Thursday, August 08, 2019

As taxation collection becomes more efficient, the little guy gets hit hardest

Modern “big data” systems are allowing tax authorities to gain full knowledge of sales transactions in their jurisdiction, thus pushing VAT tax collection rates close to 100% on small businessmen and the middle class in general. Meanwhile, Western income tax systems collect steadily less tax from large corporations and the very rich, who use loopholes and tax havens to minimize their tax liability. We have seen this type of tax system before – in the French ancien regime, where the nobility benefited from tax exemptions and the poor paid through the nose. That didn’t end well, and nor will this.

The true nature of the new surveillance and collection techniques is revealed when we realize, according to the Financial Times, that Russia is the global leader in this area. With the new partly-completed Russian system, if you confess you had a coffee at the hotel last night, the system can recognize it from the hotel’s records as one of three cappuccinos, a latte and an American.

The FT’s enthusiasm for this new technology, and its ability to increase tax yields both in Russia and worldwide, is somewhat chilling, it must be said – it’s a little like admiring the professionalism of the new torture techniques being developed by the KGB. It should be noted that the FT freely admits that Russia will never get the full whack of tax out of its oligarchs but hopes to make up the loss by squeezing every last pip out of the modest oranges of small traders and the middle class.

Technologically, I can understand how Big Data techniques enable the world’s tax authorities to improve compliance with VAT, which is already a difficult system to evade except for the very smallest traders. Employees in large companies will rejoice that their neighbor the dodgy plumber can no longer get away with tax evasion; he will be forced to charge VAT [sales tax] on all his sales. Of course, the big-company employee will be less happy when he discovers that the effective cost of plumbing services has risen by 20-25%, as they are no longer available “off the books.”

This increased efficiency of collection through Big Data is less completely shared by income tax systems. Whereas transactions involving large domestic companies are already fully covered, transactions involving foreign parties will only be covered when there is complete seamless cooperation between the tax authorities of the world and that, one hopes is a long way away and, with rising protectionism, becoming more distant. For the poor and the middle class, the income tax system can no doubt be made almost as leak-proof as the VAT system; for the very rich, who can afford to route transactions through dummy companies and tax havens, the coverage is inevitably far lower, and will continue so.

There is a huge injustice in a system where VAT is collected more efficiently than income tax. VAT is an inherently regressive tax; it collects the same percentage from all transactions and hence bears more heavily on the poor, for whom the necessities of life form a substantial part of their expenses. In some systems, such as the United Kingdom, food is exempted from VAT to prevent it falling so heavily on the poor. However, we are informed by the FT that this makes the “Big Data” analysis inefficient; it is hence preferable to include all items in VAT and then make larger welfare payments to the very poor. Naturally this will increase the state’s take, while employing an army of extra bureaucrats and making the economy still more sluggish through public-sector bloat.

Income tax, on the other hand, is generally not collected on the smallest incomes, and is then graduated to higher rates on higher incomes. (The Russian system, with a flat tax at 13%, draconian new methods of collecting VAT and huge unofficial exemptions for Mr. Putin’s most special friends, is truly spectacular in its level of regressiveness.) Hence even if the income tax system were fair and collected the same percentage of tax due from the very rich as from the poor, a tax system which was more effective in collecting VAT than income tax would still be inequitable. To Americans, used to sales taxes of 8% or so at most, this unfairness may not seem extreme, but it must be remembered that EU countries generally levy VAT at rates above 20%, and have discovered that VAT is the simplest tax to increase every time the finance ministry does its sums wrong.

There is an additional problem with a tax system that levies VAT more effectively than income tax, and that is the host of exemptions and dodges in the income tax system available to those with very high incomes. With good accountants, they can structure their earnings to be routed through tax havens. More disgracefully, there are exemptions in the domestic tax code that can be utilized by the very rich but not by those with ordinary incomes.

The most egregious of these is the wide range of exemptions available for charitable contributions. While ordinary people who perhaps tithe to their church incur a real cost to be offset against the tax benefit, the very rich can structure foundations and events in such a way as to benefit personally from the contribution made, as well as deducting it from tax. The Clinton Foundation, for example, appears to have provided a mechanism to route charitable contributions to the Clintons from people who could benefit in some other way from the Clintons’ political connections and offices. It is notable that the Clinton Foundation’s revenues fell to $38 million (against $53 million of expenses) in 2017, compared with $249 million in 2009, Ms. Clinton’s first year as Secretary of State.

We have seen before a system in which all the taxes were paid by the middle classes and the proletariat, while the aristocracy got off scot free – it was the pre-1789 French ancien regime. Under that system, the population was divided into three “estates” – clergy, nobles and commoners. The nobles were exempt from most taxes, the clergy were not only tax-exempt but got to levy tithes themselves, and the commoners bore the vast majority of the state’s tax burden. Add a crazy proto-Keynesian funny-money banking scheme that effectively bankrupted the emerging mercantile class in 1720, and you have an almost perfect recipe for economic and social collapse, which came in 1789.

There were many reasons for the French Revolution (the work of a noisy and destructive intellectual class for half a century – the “trahison des clerques” — was a major contributor) but the ancien regime’s irrational, unfair and hopelessly inefficient tax system was perhaps most to blame.

Needless to say, the combination of “funny money,” which will bankrupt the middle classes through making their savings and pensions worthless, and an irrational and unfair tax system brings us altogether too close for comfort to the pathology of the French ancien regime. The main difference is that while the court of Louis XV was a global all-time high point of art, music, architecture and decoration, the current era is nothing of the kind. “Louis Quinze without the furniture” is how our present era will be remembered by history.

The solution is twofold. First, we must fight against the power of computer systems to know every detail of our lives. Just as we are increasingly resenting Google, Microsoft and Facebook knowing our every movement, so we should resist the ubiquitous prying of the taxman. The fact that the new system is pioneered by Vladimir Putin’s Russia, not a bastion of civil liberties, is sufficient indication that it needs to be fought, not welcomed as the FT would apparently do.

Second, we must remove the current Bourbon-friendly financial system, which by elevating asset prices to the stratosphere while preventing the productivity growth that benefits the wages of ordinary people, is turning the world’s big cities into a noisier version of the Petit Trianon. The advent of Donald Trump and the 2016 Brexit vote ought to be sufficient indication to the global elite that we are onto their self-enriching ways. They may dislike populism, but as France demonstrated, thwarted populists will eventually reach for the guillotine.



Why Welfare Hasn’t Cured Poverty

When President Lyndon Johnson launched his War on Poverty in the 1960s, he pledged to eliminate poverty in America. More than five decades, several welfare programs, and $25 trillion later, the welfare system has utterly failed the poor. The poverty rate remains mostly unchanged, and tens of millions of Americans are dependent on government assistance.

Currently, the United States spends about a trillion dollars a year on 80 different federal, state, and local welfare programs.

About 40 million Americans are considered poor. If we divided that $1 trillion among those 40 million people, we could give each person approximately $25,000 a year, or $100,000 a year for a family of four. We’re clearly spending a lot of money, so why have we not ended poverty?

Our welfare system discourages work. It discourages families from staying together. And it encourages dependence on government. In other words, welfare keeps the poor poor. In many cases, welfare has harmed the very people it was supposed to help, especially children.

Why has this happened?

As welfare benefits grew over the years, they increasingly served as a substitute for a working parent. As the taxpayer became the family breadwinner, that encouraged many men to stop upholding their responsibilities, leaving more and more women as heads of single-parent households.

On the other side of the coin, single mothers were discouraged from marrying the fathers of their children because that reduced their benefits.

Sadly, the cycle continues today as many children who grow up on welfare eventually follow in their parents’ footsteps when they have families of their own. So, what do we do?

First, we have to understand that the problem with the current system is that it discourages work. Work is the fastest and most effective way to get out of poverty and become prosperous.

Welfare programs should be designed to offer temporary help while encouraging able-bodied recipients to find work and become self-reliant.

In states that have implemented time limits and welfare-to-work requirements, recipients have received job training, found jobs, and increased their incomes dramatically. They’ve also dropped off the welfare rolls.

Second, we must continue to create the jobs that help recipients transition to work. As we’ve seen in just the past few years, cutting taxes on individuals and businesses and cutting regulations that hinder business growth are the keys to massive new job creation, high levels of employment, and increased wages for workers.

Most Americans want a social safety net that helps those who can’t help themselves and they want to help the poor find meaningful work.

We’ve learned through decades of experience that throwing more money at poverty doesn’t end it. Temporary assistance, jobs training, growing the economy, and promoting self-sufficiency do.

As we wage the war against poverty for the next generation, let’s fight smarter.



World Bank Study Finds That Deregulation Reduces Extreme Poverty
Regardless of where you might live around the world, if you live on less than $2 a day, you would be considered to be living in extreme poverty.

According to the World Bank, in 2015 about 736 million people around the world, or just under 10 percent of the world’s population, had incomes that put them below this international poverty line. Believe it or not, that is extraordinarily good news because poverty rates around the world have fallen dramatically since 1981 when 42 percent of the world’s population lived on an inflation-adjusted $1.90 or less per day.

World Bank economists studying a portion of this decline in the nine years from 2005 through 2013, when the extreme poverty rate was cut nearly in half from 21 percent to 11 percent, have discovered that much of this reduction in global poverty came about because of deregulation, as governments around the world have been reducing the regulatory burdens they impose on their citizens.

Using panel data for 189 economies from 2005 to 2013, this paper shows that business-friendly regulations are correlated with the poverty headcount at the country level. This association is significant using the World Bank’s Doing Business indicators on getting credit and contract enforcement. The findings suggest that the conduit for poverty reduction is business creation, as a source of new jobs and a manifestation of thriving entrepreneurship.

Regulations can restrict the ability of individuals to find jobs or start businesses because politicians and bureaucrats often write them to benefit the interests of large, established interests, who would rather not have to compete for business in a free market.

This crony socialism benefits these special interests in two ways. First, by using the power of government to impose disproportionately large costs upon their smaller, less politically connected competition, they can keep their smaller competitors from being able to effectively challenge their interests.

Second, in the reduced competition environment that government regulation fosters, they can charge higher prices than they otherwise could, where they only need to provide the politicians and bureaucrats who write the rules a small cut of the action so they can fund their political campaigns to stay in power. Never mind the effect that has on the cost of living in the regimes where the regulations hold sway or the trust that people have in their political and economic institutions.

Historically in much of the world, the yoke of regulatory burden has contributed to the impoverishment of billions. Reducing that burden by lifting the heavy hand of government regulation has successfully diminished extreme poverty around the world in recent decades. It’s a lesson that everyone should learn.



Why Refusing To Fund Medicaid Expansion Is A Huge Win For Taxpayers And The Needy

With the recent announcement that it will not fund partial Medicaid expansions under Obamacare, the Trump administration delivered a big win for the truly needy, able-bodied adults, and taxpayers alike.

Predictably, some Democrats are attacking the move, saying it will destroy lives and the economy. But these are the same lies Democrats have voiced for years every time a lawmaker proposes a reform that will deliver the change the Medicaid program desperately needs. These lies aren’t just untrue — they ignore every piece of relevant research.

The reality is that Medicaid expansion, whether full or partial expansion, is a bad policy move. It threatens resources for the truly needy, pushes hundreds of thousands of able-bodied adults into welfare, and stretches state budgets to their breaking points.

States have consistently underestimated expansion costs and enrollment, enrolling more than twice as many able-bodied adults than predicted and costing taxpayers 76 percent more per enrollee than promised. Medicaid expansion siphons resources away from the people Medicaid was designed to serve — pregnant women, poor children, and those with disabilities, among others — and gives them to adults who are capable of working. It pushes people off private insurance and gives them taxpayer-funded government benefits instead.

And let’s be clear: Packaging it in a shiny new box and calling it “partial expansion” is nothing more than wishful thinking. Medicaid expansion in any form is a massive increase of the welfare state.

That’s why the Trump administration’s announcement that it will not offer Obamacare funding for partial expansions is so important. This will help deter states from wading into the waters of a bad policy that would have immediate negative effects.

States that have tried “creative” ways to expand Medicaid, including Arkansas, Iowa, and New Hampshire, have seen costs skyrocket. In many cases, these “private options” have resulted in cost overruns larger than traditional Medicaid expansion.

Nationally, Medicaid expansion has resulted in cost overruns of more than 157 percent. We’re not talking about a few extra hundred dollars. We’re talking about billions of dollars of debt that means less money for education, public safety, and roads.

Other states have wandered down the road of Medicaid expansion, expecting they could turn around at any moment, only to find out it’s a one-way street. With the real legal likelihood that reversing expansion isn’t possible, Medicaid expansion has become a real-life nightmare version of “Hotel California.”

Still, some continue to ignore these facts and advocate for expansion. Their claims that Medicaid expansion is necessary to help the truly needy couldn’t be a more blatant lie. Medicaid already covers the truly needy. In some states, Medicaid already covers some able-bodied adults, as well. But most able-bodied adults in Medicaid expansion do not work. To be clear, expanding Medicaid does not benefit the truly needy; it threatens the resources they depend on.

The Trump administration’s announcement is a clear signal to states that now is not the time to be expanding welfare. It follows the administration’s continued support for commonsense Medicaid work requirements, which would deliver positive change to the Medicaid program, and efforts to bolster the economy and lower the cost of health care.

Especially with record-low unemployment and the best economy in decades, it’s a good reminder that the best health care doesn’t come from Medicaid. It comes from a job.

The administration deserves praise from taxpayers on both sides of the aisle, who can breathe a sigh of relief that they’ll avoid the boondoggle that is Medicaid expansion. This is a big win for the truly needy, whom Democrats claim they want to help.



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1 comment:

Anonymous said...

The poorest and weakest ALWAYS pay for taxes in the end. Anyone with the power to raise the cost of goods or services will do so to make however much they think they can. Anyone with the power to demand a raise will do so, only the people at the very bottom who can do neither have no way to pass increased costs on to someone else, ergo they end up paying for the cost.

Trickle down works all too well despite the liars claiming it doesn't.