesn’t happen often, but still it happens, and just because it only hurts a few doesn’t make it right.

There are many other abuses due to our complicated income tax system. One abuse is that many employers and employees don’t pay payroll taxes because they operate in the illegal all-cash economy. Here in Northern California, some of my wealthiest neighbors don’t pay income taxes because they are marijuana croppers. However, their wealth doesn’t prevent them from filing for welfare benefits on the basis that their reportable taxable earnings are zero.

Individuals are not the only ones dancing to the strings of the tax master puppeteers. Businesses have developed many abominable practices in their quest for advantages from our tax system. For example, legally maintaining two sets of books, one for taxes, and one for reporting income to shareholders and investors. The tax books feature accelerated depreciation to maximize expense write offs and reduce taxes, whereas lower depreciation expense is reported to shareholders to show higher profitability.

Similarly, inventories are stated under Last In, First Out (LIFO) methodology to increase expenses and reduce taxes, while another more sensible method, like a perpetual inventory system, is used for shareholder reports to show higher profitability and to control costs.

Since our tax system is so involved and complicated, how can it be significantly simplified? The answer is embarrassingly simple. Just get rid of income taxation, and replace it with a national sales tax.

No, you politicians get your hands out of the cookie jar right now! I said replace income taxation with a national sales tax, not add a national sales tax to the existing income tax.

I know how politicians think.

“How… how … how… ” (politicians stutter when threatened by a loss of power to distribute goodies to the ones they think deserve them) “how are you going to fund Social Security without payroll taxes?” Glad you asked. The answer is simple, too. Everyone contributes to their own personal savings account.

“But… but … but… how are you going to fund Medicare without payroll taxes?”

Glad you asked again. Everyone will contribute to their own personal medical savings account. When they reach Medicare age they will chose a plan that is right for them, and pay for it from their medical savings.

“You … you … you … can’t do that. It would bankrupt Social Security and Medicare.

Wrong. While you weren’t paying attention, Social Security and Medicare already would be considered bankrupt if the government would be honest about what is owed current and pending retirees, and projections of what will be available to pay them. We can’t go on much more than one decade unless something is done to save both programs now.


Time’s a wastin’.

What are you waiting for, a miracle?

Besides a miracle, the Democrats are waiting until things are so bad, the only answer is to raise taxes … and raise taxes … and raise taxes some more. Raising taxes drastically will have the effect large tax increases always have – the economy will get flushed down into a septic tank already filled with the economies of European socialist welfare states.

“Glad you joined us,” will be their loud cry. “We knew the Democrats wouldn’t fail us.”

Again, there is a simple solution to future doom and gloom. Enact the tax reforms, encourage business activity, and grow the economy. Even Democrats, such as JFK, once realized that a hearty, growing economy would fill the government’s needs for revenue, and that tax reductions would create more tax revenue than tax increases.

Imagine, if you can, an economy not always doing the wrong things at the wrong time because of the effects of payroll taxes. Payroll taxes are an enormous business expense, even if sales are down, and make tough economic times even tougher. Sales taxes, on the other hand, go up when sales go up, and go down when sales fall.

Sales taxes don’t need a huge bureaucracy to collect, enforce, regulate, and adjudicate, and don’t require armies of lawyers and accountants for tax planning and tax return preparation. In fact, at present income taxes put a huge hidden burden on the economy by diverting enormous amounts of resources just to maintain and operate the tax system.

I know that politicians would find it really hard to give up a system that enables them to do so much social engineering, and gives them so much power to punish and reward.

However, politicians are our representatives, entrusted by us to do what is right for our nation. Our system of taxation has become much too expensive and complicated, and it’s time to replace it with a simple, effective, and efficient system.

It’s no longer just annoying. Our tax system threatens our prosperity, which in turn threatens our security.

It’s time to fix it.

It’s that simple.

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