This is a less math heavy article on my concept of natural tax policy
Natural tax policy for corporations
Corporate tax policy can be greatly simplified by taxing cashflow instead of income. At a 50% tax rate, a company that goes from a cash balance of 0 to $50M in one year would owe $25M in taxes. If its cash balance 5 years later was also $25M, then it should not have owed/paid any other income net taxes in that time. It does not matter what its profits were, how much it spent on machinery or salaries, how much additional investment it received or how much it repaid investors. Only what its cash balance is at the end of any period. If its balance goes up then back down to $25M, it would receive a refund equal to past income taxes paid.
In addition to simplicity, the great benefit of this is that it provides high incentive to spend cash like a hot potato. Cash would flow directly to people, since if a company pays another company, the receiver also wants to get rid of it in order to avoid a corporate tax bill.
If a company is out of good ideas for spending, it would repay its shareholders with dividends. Companies no longer need any complex tax avoidance schemes, because its owners (shareholders) would likely prefer being repaid to the company "wasting" money on other matters. This solves the issue of corrupt corporate governance that avoids repaying investors.
The key benefit of taking money out of corporations, and sending it towards people, is that it increases business activity and employment in order to go collect that money back as revenue.
The key problem with existing corporate tax policy is that very little tax revenue is collected from corporations because they know how to avoid taxes. If you follow the links to the more detailed natural tax policy article, it focuses on a particular current problem of corporations keeping cash abroad to avoid US taxation, and, in general, doing business in tax haven countries. Natural taxation solves the corporate tax avoidance problem by no longer expecting any tax revenue from the corporate sector, but funneling cash into the individual sector where avoidance is more difficult.
Natural tax policy for individuals
The core absurdity of existing tax policy is the preferential treatment for certain investment income, and the surtaxes on employment income (social security/payroll taxes). There is no need to encourage investment by taxing it less, because investment tends to require no real effort, and is attractive or unattractive independently of its tax rate. There are several changes to individual tax policy needed to coordinate with the corporate tax changes:
Roll up payroll taxes into marginal tax rates:
If people currently pay a 40% income tax rate and 10% in payroll taxes, then simply change the tax rate to 50% with 0% payroll tax. Any employer share of payroll taxes can be turned into an automatic raise for the employee.
Every individual receives an investment tax sheltered account
Like Canadian RSPs, every individual should be able to deduct taxable income by adding money to their investment account, and increase taxable income whenever they withdraw money from their investment account. Up to 70% of employment (non-investment) income for the year could be deferred/sheltered in this manner.
A 10% surtax on investment income
Though investment income in the sheltered account is not taxed until it is withdrawn, all investment sales, interest, and dividends received would be taxed 10% immediately. When an individual places an investment, he would receive a 10% tax credit. So overall, the 10% tax would apply to investment profits. This creates no disincentive to investing, because most people like to save for the future anyway (especially if they have the freedom/luxury to do so), and if they simply prefer to leave money in the bank, and pay less taxes, the bank will invest the funds. The biggest investment incentive that remains is the tax deduction created by adding to your investment account.
Allow income splitting through personal loans from investment account:
An individual can provide income to any one he chooses by giving them a loan from his investment account. The recipient counts the loan as taxable income, and future repayments as reductions of taxable income. The lender will pay 10% tax on repayments received, but defers any other income taxes until he withdraws funds from his investment account.
To summarize, tax revenue increases occur due to the 10% investment income surtax, and replacing payroll taxes with the equivalent increase in income tax rates, but then applying that tax rate to all income instead of just employment income. Tax deferral and income splitting opportunities are not a major loss of tax revenue. Tax deferral likely results in more tax revenue later. The loss of revenue created by income splitting is only the difference in marginal tax rates between the lender and recipient.
Economic benefits
Flow of cash away from corporations is needed in order to create demand for what businesses sell. That leads to further investment and employment to meet that demand.
The richest people have had most of their wealth untaxed because it is typically held as corporate shares that is not subject to tax until they are sold. Even if they continue to shelter most of their wealth, forcing them to accept dividends and pay 10% tax on that will help everyone else's tax burden.
The income splitting opportunity will allow people to pay for personal services (gardening, childcare) with 0% loans thereby creating income opportunities for low skilled people. The type of spending being tax deductible encourages more of that spending, and it may cause increased tax revenue if it replaces previously undocumented income.
These tax changes increase overall tax revenue and employment and economic activity. Through income splitting opportunities, income equality will also be enhanced.
Rich and middle class individuals will have their lives enhanced as a result of easy income deferral and splitting opportunities. The poor and middle class will have their lives enhanced through greater income opportunities from business and personal service employment.
Basic income funded by increased tax revenue
While economic benefits are created through the increased flow of funds of natural tax policy, tax revenue is also enhanced by the flows, and tax revenue is enhanced additionally due to the increased economic activity.
The fairest, and most economically productive, spending of tax revenue is on basic income and social dividends. Giving every citizen an equal cash amount from any surplus tax revenue, and also funded by cutting any redundant social services or any other government program.
Although rich and poor receive the same basic income as a taxable benefit, it is fundamentally a transfer from those lucky enough to be able to extract a successful living from society, back towards the entire society and including, gratefully, to those less lucky in having society value their contributions.
Basic income further creates economic activity and opportunity by creating more potential consumers for business to employ to extract funds from those consumers. Replacing social services with unconditional cash payments removes all disincentives and traps that discourage social service recipients from risking the loss of any social benefits through employment or other income.
Solving the bitcoin taxation problem
Bitcoin is some where between a digital commodity and digital currency. The distinction is critical for current tax policy implications. It has clear and obvious benefits for transactions and is a medium of exchange (like a currency), but its users might prefer to label it a commodity because then exchanging something for bitcoin is barter and non-taxable. The commodity status further complicates tax matters when converting bitcoin to cash because it may be preferred to consider it as a capital gain (preferential tax treatment) instead of income. Loss of tax income as a result of a useful barter medium will aggravate governments and societies that depend on tax funding.
Natural tax policy solves all of these issues. When bitcoin is turned into cash, it is taxable income just as any other investment or other income. No matter how popular, and ubiquitous, bitcoin becomes its convertibility to cash will always be relevant, if only to pay income taxes.
