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Tax Due Warning - A single, angled spotlight reveals a...

A common thief does not typically act with greater force or stealth.

I would guess like me you have tried to get your head around the taxes you pay without much success.

With the rising inequality concerns maybe it time you did as taxation has a future that will affect you and your love ones.

But where, and in what guise? Let’s have a look.

Slow population growth is depressing income growth, which leads to higher taxes.

Virtually every government could pay off its debts by taxing wealth.

Luckily for the rich such taxes are often politically unacceptable.

In other words, fiscal problems are best regarded as problems of dysfunctional governance by governments that are selling off state assets into Privatization until there will not be enough national wealth to pay off any debts.

Anyway for the purpose of this post it is essential that we try to appreciate the difference between real taxes and current (or nominal) taxes.

The real tax over any significant period is the level of government spending in relation to national output. The higher public spending as a percentage of GDP, the higher the real tax. That amount must in time be transferred from private to public hands—be it now or later.

The current tax, for its part, is the amount actually paid to a government in any given period, and is almost never equal to the real tax.

Got it. No. Shame on you. Try again.

A current tax lower than the real tax (that is, a public deficit) implies higher current taxes in the future, while a current tax higher than the real
tax (a public surplus—a phenomenon observable in only three of the past 50 years) implies lower current taxes in the future.

Now. You have.

So the stated political orientation of the administration presiding over a gap between current and real taxation—be it social democratic or of the supply side right—does not matter.

Because deferred taxes are simply claims against the public.

There are two ways to meet these claims:

1) higher current taxes in some future period or 2) inflating the claims away.

Inflation, which generally induces a shift of wealth from private to public hands, is the functional equivalent of a tax increase. These relations do not follow from any policy or ideology, but are purely matters of arithmetic.

Any clearer.? It’s of no matter.

Because what appears on the surface to be public debate over the appropriate level of taxation—and this goes on all the time—is in fact political maneuver by interested constituencies to get out of the line of fire of inevitable tax increases while deflecting the higher taxes onto someone else.

Now you have.

Different taxes do have different allocative effects.

Future taxes will perpetuate or even compound the misallocative effects of the present tax system.

Taxes in the next ten years, even though considerably higher than today’s, will nonetheless be insufficient, in all likelihood, to fill the revenue gap that opened wide during the last ten.

Inflation is all that remains to look forward to.

For a governments it will be like letting go to the pull of gravity.

Most wealth has already been subjected to income and other taxes, perhaps multiple times. It doesn’t seem fair to the holders of that wealth to suddenly pay additional taxes on assets that they thought were in the clear, and such taxes would signal that previous policy has failed.

It seems to me that on both ends of the political spectrum there is remarkably little concern with the allocative effects of taxation in its various forms.

However it matters how you tax if we are to halt the growing inequality in our life styles as over the next 10 to 15 years current taxes will increase mightily. Why?  Because our own consumption, fueled by debt, outstripped our incomes in recent years, while foreign savers, predominantly from Asia/China/and the Far East financed the bulk of new investment in our economies.

Why aren’t foreign savers put off by double tax on capital income?

The answer is that they would be, if they paid it. But they don’t.

Another reason it that the massive fiscal stimulus that have been pumped into our economies by Quantitative easing and the selling off of state Assets (To Sovereign Wealth Funds, see previous posts) will in their wake pull up current taxes or spread inflation, another form of higher taxation —whether consumers or savers, suppliers of capital or suppliers of labor, or both in a maelstrom of inflation.

When income from labor is saved rather than consumed, the income from that saving (now capital income, in economic terms) is taxed again.

This “second” tax on saving makes the tax cost of capital income greater than that of labor income spent on immediate consumption. The two separate layers of income tax imposed on corporate earnings and then again on dividends distributed to shareholders actually imply a third tax on corporate profits. This goes far toward explaining why we don’t save.

What can be done:

What is needed is a shift in the burden of taxation away from capital income and onto consumption.  In short, some form of consumption tax should be the predominant national tax.

The problem with a value-added tax is that people can to a considerable extent earn their incomes in one tax environment and spend them (either at retail on vacation or wholesale in retirement) in a different (and VAT-free) environment, so that ultimately both their incomes and their consumption are untaxed.

Value-added taxes and payroll taxes are analogous to an income tax that is imposed territorialy, whereas a tax on consumed income is imposed on worldwide income, minus the component of saving, and is therefore a tax on the worldwide consumption of a taxpayer.

(Turnover-type taxes such as sales taxes and value-added taxes are widely and correctly understood as consumption taxes. So is any tax that does not reach capital income.)

A tax on consumed income is an income tax in which personal saving is deducible from taxable income, thus excluding capital income and leaving only the amount of income that is consumed subject to current taxation.

In stead of contemplating such a tax in many EU Member States we got political, academic and public debate on wealth taxation which always gains traction in times of strained public finances.

The question is who ultimately bears the burden of wealth taxation (tax incidence)

The existence of a blurry frontier between capital and labor, income for the high-income earners, the role of transparency and automatic exchange of information in facilitating tax compliance and the serious political economy constraints makes any form of wealth tax unworkable.

Just imagine the difficulty to evaluate one’s wealth and the administrative costs along with the risks of tax evasion and capital flight.

Many people have become distressed about their taxes because they have been led to believe that the property they acquired would not he taxed to the extent that it has been. Accordingly, they have paid prices for the property that have reflected those expectations. They may be the reasons they are “mad as hell” simply because they feel that they have been misled by their government and that they not only have had to give up taxes but also have had to give up wealth in terms of reduced market prices for their property.

Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.

Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production.

Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and but also some good news — that relative peace and capital gains have preserved wealth up to now.

Virtual economies pose a real-world tax compliance risk, even if citizens aren’t purposefully shielding their money.

No one has a clue on how to manage the Planet. The only way forward is a consumption tax regime.