How to simplify the tax system

Considering that yesterday was the day that most Canadians were supposed to have filed their tax returns, I see the usual complaints about it being complicated. With that in mind, here are two possible ways to simplify the tax system. They offer features that should appeal to people from all across the political spectrum.

The first one is known as a “negative income tax“. About four in every five economists (79%) agree (possibly with provisos) that “the government should restructure the welfare system along the lines of a ‘negative income tax.’” The features of a NIT are as follows (I’ve explained them in comments elsewhere, but this is the first time in a post at this blog):

All income, whatever the source, is taxed at a flat rate. This includes incomes that are currently exempt, taxed differently, or deferred, such as capital gains and inheritances. Second, all deductions, whatever the basis, are eliminated. This includes ones like charitable donations, political party donations, or hazardous jobs. The result of this is that everyone with the same nominal income pays the same tax. Third, all welfare systems, like social assistance or unemployment insurance, are eliminated and instead converted into a refundable tax credit of some amount. Each taxpayer subtracts the refund from the income tax they paid. If the result is negative, they get a refund from the government. If the result is positive, they pay the difference to the government.

Let’s use examples to demonstrate. For the sake of this example, we’ll assume that the flat rate is 20%, and that the refund is $5000. There is nothing special about these numbers; they are examples only.

Alice’s T-slips indicate that she earned $20000 last year. She pays 20% of that ($4000) in taxes. She gets a refund of $5000, which means that she actually gets a net $1000 from the government. The same year, Bret earns $25000. He pays 20% of that ($5000) and gets a $5000 refund. Therefore, he actually pays no net taxes and gets no money from the government. The same year, Chris earns $30000. This taxpayer pays 20% of that ($6000) in taxes. After the refund, $1000 is still owing, so this taxpayer actually pays a net tax of $1000.

As can be seen from the examples, by tinkering with the rate or the refund, a guaranteed minimum income can be maintained, and any arbitrary no tax payable point can be chosen. Update (2013–05–05): And it goes without saying that certain “special circumstances” can be given a slightly different refund, such as dependents or disability.

The negative income tax system has a number of significant advantages over the current regime (after the jump). In no particular order:

Something that should happen, but won’t

This will probably one of the very few times I might have something nice to say about Republican obstructionism. ThinkProgress reports (my emphasis):

House Republicans let the five-year farm bill expire at the end of September without a new law to replace the massive measure covering billions of dollars in programs, including food stamps and agriculture subsidies….

I’m against cutting food stamps, but in the unlikely event that this obstructionism results in the end of American agricultural subsidies I will be really glad. Agricultural subsidies are one of the worst possible things a government can do with its money. For the most part, these line the pockets of agribusinesses and cattle barons. Contrary to popular believe, only a minute fraction of agricultural subsidies go to family farmers. The chief effect of these unnecessary subsidies is to distort the food market, mostly by artificially lowering prices. The effect is to give an income to agribusiness that the free market won’t (or can’t). In almost every other circumstance, wingnuts would be screaming “SOCIALISM” until their vocal cords broke. But in this case, we usually end up with bipartisan agreement to squander government money. It should come as no surprise that an overwhelming majority of economists agree that agricultural subsidies should be eliminated.

In many cases, these market distortions skew people’s food choices, especially towards unhealthy foods. Elimination of agricultural subsidies would hence improve public health.

Eliminating agricultural subsidies has an additional benefit. Agriculture is one of the few areas where poor countries have a comparative advantage. Eliminating agricultural subsidies (in all countries, not just the US) would allow farmers in those countries to make more money, causing economic growth and development. This is exactly what foreign aid is supposed to do. Therefore, if agricultural subsidies are eliminated, we will get most if the advantages of giving foreign aid, without any of the costs. Indeed, since eliminating these subsidies would have much of the effect as giving aid, we could even cut foreign aid, therefore saving more money.

We could get billions in revenue

A new study has determined that more than 366,000 British Columbians use marijuana, with the market value of their purchases being about half a billion dollars a year, According to the study, taxing it (the same as with alcohol or cigarettes) would bring in billions in new revenue (links removed):

The researchers also point to data from Washington, which recently held a successful referendum to legalize pot, that suggests the same number of pot smokers in that state could bring in $2.5 billion in taxes over five years in a regulated system.

This is one of the reasons why marijuana should be legalized. It would free up money spent prosecuting and incarcerating non–violent criminals who harm no one other than themselves. It is especially important, as the legalization in Washington state could cause a grey market of British Columbians going there to get their marijuana. Completely legalizing it here would prevent such an event. As it stands, a potential boost to ours (and more diffusely, the Canadian economy) is being lost and undercut.

And this study shows yet again why socons should never be allowed to control the public purse. Given the chance, they’ll always deny revenue and blow the budget on puritanism, going after people for doing something they probably do themselves.

Why a carbon tax is the way to go

An editorial in the New York Times got me thinking about why a carbon tax is a better way to fight global warming and climate change than either cap–and–trade or efficiency regulations.

Here are several reasons I can think of:

• Carbon taxes always provide an incentive to pollute less and use less energy. Even if you cut carbon emissions by half, you still are paying taxes for the carbon you do emit, and therefore still have an incentive to eliminate it. Compare this with efficiency regulations, where someone has no incentive to reduce energy use once the regulation is met. In addition, all too often regulations are designed by businesses themselves, so as to prevent competition (rent seeking). Also compare this with cap–and–trade, where a source of carbon credits may well allow heavy polluters to continue, just because they have deep pockets. A lot of money will not allow someone to avoid paying a carbon tax.
• Carbon taxes drive both individuals and companies to use less energy. Cap–and–trade is usually done by businesses, and efficiency regulations only impact new products (unless old ones are mandated to be destroyed).
• According to the editorial, a carbon tax is far cheaper than efficiency standards once a global view of costs is taken into account.
• Carbon taxes (especially those on fuel) make people drive less and live in denser environments. On a per capita basis, cities are more energy–efficient than suburbs. For example, recycling and public transit are more feasible in densely–populated areas. And people who drive less are less sedentary and therefore healthier.
• It is possible that cap–and–trade and efficiency standards alone will not do enough to mitigate climate change.
• A carbon tax is easier to offset as part of a green tax shift than other methods. It can even lead to lower tax levels overall, such as here in British Columbia (cite).
• Efficiency improvements are subject to the rebound effect, where the decreased cost of using a resource partially offsets gains from using it more efficiently. A carbon tax does not generate perverse incentives.
• A carbon tax is easier to adjust. If too many pollution permits are issued, cap–and–trade will not have much of an effect since it is harder to eliminate privately–owned pollution permits.
• Many countries that export oil are rentier states, which means that they earn most of their revenue from natural resource royalties. Those royalties pay for oppressive paramilitary forces that enforce authoritarianism in those countries. A carbon tax will eventually reduce revenues received by those countries, improving freedom there and those countries’ human rights situations.

Hence, for all of the above reasons, a carbon tax is the way to go. My preferred offset is to payroll taxes. But such has virtually no chance of being enacted in the United States (a better chance in Canada [I hope]), due to the extreme polarization and total irrationality (and far worse!) of a number of politicians there. And since climate change is a major danger, Christian conservatism’s climate change denialism makes it, in the long run, the world’s most dangerous ideology.

Tomorrow is more like today than you think

I came across this post at Dispatches from the Culture wars. It got me thinking, and eventually my mind thought about previous predictions of what the 2010′s would be like. This led me to realize that the past is more like the present than you think. Indeed, if you predicted that the world thirty years from now would be exactly like today, you probably wouldn’t do too badly.

To illustrate, let’s pretend that some futurologist, Ima P. Rofet, writing (to use round year numbers) that the year 2010 will be exactly like 1980. Let’s see what predictions our prognosticator would have been correct on (not an exhaustive list):

• Politics and international relations:
  • There will be two major political parties in the United States, the Democratic and the Republican. There will be other parties, but only these two will have a realistic chance of taking power.
  • Russia will be governed as an authoritarian state.
  • Nuclear weapons will never have been used in warfare since Nagasaki.
  • The conflict in the Middle East will have been unresolved.
  • There will be no peace treaty in Korea.
  • There will have been no female president of the United States.
  • Oil will give the Middle East disproportionate influence on world affairs.
  • Terrorism will influence some countries foreign policy.
  • The United Nations will not be a world government.
• Culture and society
  • Television, movies, and recorded music will be popular forms of entertainment.
  • Classical music will be important in music education and most people will be exposed to it in movie and television soundtracks, but it will only retain niche popularity.
  • Most people in the western world will live in cities and suburbs.
  • An appreciable number of people will have used marijuana, even if it is nominally illegal.
  • Most people will travel by car or airplane and, in densely–populated cities, train or other public transport.
  • Many people will live in poverty and lack adequate access to food, water, and medicine.
  • Many women will still be oppressed and be second–class citizens, even if they nominally have equal rights with men.

Sequel of the random stuff

In no particular order:

• Same–sex marriage was illegal in North Carolina, but the people there voted to ban it again.
  • The last time North Carolina amended their constitution to concern marriage was to ban interracial marriage (via).
• If it was legalized, same–sex marriage could provide a one billion dollar boost to the American budget each year for a decade. Marriage equality, it’s good for the economy!
• Teh cute.
• Yet another misogynistic fundamentalist pastor. He’s against women voting and blames them for everything. No surprise there.
• I’ve often said that complementarianism is really hierarchicalism. And now (via) Rachel Held Evans reports that complementarianism is losing ground. Good.
  • Evans also quotes someone who writes that (my emphasis) “For millennia, followers of God have practiced what used to be called patriarchy and is now called complementarianism.” Well, at least he’s honest.

Book Review: World on Fire

Recently, I picked up World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability (Doubleday 2003) by Yale law professor Amy Chua for a reread.

Chua’s basic thesis is that the sort of austere economic policy (such as no safety net, etc.) promoted by certain organizations and entities (free markets), in conjunctions with democracy (universal suffrage), when certain conditions arise, leads to a situation similar to a powder keg ready to blow up. The certain conditions are the presence of an ethnic minority that is disproportionately wealthy and economically successful. Chua calls them “market–dominant minorities”. When the previously–mentioned economic policies are implemented, any economic benefits that arise flow exclusively to the market–dominant minority. In a democracy, a demagogue arises and riles up the poor majority against the minority, using this to come to power. The result can therefore be a backlash against the democracy (where the minority takes over, sometimes with the help of a majority dictator), a backlash against capitalism/markets (nationalization, expropriation, and so on), or a backlash against the market–dominant minority itself (leading to genocide and the like).

Chua provides several examples to support her thesis. Some examples seem more supported by her evidence than others. For example, she uses the example of her own people (ethnic Chinese in the Philippines), including a discussion of a relative’s murder that was motivated by ethnic resentment. On the other hand, several examples seem like she is stretching her thesis. One example she used was the Russian oligarchs. As a number of them were Jewish, she attributes (qualifying her conclusion that it is only a partial explanation) anti–Semitism in Russia to resentment of the oligarchs. But anti–Semitism in Russia goes back way before the oligarchs arose, and it remains after many oligarchs have been weakened. For example, in the nineteenth century, members of the intellectual class routinely used anti–Semitic terms in correspondence, and agents in the czarist secret police plagiarized a novel to create that hoax, the Protocols of the Elders of Zion. For those and analogous reasons, I did not find all of her examples convincing.

To the extent to which Chua’s thesis holds, she suggests mitigating both halves of the causation equation; more redistribution and social safety net, a slower democratization process. I’m not sure a slower democratization process is necessarily the best way to go. Democracies are more peaceful than non–democracies, and hybrid (between autocratic and democratic) regimes are the least peaceful of all. Hence, there could well be a possibility of a long period of democratic transition blowing up spectacularly. And if that happens no one will be better off.

And I am not sure that demagogic backlashes even require there to be a wealthy, market–dominant minority. (Although Chua pretty conclusively demonstrates that they certainly help cause them, at least). For example, consider the United States in the 1930s, during the Great Depression. One of the challengers to Roosevelt was Louisiana Senator and Governor Huey “Kingfish” Long. He came up with the political platform of “Share Our Wealth”. As its name implies, it was an explicitly redistributionist movement. This was popular enough that, if Long ran in the 1936 election, he would have split enough votes to swing the election to the Republicans. And what did Roosevelt do in response to this left–wing threat? He adopted some of their rhetoric and co–opted enough of their leaders to defuse the threat enough so that he would win the election. The net result of this was that there was no socialist of communist revolution. In other words, FDR saved capitalism.

The key point to draw from the above is that it is entirely possible to have a (nascent) backlash against capitalism, where there is no group that can be considered a market–dominant minority. And another conclusion to draw from this is that the typical wingnut response of “resort to private charity” does not work. In many of the countries where such backlashes have occurred, private charity has been ineffective at preventing backlashes. The fact that several international organizations (in some cases, used to) be against almost any sort of social programs will inevitably lead to the backlashes Chua describes. Hence, actual government programs ought to be tried. Even if it fails to result in some sort of egalitarian utopia it would likely do enough to allay resentment and kill any backlashes. Chua provides examples to support this. And anyone who advocates policies like no safety nets, no redistribution etc. is only asking for trouble and is taking a step on the royal road to socialism (or worse). It’s a complete fantasy that people will continually cheer on their plutocratic overlords and gleefully accept forever having no future. Eventually something will give.

I explicitly decline to firmly recommend or not recommend this book. World on Fire is a much better and more impactful book if the qualifications I mentioned above are kept in mind. If that is done so it will be a good read.

Cover picture from Wikipedia. This post is based in part on a comment I made at Dead Wild Roses.