Poor Richard's Junto: management science, entrepreneurship, business ownership, management

This blog dares leaders to do better. We encourage those managers with the wits to change and we exchange ideas in management science to mutual benefit and personal development. This is the place for those leaders who admonish folly and hubris and yet are devoted to continuous mental development, entrepreneurship, business ownership, & business management. As such, let this be a forum for thought leaders, CEOs, and business owners as Ben Franklin once did with the Junto and his almanac.

If two men exchange dollars; each man stands to gain a dollar. However, let these men exchange ideas, and each stands to gain a fortune.

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Sunday, July 10, 2011

A Better Way to Tax

I have some thoughts for a few guiding principles that we could use to do a better job taxing ourselves. For context, I began with two perspectives presently playing out in the battle between conservatives and liberals locked in debate over raising the Nation’s debt limit. With this context in mind, I then cover three ideas to improve our federal income tax system.

I heard of some conservative university students conducting an experiment to make a point regarding taxation and the redistribution of wealth. These students approached other students on their campus and proposed that those with a 4.0 GPA should consider giving up a few points to those with lower GPAs to help their disadvantaged colleagues prosper as well. Naturally, those with high GPAs were reticent to give up something they worked so hard for. The GPA, like money, represented a measure of achievement and reward. To the high GPA students, it didn’t seem fair to have it redistributed to those who may have been less diligent in their studies. The experiment is a great example of Republican and Libertarian views on taxation and the injustice of taxing the wealthy more than those less well off.

Conversely, some liberals might point to the parable of the Good Samaritan (the Samaritan helped a beaten Jew on the side of the road as others just passed by) as a cornerstone to the values that our laws and nation should exemplify.  As a moral people and values based society, much of our Country feels that the wealthy shouldn’t squander money on excessively material objects. Instead, this excessive wealth should help the needy and that such a redistribution serves the long-term social interests of a productive society.

Both conservative and liberal views are compelling and logical. Thus Boehner and Obama have been rather deadlocked. However, as Ben Franklin suggested, when one thinks they are stuck between two options, there often exists a third just out of view which likely proves the best alternative. Along these lines, I think there are three elements missing from the debate. One is the utility of the dollar, the second is the joy of giving, and the third is the pride of citizenship.

Utility of the dollar basically states that the satisfaction of a starving person eating a fast food hamburger is exponentially more than a well fed person eating their fifth $35 burger for the evening.  More so than a GPA, fixed to a 4 point scale, money can have a much wider degree of variability. For example, someone making 1 million dollars may have limited gratification if they are already worth 50 billion.  A flat tax of 20% on $5,000 or $20,000 of monthly income may appear fair as everyone pays the same percent.   On paper, one might think that since they are both at 20% the burden is the same because the person with less income is correspondingly paying less in total dollars.  However in practice, if a gallon of milk and pound of steak cost the same for both tax payers than it’s easy to figure out that one will have more discretionary income after the basic cost of living than the other one.  Each of us has a basic cost of food, shelter, clothing, etc that we can’t get around. Above the cost of survival; utility starts decreasing in a broad sense.  Add to this, the possibility that the tax payer with the $5,000 income may have less in savings, more kids, an expensive congenital disorder, etc. then clearly the lower income person has a substantially greater burden paying the same 20% rate than the wealthier person or, vice a versa in some cases. My thought is that taxation could be based off a flat rate that is then adjusted by a capacity to pay determined from a combination of discretionary income (above a basic household size cost of living) and aggregate savings. The premise is to acknowledge the utility of the dollar and a basic cost of survival which is really a more effective flat tax then an arbitrary percentage universally applied.

My second idea, the joy of giving, centers on all of the social programs that proponents of redistribution of wealth hold dear. As an overarching theme, my personal belief is that government, where possible, should orchestrate initiatives rather than administer programs due to its track record of mismanagement and overspending.  However, that aside, I want to see people in our society helped. I want to know that those who seek help can find options.  I know that available aid and a good store shelter leads to a safer and more empathetic society without the perils brought on by desperation that we can see in third world countries.  But, why have a system that penalizes citizens by taking money from the wealthy to give to the poor?  Why let government thru a punitive tax system steal the joy and education to be found in voluntarily giving to others? Redistribution is not inherently bad – after all it’s what charity is. What seems unjust is to force charity from high income earners (but not necessarily high net worth) to give to an irresponsible government and then deny society the experience and personal responsibility of giving.  So, why not make a system so wonderfully incentivized that any truly wealthy person would be simply foolish not contribute? Let’s suppose the income tax (utility adjusted as proposed) on a billionaire making 20 million a year in income was 60%. Next, let’s say the billionaire through a combined donation to a qualified venture philanthropy fund and entrepreneurial start-up investment would get them down to a 20% effective tax rate.  And, for making the wise decision to cut taxes, let’s say this individual was overwhelmed with ceremony and recognition by public figures for their good deeds.  I’d bet that billionaire would exhibit wise behavior and even enjoy it. And, the government wouldn't have to step in with its own administered “stimulus”. If we want the wealthy to behave with empathy and charity than we can encourage it or, just take the money – but, which one would you think is likely to have a sustained and exponentially positive effect? 

My third idea is that pride in citizenship be used as a means to growing our tax revenue. Ben Franklin was said to have been opposed to making voting available for everyone – he wanted just property owners to have the right. I suppose the thought was based on concern of “rule by mob” (or those who were not stakeholders); the reason we have a Republic and not just a Democracy in America.  I’m not sure I agree with Ben’s solution regarding property owners but, I do think there is merit to having to earn citizenship and voting rights.  We have the greatest Country on Earth, yet those of us born here often take our membership for granted.  And, those not born here often see the “city on a shining hill” with a big locked gate and “do not enter” sign.  I think there should be some degree of “membership” in society for those born here, nothing drastic but, I don’t want some active and repeat criminal to have the same rights and benefits as the responsible members of society. Maybe a call to serve (military, science, social, etc) as a rite of passage would be a good idea.  Having something to aspire to and work for creates value.  For those not born here, why would we not create a system to import inexpensive and fairly treated labor here (vs. jobs going to overseas) that could earn their way to citizenship? Why would we not take the wealthy, the business owners, and the educated that could afford citizenship and charge a good amount for it (in addition to service)?  We have the best product in the world and we don’t seem to want to “promote” it.  Yet, we need growth, we need competitive labor, we need a system to stop costly and dangerous illegal immigration, and we need our national pride back.  Idealistically, we should cut the check to pay our taxes ourselves with a smile because we know the great value we’re getting for our money.  We may not get that far but, to get a step closer I propose that we obtain labor and money from a truly first class expedient immigration system, that we get engaged “stakeholders” as citizens, and that we cut government spending (without breaking promises to Social Security etc. where the elderly wouldn’t be able to adjust).  Most importantly, as a strategy to really grow tax revenues without raising an arbitrary percentage that reduces supply of capital and incentive, we should focus on growing GNP thru expanding our competitive workforce with an immigration mix of low-cost labor and highly educated and/or wealthy stakeholders; all of which also happen to be consumers that need housing.

Thank you for your kind and thoughtful consideration of the concepts of utility of the dollar, the joy of giving, and the and the pride of citizenship. I share these ideas for no other reason than to make a contribution. Please share, promote, and debate the ideas to evolve the dialogue.


  1. Really- nice blog created about tax ideas....
    Change Management

  2. When I read your article what comes across to me is sincerity. I think you are on the correct path to a common sense based tax system. Let me give some food for thought.

    A fine is a levy on doing something bad. A tax is a levy on doing something good. The founding fathers of capitalism, the French Physiocrats (originators of Laissez Faire, Laissez Passer) along with Adam Smith (who went to France and learned from the Physiocrats) provided a Tax system based on land values. Not fines nor taxes.

    They agreed when government taxes:

    1)It should bear as lightly as possible on production -- least impeding the growth of the general fund, from which taxes must be paid and the community maintained.

    2)It should be easily and cheaply collected, and it should fall as directly as possible on the ultimate payers -- taking as little as possible from the people beyond what it yields the government.

    3)It should be certain -- offering the least opportunity for abuse and corruption, and the least temptation for evasion.

    4)It should bear equally -- giving no one an advantage, nor putting another at a disadvantage.

    They reasoned a levy on land values did not harm the industry of the people. They were correct in their reasoning. There is no disincentive to the economy when revenue is based on land values. It is not a tax but a user fee.

    Land value is a wealth transfer from the community to a site location. When we pay taxes for roads, bridges, transit systems, schools, police, courts, sewers, etc. land values increase. When people are productive in the economy (silicon valley) this also adds to land values.

    The landlord provides nothing. The system we now have attacks productive human effort. What we now argue over is whose effort should pay up.The republicans want wage and sales taxes while the democrats want taxes on businesses. Both are wrong. When you tax land you do not get less land. Actually, more land is put to productive use.

    The original Articles of Confederation had land taxation. We did it then and we can do it again. If you are interested go to www.henrygeorge.org and try the various links.

  3. Thanks Ryan. Note that transferrring GPA points wouldn't ultimately make the recipients more successful, because they wouldn't process the corresponding knowledge, skills, discipline,etc. Correspondingly, transferring wealth does little to really help people in the long-term. Thus the idea of teaching someone to fish rather than giving them fish, although there r times when this is appropriate as a short-term solution, especially when part of a long-term "help them help themselves" plan. As u indicated, the best solution is to incentivize desired behaviors and disincentivize undesireable behaviors. I also, don't think that non-tax payers should be able to vote. Voters living on tax payer dollars have a major conflict of interest.

    Best, Mike


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