Sunday, June 06, 2010

The Royal Navy, IRS and a new fair tax? 

Over 200 years ago the English Parliament enacted a personal income tax to solve the chronic financial management of the Royal Navy.  Back then it was a classic tithe - 1/10th of incomes and it transformed the Royal Navy into a professional fighting force that built the British Empire.  Citizens were contributing directly to their nations survival initially against Dutch, French and Spanish threats and even Moorish pirate incursions and then of course to a huge successful trade system built on naval domination.  That also led to the worlds largest accounting bureaucracy that supported the Navy and its supply chain using paper based ledgers and ships logs recording.

In 1913 the US Congress went down the same path, with WW1 providing the impetus for a constitutional amendment - http://www.taxanalysts.com/museum/1901-1932.htm

Of course this is all a slippery slope.  Once established there is no reverting to past practice.  As Winston Churchill discovered when he brought in the road tax for cars to pay for roads.  In the UK currently 40 billion is raised in road tax of which about 4 billion is spent on roads.  But of course politicians find it easy to justify a road tax and people have to pay it.

And that is exactly the problem the US now faces.  The whole income tax system is no longer "for the people, by the people", but is instead "against the people, by the government".  This is made even more obvious by the stark reality of recession, when the government is ever more desperate for funds and hence taxes the successful wherever it can.  And thus inhibiting the very economic recovery that is desperately sought.  Worse those people who are trying to work their way out and pay down their debts are the very ones hit hardest by back taxes, penalties and interest when their year end incomes actually incur more taxes than they anticipated.  Not to mention that working really hard exposes you to bureaucratic abuse by the IRS because it leaves you preciously little free time to deal with their demands, methods and procedures.  Including the notorious "adjustments" to prior year returns that are almost impossible and impractical to contest, with inevitable penalties and interest tacked on. Also amazingly these adjustments work on the principle of guilty until proven innocent! Of course if sickness, unemployment or family strife intervene then this simply makes you even more vulnerable.

The IRS has become so adept at harassing citizens and false stepping them with an arcane and largely hidden bureaucratic infrastructure process distributed across the US.  Notice that federal tax workers in lower income areas can be pitted against citizens working in urban areas thousands of miles away.  Creating a divided society and exploiting those who are not in a position to question the IRS methods and for whom any government job is welcome (http://www.financialsense.com/editorials/cliffkule/2010/0520.html).   Worse still for job creation, actually the current tax situation positively rewards companies for moving jobs overseas and away from the US.

How did a democracy founded on the very principles of freedom from excessive government end up with the very opposite in the current IRS?  Two successive World Wars and then the Cold War clearly played a part.  However politicians and the political system also has been a major contributor, using the tax system to reward the more powerful. Tax avoidance for businesses is clearly a major part of being a large enterprise and hence worth significant political contributions. And this has led to Congress turning a blind eye to the excesses of the IRS.  How can the IRS justify charging penalties and interest on bureaucratic revisionism for citizens, when the government allows financial institutions loans at trifling interest rates, and similarly provides low cost loans to enterprises in research grants and other perks?

Particularly shocking in the "against the people, by the government" equation is now the obvious fact that the most beneficial scenario for the government is when middle aged citizens actually just die!  This maximizes the benefits and revenues to the government, and provides cost avoidance on older age health benefits and retirement payments.  In fact the more collateral stress and strife the IRS causes citizens the better because that puts them at higher risk for depression, suicide, stroke, cancer and alcoholism, in short all the high risk killers.  Do not expect the IRS to keep statistics of that nature of course!

So what can be done to reverse the shame that the IRS has made itself?  Fortunately 21st century technology provides the answer, allowing us to replace an 18th century imperial tax system with a system that rewards everything that being American symbolizes instead. And fittingly July 4th, 2010 is the date chosen for national awareness of this new system.  It is called the Fair Tax initiative - http://en.wikipedia.org/wiki/FairTax and the http://www.fairtax.org web site provides resources and informative presentations.

Essentially modern America is built on consumption of goods and services.  This came about particularly following WW2 (see The Story of Stuff - http://www.storyofstuff.com/) and the advent of modern consumer goods, gadgets and devices.  So a tax system that is built on consumers makes complete sense, not to mention that this drives incentives for the government to keep you alive as a healthy, productive and happy consumer.  Government for the people, by the people.

One thing that supporters have failed to highlight up until now is how modern computer accounting systems and particularly credit cards and other emerging electronic payments systems allow us to completely automate tax collection.  This is illustrated by the UPromise initiative (http://www.upromise.com) that rewards users with college funds for each purchase made of qualified goods and services.  You signup to push applicable transactions to their system from all the major credit card vendors. What this tells us is that the mechanisms to collect a Fair Tax already exist and work. Now of course this is NOT a pull system!  The last thing we need is a replacement IRS with ability to pull every citizens financial accounts, that is way too much government intrusion in peoples lives.  However for enterprises above a determined threshold of sales volumes it does mean that qualified transactions can be accounted, audited and accredited by third party services and hence fair payments made to the government.  As the Fairtax folks point out, this is also way cheaper than the current tax accounting companies are burdened with.  Hence cheaper tax systems mean more competitive American businesses globally.

Another good thing for citizens is that they get a significant chunk of their lives back.  Since the current tax system expects every citizen to be an accountant, there is the small matter of days lost to current tax paperwork.  Says this takes 2 days annually of your time, and you do this from age 18 to say 88 when you die.  That is 70 x 2 = 140 days of your life = 4.5 months.  Not to mention that the IRS has receiving funding during the Bush administration to allow it the staffing resources to audit each citizen once during their life time.

Good luck America - as the Fairtax initiative explains - you deserve a better tax system, and now is an excellent time to adopt it and help move America forward as a society.  And that is key, it is not so much about taxation itself as about creating a society that can reward citizens who contribute to everyones well being instead of punishing them.

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