Taxation... again...

Here's a thought...

In my previous blog, I mentioned that the philosophy behind the progressive tax is that those who receive the most benefit from the protections of our society should pay the lion's share for those benefits. I still believe that this is a valid approach to taxation. The problem is: how do you effectively implement it?

For many years, just like many others, I've felt that taxing personal income was an unfair approach to generating revenue, albeit for different reasons than most. None of the other proposals floated are free from major defects in fairness either, but there is one idea that might, just maybe, have a chance to distribute the costs of government fairly. That idea is the net worth tax.

Here's how it works:

1. Add up the fair market value of all of your assets, including real property, machinery, furniture, tools, cash, savings, stocks and bonds, principal and interest of debts owed to you, etc. Anything you might own that has recognized monetary value.

2. Add up the fair market value of all of your liabilities, including the principal and interest of debts you owe, local and state government levies, etc. Anything that might lay claim to the value of the aforesaid assets.

3. You subtract your total liability from your total assets, to generate a current net worth.

4. You pay a fixed percentage of that net worth as tax.

Would this do away with the IRS? No. There still has to be someone around with the means to detect and authority to punish cheaters. Would everyone pay taxes? No. People with no net worth would pay no tax, because the tax you paid would be proportional to your net worth (zero), and thus the expense that our society incurs protecting them (zero).

One fly in this ointment is that many of the very rich have no assets, at least on paper. In order for it to work, it would have to apply across the board, including applying to corporations , nonprofits, and NGO's equally with individuals. This would disallow any means of hiding assets from taxation.

And yes, under such a system, churches and religious organizations would also have to pay taxes on their assets, if only to prevent "tax cults" from springing out of the woodwork. There would be no exemption for non-profit organizations. If a non-profit or NGO is accumulating assets, those assets have to be protected, and the cost of that protection should not be borne by the people at large.  Let them either get contributions from their constituency, or sell off some assets in order to pay taxes.

I would expect to hear a hue and cry about taxing churches, but remember, Jesus said "give unto Caesar what is Caesar's and unto God what is God's." This was in direct response to the question of whether the temple tax demanded by Rome should be paid. Some will even try to claim that the Constitution protects churches from taxation, but levying a tax doesn't constitute a law "respecting an establishment of religion, or prohibiting the free exercise thereof" if it applied across the board, so there is no constitutional issue.

Some will object to taxing stocks and corporate assets at the same time.  Let's look at that.

The value of corporate stocks is set by the marketplace, and is no wise connected to the value of corporate assets.

To be sure, preferred stocks are considered to be something approaching a debt instrument, but the payment of that debt is unenforceable under any circumstance short of liquidation of the company.  As a corporate liability, it just doesn't count.

The claim that common stocks have on corporate assets is even less enforceable than that of preferred stocks.  Unlike most preferred stocks, they usually do endow voting rights in corporate elections, though, so you could say that when you buy common stock, you are buying the right to influence corporate actions, albeit indirectly.

In the event of corporate liquidation, the corporation's creditors would be paid first, including any fines imposed by regulatory agencies; then the holders of preferred stock would be compensated in compliance with the terms of issue, in so far as possible;  then finally, if there are any remaining assets, they would be allocated among holders of the common stock.

As far as earning potential is concerned, dividends are declared at the pleasure and judgement of the corporate board, and neither common nor preferred stocks are guaranteed dividends. If a dividend is declared, the holders of preferred stocks are paid first, according to the terms of stock issue, in so far as possible.

As you can see, neither type of stock is in any real sense a corporate liability, and since the value of stocks is set by the marketplace, independent of the value of corporate assets, it makes little sense to link the two things. Stocks are assets belonging to the stockholder, but they are not liabilities for the corporation, so there is no reasonable excuse to treat corporations differently from individuals when it comes to taxation.

What about assets that are held abroad?  Well Bunky, they are still assets, and if you want to keep 'em, you've got to count 'em.  If we catch you moving assets offshore to avoid the tax, you heirs will be paying the tax on your assets! Oh, and by the way, what makes you think those foreign governments are going to be willing to protect your ass when we train our guns on 'em?

Now, how much should the tax be?  I have no clue, but I do know how it should be determined.

The tax should result in enough revenue to pay all of the expenses of government.  Period. So, simply add up the net worth of all entities residing or operating in this country, and divide it into the annual budget for operating the federal government.  That budget should not include provisions for borrowing new funds; rather it should include provisions for retiring outstanding debt with all deliberate speed!

Mariner