Are companies such as Amazon, Apple, and Google morally bankrupt because of their attempts to minimize their income tax?

Absolutely not. 
 

There is a deep underlying problem here. And that problem is called ‘The Income Tax’. Taxing income is the worst sort of tax that there is. First, it is impossible to define ‘income’ consistently because it is typically considered to be 'gross income minus expenses'. But what is an expense? In the United States a Realtor can subtract the cost of car travel from his income. But someone who drives to work and back home cannot. What’s fair

It’s so difficult to determine what’s fair that the income tax code in the US is more than 2,000,000 words long. There’s not a single person in the world who understands it. 

The worst thing about it is that it gives almost everyone the idea that just because a person or company earns lots of money, they owe you, me, the country, or the world, money. And why is that? There is no moral reason that they should be taxed just because they earned money. 

One could more easily argue the opposite: those individuals and companies that earn money do so because they are providing a product or service that people want. 

Rather than tax them on their profits, we should be thankful for such companies, because of the jobs and services that they provide. But an income tax punishes them.

Rather than be envious (a sin) that an honest person or company is prosperous, we should be happy that they were rewarded for their efforts to provide us with their service. And then we might be motivated to work harder, earn more money, and enjoy the fruits of our labor. 

I'm glad Apple has a presence in Ireland to try to minimize their income tax. When the income tax rate is 0% for all, I’ll be happy.

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You might ask, “But we need taxes, so what’s a good alternative?” We do need taxes, but they need to be moral taxes. 

And what taxes are moral? Taxes are moral if they are essentially ‘user fees’ for the use of some government provided service. 

For example, a road tax, that charges per mile traveled per weight of a vehicle, is a fair tax. It is a tax that pays for the amount of road used up by a vehicle.

A land tax charged for the private use of land is also a fair tax. Because the owner of land did not create the land, it is appropriate to charge a monthly or yearly land tax, so that the land owner compensates the rest of us for the fact that the owner is given control over that land. 

One last example is a natural resource tax on those companies that extract scarce natural resources from the ground. For example, a company might gain the right to extract bauxite, an ore of aluminum, so that they can refine it and sell the aluminum. This is good because aluminum is a metal we need. And it is appropriate to charge a tax per ton of aluminum extracted, because the company did not create the aluminum. So again, the tax compensates the rest of us for the right to extract a natural resource.

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Let's get rid of the immoral and unworkable income tax, and replace it with taxes that are moral, and that do not discourage the creation of a product or service.

Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas, and a former Professor of Mathematics. The views expressed herein are those of the author. Some of his main interests are in online education, and the reconciliation between science and spirituality. You are welcome to comment upon this blog entry and/or to contact him at tfarage@hotmail.com.

Government based upon Natural Law - (Part 4) - The Advantages of a Natural Resource Tax

Introduction 

In a previous post, "Government based upon Natural Law - (Part 3) - The Income Tax is Bad", the many and various disadvantages to having an income tax were discussed.  In this post, fair, just, and efficient alternatives to the income tax are given. 

What kinds of taxes are just?

What kinds of taxes are fair and just? Fair and just taxes are those that pay for the use of a government-provided service; these are frequently called "user fees".

Actually, many of our current taxes are just.  The gasoline tax is a good example.  The government (federal, state or local) builds and maintains the majority of the roads.  It is fair and just that those who use the roads the most should pay the most for them.   A semi-truck that travels 100,000 miles a year should clearly pay more for the roads than Aunt Pearl who drives to church on Sunday in her Ford Taurus.  Since the amount of gasoline a vehicle uses is proportional to the weight of that vehicle and the distance it travels, gasoline taxes are a relatively fairer way to pay for the roads, (although a road tax based upon the weight of the vehicle and the miles driven would even be better).

The FAA (Federal Aviation Administration) provides another good example of a just tax.  The FAA exists mainly to monitor air traffic and ensure the safety of aircraft. Clearly, the people who fly are the ones who should pay for this.  And this is currently the case, because each airline ticket has attached a small federal tax on it to pay for the FAA.

How about taxing human-caused pollution? By definition, human-caused pollution consists of substances that harm either people or plants or animals. Thus, it would be fair and just to tax a polluter in proportion to the harm caused by the pollutant for which they are responsible. This also results in the beneficial side effect of encouraging less pollution, since creating less pollution means paying less pollution tax. And it so happens that those who are rich usually pollute more for the simple reason that they own more cars, homes, boats, jets, etc. Thus a pollution tax would naturally cost more for those who can most afford to pay it.

(As an aside, the EPA has recently defined carbon dioxide as a pollutant so that they can regulate its emissions.  This was a mistake, since carbon dioxide is essential to life, and is not harmful to humans, plants, or animals.  On the contrary, plants breathe in carbon dioxide, and would die without it, and we would shortly follow suit.  Many think that it is a major contributor to global warming, but that is not a reason to label it  pollutant. Having a CO2 tax will do nothing to prevent global warming, but it will harm the poor here and abroad, because it will increase the price of gasoline and electricity. (But this is the subject for a another post).

Each of the taxes mentioned above, I believe, would fit the definition of fairness of any five-year-old. 

Reasons for Having a Natural-Resource Tax

However, there are some legitimate and constitutional functions of the government for which it is more difficult to assess how we can be fairly taxed to pay for them.  The military, foreign affairs, FBI, police, and fire departments fit into this category.  How can we fairly pay for them?  One way to think about this is to ask, "Who gets more protection from the military or the police or fire departments, Bill Gates or Aunt Pearl?"  While Aunt Pearl only has, say, a small apartment that benefits from military or police protection, Bill Gates gets quite a bit more protection because he owns many vehicles, buildings, and acres of land.  And he would suffer much more loss if we were to be successfully invaded by a foreign power.  The general principle is that those individuals or companies that own the most land or other natural resources should pay the most for these kinds of government services.  Thus, a natural-resource tax (NRT) would be a fair and just tax to be placed upon us.  Such natural resources include land, as well as coal, oil, aluminum and other minerals, etc. 

Another principle concerning natural resources is that they are a product of nature (i.e. our Creator and His Helpers) and thus are not produced by man.  Therefore, the only just way to deal with natural resources is to treat them as the property of the people as a whole.  So, if government wishes to sell or lease land or sell the rights to a company so that it can extract a natural resource, it is appropriate to tax that resource as compensation to the people for allowing the use or extraction of that resource from the commonwealth.

For example, in Alaska, private companies are permitted to extract oil from the ground.  To compensate the people of Alaska for this, Alaska taxes each barrel of oil removed, and that money goes into Alaska's Permanent-Fund Dividend.  These funds are paid to the residents of Alaska each year.  In 2008, the dividend was over $1,000 per person.

For consumable natural resources, the fairest way to apply the NRT is to tax it once—paid for by the company that extracts the resource. Thus, you would not pay a NRT on the aluminum can of Diet Coke you bought. But the company that extracted bauxite (an aluminum ore) would pay a tax to the federal government on each ton of aluminum it extracted. Of course, the cost of this tax would be passed onto the ultimate consumer, so in this sense those who use the most natural resources are those that pay for them.

In the case of land, only the land owner would be taxed, as a monthly land-tax fee. Note that there would be no NRT on the home or buildings on this land, because the NRT would have been paid previously by the companies that extracted the resources needed to build these structures. 

The legitimacy of this tax is based on the fact that no one has created the land. Thus, if a person or company 'owns' land, they have the right to control who is allowed on it. Therefore, they should pay for this right as a land-tax, which is one part of the NRT. 

Why the Natural-Resource Tax is Efficient

On the practical side, all local governments and some state governments have already established such taxes, usually called property taxes.  Thus, it would be fairly easy to have such a federal property/natural-resource tax as a replacement for the income tax (and Social Security/Medicare taxes, as well).  Ownership of property and natural resources such as land, oil wells, coal mines, etc. are already publicly recorded, so there would be no additional intrusion into our lives as a result of this tax.  It would take no tax attorneys, accountants, tax software, or tax forms to do our taxes.  Individuals that own land and companies that own land or extracts natural resources would be taxed regularly, preferably monthly.  Furthermore, property valuations that have already been done at the state or local level could be used at the federal level, thus avoiding another bureaucracy. 

Other Benefits to having a Natural-Resource Tax

There are many other benefits to a natural-resource tax.  For instance, today some of those who are wealthy can often live off tax-sheltered investments and pay virtually no tax.  With an NRT, those who are well-to-do would naturally pay more taxes than those who are not, because they would use more natural resources.  Own five homes?  No problem, but you'll be paying taxes on each lot that the homes are built upon, and would be indirectly paying for the natural resources used to build the homes.

It is important to reiterate that home owners (as well as owners of other buildings) would pay an NRT only on the land that their home sits upon and not upon the building itself.  Thus, in a given subdivision, all lots that are substantially the same would have the same taxable value and the tax assessors would not have to be concerned with the value of the home itself.  This would encourage people to build and maintain nice homes, since they don't have to worry about their taxes going up because of improvements they make.

Also, it would be fair to tax farm land, residential lots, and commercial lots at different rates, given their various uses.

Life would be easier on farmers as well.  They would only be taxed on their land and not on their profit.  Thus they would be encouraged to make the best use of the land they have.  There would be no incentive to not grow crops as there is now in some cases.

Because people naturally want to minimize their taxes, a wonderful side effect of an NRT is that if people want to save on taxes, they only need to consume fewer natural resources. This then encourages the use of more energy-efficient cars, homes, and buildings, and encourages recycling as well. 

The Natural-Resource Tax Dividend

And finally, but importantly, just as with Alaska's Permanent-Fund Dividend that is given to the people of Alaska from oil companies, the federal government could give all citizens and legal residents an NRT Dividend to compensate them for others' use of natural resources.  This would be a fair and just thing to do, and it would be an equitable way to assist the poor (and everyone else).  If done right, this NRT Dividend could replace all subsidies that the government gives out (except for the Health-Care Subsidy and Education Subsidy to be discussed in other posts), saving the taxpayer money from the reduced bureaucracy of administering hundreds of different subsidies.  The amount of this subsidy can be debated, but I'd like for it to be around $1000 per month per adult citizen or permanent resident of the U.S., adjusted each year for inflation.  We could encourage the more prosperous among us to refuse this subsidy, which would help keep the price down. (In order to keep the budget balanced, this amount of this natural resources dividend could be defined as 10% of the Gross Domestic Product - GDP).


Another Benefit of the Natural-Resource Tax Dividend

As time goes on, fewer and fewer low-skilled workers will be needed due to automation. The NRT Dividend will assist those by providing a base income to all. And no matter how much extra money they earn, this Dividend will never be taken away.

Conclusion

In summary, let's replace the income tax and FICA taxes with user fees, taxes on pollution, and a natural-resource tax.  It is the fair and just thing to do, and will create a cleaner environment and a more prosperous nation.

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Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas. The opinions expressed herein are those of the author. You are welcome to comment upon this blog entry and/or to contact him at tfarage@hotmail.com.
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Government Based Upon Natural Law - (Part 3) - The Income Tax is Bad Idea

Unintended Consequences of the Income Tax 

Ever since the IRS was established, people have complained about its abuses. Many bills have been passed in Congress in the hope they will correct some of these abuses. Unfortunately, any fix is doomed to fail.

It is not the IRS but Congress that has established a tax on income. (At least they even did it the right way – we passed a Constitutional Amendment that allowed Congress to tax income. Sadly, this was the one of the worst amendments ever passed). It was Congress that has modified a tax code that initially levied a 1% tax on those with above-average income to a tax code that is over a million words in length and that literally no one understands. The IRS is authorized by Congress to enforce this code and to collect such taxes. Since some people will try to hide income in order to avoid paying income tax, the IRS naturally tries to find these people. Is it a surprise that the IRS has a computer database that stores information about us? Or that they can use this database to check to see if someone's purchases correspond to his or her reported income? Or that they monitor cash deposits over $10,000? Most of us don't like this, and we shouldn't. But it's not the fault of the IRS. The problem is the income tax itself.

Taxing income is bad for a large variety of reasons. It has been estimated that it costs the American people between $200 - $600 billion dollars each year for the tax attorneys, accountants, record keeping, books, software, etc., just to comply with the tax code and minimize their taxes. This does not include the millions of hours we waste each year in tax related activities.

The income tax is arbitrary and frequently counterproductive as far as what deductions are allowed. For instance, you can deduct day care expenses from your income tax, but if a mother chooses to not work outside the home, no deduction is available. Congress uses deductions as a way to encumber us to them and they are loathe to make major changes. There are so many deductions we think we depend on, that we'll vote for whoever will maintain or increase them. Woe is he who runs for office and who wants to eliminate popular deductions. Furthermore, many prosperous individuals pay very little income taxes.

Another issue is that having to report income to the government is an invasion of privacy. Should it really be the government's business how much money we earn, where we earn it, or how far we drive while earning it?

Because of the complexity of the tax code, taxpayers must concern themselves with taxable events, such as selling stock or property. The economy is distorted and less efficient when we make decisions based upon whether or not a taxable event will occur rather than what we think would be a good use for our money.

Income tax law is even at fault for abridging freedom of speech. How can that be? Section 501(c)(3) of the IRS code grants certain not-for-profit organizations, including churches, a status that allows them not to pay income tax. However, it also prohibits such organizations from making political endorsements, and it stipulates that nonprofits should spend no substantial part of their activities in carrying on propaganda, or otherwise attempting to influence legislation. Such organizations may not participate in, or intervene in any political campaign on behalf of or in opposition to any candidate for public office. The IRS has investigated and is still investing churches who they think might be violating 501(c)(3) code. This is frightening to those of us who believe in free speech. The point here is that if there was no income tax, there would be no such IRS code controlling the free speech of non-profit organizations.

Unjustness of the Income Tax

But the biggest reason against a tax on income is that it is unjust.

An income tax is unjust because it has nothing to do with fees charged for services provided by the government. What government service does a person use just because he or she is earning money? To clarify this point, imagine two people who have the same job and earn the same salary during the day. At night, one of them watches TV and the other does marriage counseling out of his home. Is there any rational reason that the second person should pay more taxes that the first? No, because the counselor is certainly not benefiting any more than the TV watcher from government services. Taxing the counselor more than the TV watcher is tantamount to discouraging him or her from counseling. As a matter of fact, the income tax is unjust for the same reasons that the tax on polluters is just. We should tax polluters because of the harm they cause; and this tax discourages them from polluting. We should not tax people for working, since people who work are clearly benefiting our country. Taxing their productivity is precisely the wrong thing to do for such taxes discourage work! 

So let's replace the income tax (and FICA taxes, too). No more tax on wages and salary, no more wasting time, money and human intelligence trying to minimize or avoid paying income taxes and complying with an impossible-to-understand tax code. No more intrusion into our personal lives. No more taxing productivity. No more tax forms to fill out or tax audits to go to.

Of course, the government has many legitimate needs, and there will have to be some kinds of taxes to pay for them. What taxes are fair and just?

You can find out in my next blog entry, "Government based upon Natural Law - (Part 4) -The Natural Resource Tax".

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Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas. The views expressed here are those of the author. You are welcome to comment upon this blog entry and/or to contact him at tfarage@hotmail.com.
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Government Based Upon Natural Law - (Part 13) - Retirement and Social Security

The History and Future of Social Security

Social Security is a poorly planned system that is not economically sound, and is unfunded.  The current Social Security tax rate is 12.5% and this money is used to pay current retirees; thus none of the Social Security taxes paid by an individual are actually invested for that individual.  This is why it is considered unfunded.  Because of this and because of the aging population that is occurring all over the world, Social Security benefits are becoming an increasingly large inhibitor of economic growth, and are taking up a larger and larger share of federal spending. In 2009, it has been estimated that Social Security and Medicare are underfunded by around $50 trillion.  This means that if the benefits remain the same, and the FICA (Social Security and Medicare) tax rate remains the same, an additional $50 trillion would still be needed.  Any company that had such a retirement program would rightly be prosecuted.

To show how badly out-of-balance these programs have become, between 1966 and 2006, Medicare and Social Security grew from 16% of the federal budget to 40%. (Defense spending declined from 43% to 20% of the budget during that period.)  By 2050, spending on Social Security, Medicare, and Medicaid is estimated to take up the entire federal budget, if the budget were to remain the same proportion of Gross Domestic Product (GDP) as it is today.  (This does not even include the interest on the federal debt, which is increasing even more rapidly; it is projected to be three times the entire GDP by 2050.)  Obviously something will have to be done, and it will not be pretty.

Even worse, as of 2010 or so, people are paying more into Social Security than they, on average, will get out of it.  For instance, if a person turned 65 in 2010, they will have paid into Social Security about $588,000 and will only get $555,000 in benefits.  And these figures get worse every year.   Thus, people are getting a negative return on their 'investment'.

Most people are not aware that when Roosevelt and Congress started Social Security, the FICA tax rate was only 2%, and even then only those who earned over the median income paid into it.  Also, it was only intended to supplement one’s retirement.  Now, virtually everyone who works pays into Social Security at a rate of about 12% of income, and it still is only intended to supplement to one’s retirement.  This is truly pitiful and unbecoming of a great country. 

Retirement Planning

In a system based upon personal responsibility, individuals are responsible for their own retirement funds.  It would be wise to invest at least 10% of one’s income into a retirement plan.  I would recommend that children be taught in school the importance of saving for retirement from their very first paycheck.

To make the transition from our current system, we might require individuals to invest this money, although this would still slightly violate the premise of personal responsibility.

(As an aside, another 5% or so should be used to purchase long-term care insurance, and to purchase disability insurance as well.  Surprisingly often, many people will at some point become disabled, and/or need long-term care).

This 10% of one’s income would be invested in one of a number of government-approved investment companies.  Such companies would have to meet certain strict standards, as determined by the government.  These funds would be held in a segregated account in the individual’s name, so that such savings are immune from the solvency of an employer or the investment company.  This is similar to many retirement plans many States use for State employees.

To get an idea of how much money a person could have at retirement, let’s assume that the person works for 40 years, and has a starting salary of $36,000.  Let’s also assume that the person only gets a raise equal to the rate of inflation, so that they are essentially making $36,000 in today’s dollars for their entire working life.  This is a rather conservative assumption, since the median income of men who worked full time in the U.S. in 2007 was about $45,000.  The final assumption is that the entire amount is invested in a stock-index fund that mirrors that entire stock market.  Over any 40-year period since the modern stock market began in 1920, the stock market averaged a gain of at least 10% annually.

Whipping out my financial calculator, and investing $300 monthly (10% of the $3,000 monthly salary) for 40 years, earning 10% per year, gives almost $2 million in today’s dollars.  (The actual amount would be the value of $2 million of today’s dollars 40 years into the future, a much larger figure.)

Once you retire, you can safely take out 5% of this $2 million each year without reducing the principle, so this would give an income of $100,000 per year for the rest of your life!  And you would never have to worry about running out of money.  When you die, the $2 million could be willed to one’s spouse, children, charity, etc.

Imagine how much better this is than the current Social Security system, which takes over 12% of your income, and gives you about $25,000 per year for life at retirement.  This is what happens when government takes charge of your life.

Even better, we would no longer need to save additional money for retirement as we do now.  For instance, I work at the University of Texas at Dallas.  I pay 12.5% of my income (between me and my employer) into Social Security.  In addition, I am required to pay 15.5% into my retirement plan.  Under the plan I gave above, it would only cost 15% of one’s income (which includes long-term care and disability insurance as well as retirement).  That means I’d have an immediate additional 13% of income to spend.  Would you like a 13% raise?

Conclusion

We need to immediately implement a retirement program as described above.  At the same time, we need to phase out the fiscally irresponsible and damaging Social Security program.  But this needs to be done without harming those retired or near retirement.  This will be expensive to do, but will only get more expensive the longer we wait.  It is likely that the best way to make the transition is to require individuals to put 15% of their income into their own retirement/disability program, and yet still pay FICA taxes until almost everyone has their own well-funded retirement program.  This will take decades, but it took us decades to get to where we are now.  As usual, the piper must always be paid.

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Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas. You are welcome to comment upon this blog entry and/or to contact him at tfarage@hotmail.com.

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