How to Tax

Paul Graham recently posted (though apparently wrote some time ago) an interesting piece on the distribution of wealth. In the essay, he argues that variations of income can be a sign of progress, once past a certain tipping point. He justifies this by correlating the growth of income variability to the growth in productivity variability that is inherent in the invention of more productive techniques. Beyond the opportunity for productivity variation there is also the amplification of skill value that enabling technologies provide.

He ends with:

You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich.

I find this quote interesting because it comes very close to hitting a point that Paul missed or omitted. Paul speaks entirely of income, and not the use of income. There is an old saying, “Money is power”. It may not be an absolute truth, but in society, it is essentially true. Attached to this saying is a stigma that stems from well known abuses of power.

I see a different side to this saying that may provide insight into a better way to deal with some problems resulting from an income gap. One problem is, very wealthy people have many opportunities to waste resources in an unproductive manner. Not all wealthy people do. In fact, many don’t, especially those who made their fortunes through business. Often, successful business people understand waste, and have a natural aversion to it. This quality improves the chance of business success, so you’ll find it more often among wealthy business people than wealthy actors or professional athletes.

When an actor carries out a performance for a movie, there is definitely some form of wealth, in the form of entertainment created. But it’s highly debatable if that value is greater than the waste generated. When actors take their earnings and use them to buy custom made cars, huge mansions, private jets or worse, drugs, is there really enough value in the performance to justify all of that waste?

In theory, you’d say yes because people are paying for it. But in reality, we know what people pay is not directly enough related to real value to be more than a vast generalization. Commodity markets, that trade in tangibles like corn, oil or lumber struggle to find the real value of these commodities. But even in these markets, which have a clear purpose, and an attentive set of purchasers, this value is hard to determine and varies drastically from one day to the next. In consumer goods, the consumer is less attentive, the purpose less clear, and the products often more abstract. This suggests consumer good prices are very loosely related to real value.

Money as Power

The income of the wealthy is not all directed towards waste. Many business people put money back into their business, or other’s businesses. This investment is one of the most important factors toward economic, technological and even social progress. Many people assume the only reason wealthy people invest is to make more money, so they can waste more money. But that simply is not true. Many investments are only about money, but many investments are made because of a belief in the value of a certain endeavor toward progress. It is a side effect that if an endeavor has real value, it will generally be able to make money.

Sure, the wealthy who manage businesses could price goods such that they don’t make money, but in general, this doesn’t make sense. For one, what about the next endeavor? Money will be necessary for that, perhaps more money than the first. Second, it’s simply easier to manage a business in a way that wastes less than a charity. Third, if you don’t plan to make money, it’s very difficult to get help, from other investors and banks, when you need it. As a charity, you must rely upon either the government or individuals. If you’re having problems with waste already, those entities will be less interested in your cause.

The use of wealth for investment is beneficial to society. Products still get purchased and wages paid, but the difference between spending money on new business endeavors and spending money on a lavish lifestyle is that one has a positive value, and the other negative. I’d hold that the concept that consumer spending is the most important factor in an economy is inherently flawed because it fails to consider that businesses buy computers, desks, chairs, office space and all other manner of manufactured, invented or other goods.

The problem is people who think of investment this way are a minority. We are lucky the laws of business ensure this type of person is more likely to become wealthy. For people like this, money is the power to encourage change, or the power to create progress. Even among the wealthy, this type of person may still be a minority; it’s hard for me to say. We hear about ostentatious types more often because they make more interesting news stories.

Using this Knowledge

I don’t think an income tax is the most socially advantageous way to collect tax. Income does not measure your burden upon society, or your benefits from society. Income is a measurement of societies benefit from you. It’s an imperfect measurement, but the general principle is true. As Paul says, what you do to earn income is what society needs. What society doesn’t need is your waste.

It makes more sense to tax personal purchases, personal holdings (houses, cars, boats), and not tax things associated with the creation of wealth. Consumption taxes like a sales tax or a value added tax, are one form of such a tax. Another type is a property tax.

The traditional problem with consumption taxes is, when applied naively they are regressive because the poor need to use a greater portion of their income on purchases then the wealthy.

By Good

Consumption taxes can be more progressive by taxing different goods differently. Excluding food is one example. Additional taxes on luxury items are another. But regulations of this type are very hard to properly manage. The number or products needing classification is staggering, and difficult. Should $150/oz beluga caviar be taxed? It’s food, but it’s also a luxury. How about $2.50/oz American Salmon Roe? Also, many goods are used by poor and wealthy, but the wealthy use disproportionately more. Gasoline is a good example.

Taxing goods differently has not done enough to satisfy society’s desires for progressive taxes.

By Income

Consumption taxes can also be more progressive by taxing individuals differently depending upon their income. In the past, such a system would have been very difficult to administer, but today, the electronic nature of almost all purchases makes it much more feasible.

This system could be administered by distributing a card to all households based upon the prior year’s (or month) income. When purchases are made, the card would be presented and would determine the tax rate. The card would not need to be personally identifiable, but privacy concerns would still exist.

Also the concern of card-swapping or proxy purchases would be problematic. The only way to address these concerns would be monitoring that would raise additional privacy concerns.

However, the consumption tax would be truly progressive, and would encourage investment in the future. The ostentatious would be appropriately penalized, while the visionaries would not.

By Consumption

Consumption taxes can also be more progressive by applying a higher tax rate as an individual’s consumption increases. Taxes would increase non-linearly with consumption. For example, spending $4,000 in a month might trigger a 15% tax rate, or $600 in tax. Spending $10,000 in a month might trigger a 25% rate, or $2,500 in tax.

However, many of the same concerns as by income apply to by consumption. Privacy concerns would be even greater because the tax agency would need to have a record of every purchase you made in order to calculate how much you spend. Card-swapping and proxy purchases would still be a problem, though less so since use would raise the proxies tax rate for all purchases. The necessary information for monitoring would already be supplied to administer the tax rate, but that doesn’t relieve the associated concerns at all.

On the other hand, a by consumption tax would just as progressive as by income with the benefit of a greater scaling benefit in encouragement of investment among the wealthy.

By Non-Savings

It’s also possible to attack the problem from a different angle. Under the current income tax system, general savings are taxed. There are some exceptions to this rule, such as IRA’s. If these exceptions were expanded to include all investments in stocks, bonds or deposits to savings accounts then you would have a system similar to the by income system. In theory one might think that this would benefit the rich disproportionately, but by adjusting the actual brackets and rates appropriately, it could be brought into line existing social goals.

Other Characteristics

In addition the basic rate system, certain exceptions may be desired based child raising or other socially protected situations. In most cases the most reasonable solution is a deduction, credit or rebate rather than an altercation of the tax rate. An example of this is the FairTax rebate plan.

Summary

I admit, some of the later systems I list are radical. I like radical ideas. They are interesting and challenging to think about. But I’m a realist too, and I realize that the radical takes time to accept and thought to mature. But some ideas are at least less radical and possibly stepping stones to something even better.

The FairTax plan is a simpler, but still effective framework that would be a major step in the right direction. To the average American it might still seem radical, but many other countries around the world, especially in Europe, rely either very heavily or entirely upon a consumption tax. Also, our state and local governments collect revenues from consumption taxes today. This means a simple consumption tax like that of the FairTax plan is not an untested concept.

A great deal of the FairTax plan appears to be designed to hold other variables constant where possible, and thus increase its political viability. It certainly could be improved upon, but its structure is not designed to be perfect, but rather a cautious improvement. As political compromises go, I see the rationale behind it.

Blogger Review Group

Every once in a while (ok most of the time), I write something that I’d really like to have a second opinion on before posting. Right now, I tend to resort to friends or family, which feels a bit odd since they’re not really into the whole blogging thing. Plus, since they don’t have blogs of their own I can’t exactly turn around and review things for them. Of course, I probably make up for a lot of it in all the free computer advice I give out, but considering how much I write it feels odd.

That’s why I’ve come up with the idea of a forming a small group of bloggers who’d be willing to trade reviews. The idea is, a small group of bloggers, I’m thinking three including myself, who’d be willing to pre-review posts from the other two. If you joined, the rules would be:

1. Sending little 10 line snippets is probably a bad idea.
2. When you get something from the group, let the sender know if you’re going to have time to review it.
3. Make an effort to review as much as possible.
4. Never rip off someone else’s work.

That’s it. Just a few informal rules. Anyone interested? Email me at ryan.technorabble@gmail.com.

Indecision Harms Sales

Rumor is, Apple is going to start a program where you can get credit for tracks on an album already purchased when you go to purchase the album.  It's something I've been saying for a while should be the norm, so it's encouraging to see even a rumor of it.  One angle that that little CNet blurb missed is that not only does a lack of such a policy hurt the full album sales due to angst over wasted money (by paying for the same track twice), but it also hurts track sales as well due to indecision introduced into the initial purchasing decision.

Anyone in marketing knows that purchasing is influenced by a lot more than just price.  Often it's far more important that a consumer feels they are getting a good deal.  Sure some bean counter can figure that you could in theory make more money by selling the same track twice, but reality has a habit of ruining these theories.

In general, any pricing model that takes indecision out of the process is going to yield better results, especially for small items like 99 cent tracks or even $9.99 albums.  Tracks should be as simple as yes/no.  If you have a pricing model that is designed to confuse, trick or coerce your customers into not getting the best deal unless they pay extremely good attention, then it should be no surprise to you how easy your customers are stolen by someone who doesn't introduce negative emotion into billing, ordering, etc.

I know I've railed a llot about Apple in the past, but if the rumor holds, they'll have done at least one good thing.  Though, Apple seems to be resisting the offering of a subscription based model, which other vendors offer.  Personally at the moment this is what I prefer because it takes all of the decision out of it.  I just pay a monthly fee and listen to whatever I fancy.  Or actually, I generally just listen to Yahoo Music which customizes a station for me.  I rate things every once in a while, but I don't have to plan out playlists to get music I like to play.  Hassle free.

Good Politician, Bad Politician

Many people will say good people don’t go into politics. The trick to this statement is whether you mean merely good, or good in general. Does good include people who go out of their way to fight for something they believe in? Does good include people willing to accept hardship, willing to do more than simply avoid being obviously and outrageously bad?

If you separate this type of person out from good, and include them in a different class, I’d agree. Merely good people don’t go into politics, or at least don’t stay very long. You might call people with such character great, but I think most people in this group wouldn’t think of it this way. They probably see the difference between themselves and others, but they wouldn’t describe it as great, because they know there is no unachievable difference between what they are, and others are. Their actions and effects may be vastly different, but there is no great journey required to go from merely good to what they are. It’s more of a simple choice than anything else.

Another question is can people who are merely good at politics succeed while maintaining that character? Perhaps beyond simply having a quality of character above average, a person must be a great politician. I use the word great here because in this case there is a difference that is not something you can simply choose. Going from good to great as a politician takes a great deal of time, thought, and practice. It may even be that some people simply do not have the natural abilities necessary to accomplish this feat. But it seems to me politicians, in today’s society, if they wish to be successful, without compromising in ways they’ll regret; they must be more than merely skilled at politics.

It may seem I’m suggesting political skill is the more valuable quality, but I’m not. While it may be far more difficult to acquire political skills, they are something others can help with, something that can be learned through hard work. A skilled teacher can convert most motivated students, from good to great. Being more than merely good in character however is not something that can be taught. It’s a choice that can occur only from within. It’s possible for others to prod one along or to jolt a person in a way that forces a change, but I don’t know that there is any equation, any reliable mechanism for progress. Either it works, or it doesn’t. Many of the hardships known for “building character” are as likely to produce a saint as a monster.

I don’t like the original statement because it’s a vast simplification. Also, it characterizes a very critical group in a poor light. Great people are a minority, perhaps even more so in politics. And because politics attracts so many of the worst kind, that minority is more important than virtually anywhere else. When people oversimplify this point, they form opinions that make it even more difficult for good or great people to succeed in politics.

Since the bad guys try very hard to appear the same as the good guys, it’s would seem like the safest course is to assume they are all bad. In reality, however, you have to choose one or the other. Being cynical is justifiable, almost advisable, since the choice is often so difficult. But it would be nice if we could realize that going beyond cynical to abusive is taking a great risk of raising the level of hardship for not just the bad apples, but also the few good ones we have left.