Thursday, April 16, 2009

Tax competition the next domino to fall

What do you get when you take Kentucky's questionable projected budget "shortfall" number, double it, and combine it with an international effort to make the United States tax code even less competitive in the world?

The fake idea that tax competitiveness between nations is costing Kentuckians $915 million a year. It's just a matter of time before the idea low-tax nations will have to be punished because of their low taxes.

It's just a matter of time before this ruinous tax increase strategy gains currency (pun intended) with more than just a few big-government fans and winds up taking a bite out of all of us.

Tax code manipulation is a very powerful tool in the hands of politicians. When you hear them talk about eliminating "tax havens," rest assured that they will be coming after us soon enough.

Here is a good primer.


Anonymous said...

Are you sure you're not a Libertarian ?

David Adams said...

I'm a capitalist.

Hempy said...

Being a low tax nation would be a breeze were our leaders to implement Alexander Hamilton's proportional taxation concept on the movement of all moneys. Deficits would be a thing of the past. In Federalist Paper 12, Hamilton wrote:

The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.

Anonymous said...

Hamilton is saying nothing about proportional taxation, Hempy. For the thousandth time, try to defend your claim.

He says the amount of money in circulation and the speed it changes hands is in proportion to the ability to collect taxes. If one goes up, the other goes up. If one goes down, the other goes down. i.e. a proportion.

He says nothing about how to tax commerce and that if you do tax commerce it should be proportioned (flat).

Hempy said...


Hamilton was not a proponent of a fixed tax. In his 1791 report to Congress on manufactures, he wrote:

There are certain species of taxes, which are apt to be oppressive to different parts of the community, and, among other ill effects, have a very unfriendly aspect towards manufactures. All poll or capitation fixes are of this nature. They either proceed according to a fixed rate, which operates unequally and injuriously to the industrious poor, or they vest a discretion, in certain officers, to make estimates and assessments, which are necessarily vague, conjectural, and liable to abuse.Hamilton read Adam Smith's Wealth of Nations. Throughout Smith's work, proportion is discussed frequently. It has nothing to do with a flat tax rate.

You seem to be saying that if the ability to collect taxes goes up (increases) then the supply of money goes up (increases). And vice-versa.

I'm not sure that necessarily holds.

Hamilton expressed concern about the injurious and inequitable nature of flat taxes.

A proportional rate would avoid the oppressive nature of flat taxes. Flat is not proportional.

Under a proportional rate tax system, if the volume of money increased in circulation, then an increased proportional rate would be assessed.

The result would be a lower tax rate on everybody.

Anonymous said...

From encarta online entry of taxation:

"A proportional tax takes the same percentage of income from all people. A progressive tax takes a higher percentage of income as income rises—rich people not only pay a larger amount of money than poor people, but a larger fraction of their incomes. A regressive tax takes a smaller percentage of income as income rises—poor people pay a larger fraction of their incomes in taxes than rich people."

I think my whole confusion to your Hamilton postings has come from what you are calling a proportional tax. Maybe it goes by another name?

If you pay $10 in taxes for $100 earned, and I pay $20 for $200 earned, we each pay an equal proportion of our income in taxes. That's also a flat rate of 10%.

But you say "Flat is not proportional."

Give a dollar example of what you mean.

Hempy said...

The rate is proportional. It increases at certain break points. For example, in a column of numbers a break point could occur at a median. Likewise for subsequent columns so that the break points fall on the same line. A tax rate shouldn't exceed 10% because at that point evasion is encouraged.

That's a problem with flat or progressive taxes. Flat taxes that have a cap on an upper limit introduces inequality.

Progressive taxes encourage "loopholes," a legal form of evasion.

The Fibonacci spiral is an example of proportional growth. You see it in sea shells, trees, plants the whorl of hair growth on the scalp.

A proportional tax based on that though, might go up too rapidly.

I suppose it could be tweaked some and made to work, but you don't want taxes increasing exponentially. That I'll leave to economists and mathematicians to figure out.

An example of a proportional rate increase would be a column of 40 numbers beginning with zero (0). The dollar amount would be zero also ($0.00). The median would be at $5.00.

The rate increase could be 1%. All subsequent rate increases would have to be 1%.

The second and subsequent column of numbers (which could be more than 40 numbers) then would have to increment up so that the median fell close to or on the same line as the first line's median. At that median point the rate would increase by 1% assuming that's the initial increment. Likewise for all subsequent columns.

According to Hamilton, such a tax would be predicated on taxing the movement of all moneys. He seemed to be looking at the movement of money much like goods were moved via land, sea or rivers. Hence, for Hamilton it was on money in circulation and how fast it circulates that would be taxed.

The extent to which nations have gone to exempt certain items from taxation has resulted in huge deficits and inequalities in tax codes that need never have been.

Commerce is what puts money into circulation and the more it circulates the more it grows.

Taxing that quantity and movement even at a maximum rate of 7% would more than supply the needs of the treasury.

Governments don't need huge surpluses. Were a Hamiltonian proportional tax rate implemented, the top rate might be as low as 3% or a max of 5%.

In a proportional rate system, there's no cap on the amount of money that can be taxed. The $531 trillion of derivatives, the $1.5 trillion of bank-laundered drug money, and the mark-to-market value of stocks would all be subject to a proportional rate.

So would day-to-day purchases at stores, fast foods, fuel purchases, etc.

Hope this helps.