Thinking Unconstrained

Examining the world with a critical eye. Topics span a wide range including but not limited to, observations, insights, problems, solutions, proposals, and hypothetical scenarios.
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By G.I. Bergstein
Taxation is often seen as a necessary component in any functioning society, regardless of the actual political or administrative structure that oversees its implementation. In a world that tends to digitize anything and everything that can be digitized, it requires very little cognitive leap to suggest that taxation can also be digitized. In fact this has already happened as incomes tax is automatically withheld from paychecks and goes straight to the tax authorities in digitized form. In the US, many people use softwares and efiling to submit their tax returns every year. Once this pool of money is put in the hands of the authorities, it is up to them to allocate how it is to be used in state budgets and projects. This makes sense in a world where representatives and authorities are needed to centralize and oversee the welfare of the state and its interests. However, let us imagine for a moment what would happen if the individual tax payer had the right and the means to control where and how his tax was used. Or that he had a direct say in how taxation should be implemented in his society. What would that look like?

Well, let us envisage an implementation using our current computing technology. A computerized system using the internet from a technical point of view would not be difficult to develop, as many of its parts and problems have already been solved by other applications and platforms. A web interface with a personal account that can be accessed like an investment portfolio or a bank account is what one would expect to see. Let us say that a person's tax money (at least a certain allowed percentage subject to government permissions) can be directly assigned to various projects by the account holder, as one would do by picking company stocks on the open market. These projects are proposed and backed by government officials, and they are set to compete with one another as private companies do. For the tax holder, he can allocate his money to the projects that he believes the tax money should go to. If in the instance where the tax holder does not care and does not allocate his funds, then a suitable default allocation is made (perhaps based on a set of preferences to auto-allocate). Such a system gives direct transparency to the tax payer on where his money is going. If he is more inclined to support education than infrastructure then he can make that allocation. Additionally, if the money trail itself can be tracked like a package (perhaps blockchain is applicable here), then it should provide even more transparency to the taxpayer and decrease the likelihood of money laundering and shady reallocations further downstream.

The framework would also allow for campaigns by public and private groups to support certain projects and to convince people to change their allocations. I.e. advertisements to win your tax money. This can be used to foster competition within government contracts and improve quality. It can also let the taxpayers interact and bring focus to important issues such as local infrastructure needs and EPA violations. Therefore it has the fluidity and the functional means of allocating funding for things that directly matter to the tax payers, rather than allowing representatives to interpret and spend that money as they deem fit. However it's important to note that the implementation of such a system and the degree of freedom allowed for each tax payer will be dependent on the maturity and the culture of the society, in much the same way how governments differ for different societies, even though they may all like to refer to themselves as "democratic". But it does have the potential of decentralizing the echelons of power by taking direct control of government funding and projects. Therefore in its most progressive form, it would essentially be a direct democracy.

Conversely, such a system in all likelihood would be incompatible with existing power structures as it would create more problems than solve them. Especially when you consider that all nations run a deficit, hence uses a portion of the tax money to pay down the national dept, or that taxes are used to fund projects that may not be popular with the general public but are deemed necessary to the insiders. Letting the average tax payer make these decisions for themselves might incur national security problems. Rather my personal take is that this is suitable for societies that value transparency in governance, composed of a well educated and emotionally mature population who value individual freedom and social cohesion.
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By Sybilla
How dare you suggest that the people have a right to know where their money is spent by the government! Such treachery and reckless thoughts are inexcusable! Next you'll be suggesting that the people have a right to set how much they're taxed or that the wealthy philanthropists pay their fare share instead of funneling their gains to tax-exempt charities and other "off-the-books but perfectly legal" entities and accounts! Or maybe you'd like to suggest that the people have a right to rule themselves? What absurdities! Have you no shame?

While I'd like to continue the sarcasm for another paragraph or two, I think I've made my point quite clear so I'll stop here before this mild vinegar turns negative on the pH scale. But to suggest that the people have direct control over taxation is essentially saying that the people would be the boss of the government. They would have "power" over government spending, and such a system can be very unstable if everyone's allowed to allocate their tax funds that would only personally benefit them (because that's what people do). Oftentimes the "insiders" (i.e. regular public sector employees specialized in their own departments) know more about how things work than regular folks. Finding a middle ground or a sweet spot would be the right way to implement this rather than screaming for direct democracy and resulting in a failed state six months down the road. In other words, the people must be smart and competent bosses in charge of smart and capable employees. They need to work together to succeed as a team.

This doesn't mean however that the people will have all the power. Far from it. Republics are built on the foundational premise that the mob has the "power" by the means of democratic elections and the threat of non-compliance and violence. They would now also have the power to control spending directly rather than relying on representatives. But those representatives would still have the means of manipulating the structures and tools available to them. Since people in general have voted in politicians that (patronizingly or naively) promise and tell their constituents what they want to hear rather than what they need, they usually get the leadership that they deserve, in both complementary and pitiful terms. It would indeed be a typical political move of Napoleonic politicians to centralize their power by presenting ultimatums and solutions that would benefit their positions rather than the people they supposedly represent. In such a scenario for example, the share of directly allocatable tax for individuals would shift to be negligible or there would be some other measure to wrest the power away from the individual tax payer. But that's the nature of power, and unfortunately it's part of the human experience to be susceptible to such forces. Hopefully a well-functioning system would prevent such corruptions from rearing their ugly heads in the first place.
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By Candideto
The vast majority of government spending supposedly goes to healthcare, welfare, defense, and interest payments on debt. Everything else is pretty much small potatoes by comparison. Since these are mandatory, any individual tax allocation made would go to those small potato projects and would only have a marginal effect on the overall spending. Note that technically speaking, defense isn't mandatory but it effectively is for any state that has a large military and a vested interest in keeping it that way. The strange one in that list however is the interest payment on the national debt. Apparently government spending almost always exceeds the amount that is collected, and therefore there's always a deficit. Whether the national debt is supposed to be eventually paid off or if it's more convenient to have it as part of a convoluted accounting arrangement is an interesting question to explore. Government securities are also traded on the open market using this setup and it's intimately tied to the subject of money supply and currency regulation by central banks. So unless this aspect is well understood, it's not something that a regular Joe should be able to control with his tax allotment.

As for welfare and healthcare payments, these are major commitments by the government to ensure a social net and a functioning health service for the entire nation. For the US, these two take up around two thirds of all spending. If they can be reduced by improving operational efficiencies or by some other scalable measures then that should have a large impact in reducing the overall expenditure. The giant pink elephant in this room is quite obvious though. People in general live longer these days, but with expensive chronic medical conditions. The overall demographic is older as well since people have had less children and the young people these days are not even bothering to procreate. Employment among the young are low and the wages have remained stagnant for decades, while inflation has risen to new heights at just about everywhere. Therefore in order to pay for the ballooning welfare and soaring healthcare costs, the government needs to get into more debt. There simply isn't enough tax to pay for it all. And the only portion of that debt that is paid in the yearly spending is just on the interest and not on the principle. Surely this arrangement makes no sense to anyone who deals with personal finances and budgeting. Perhaps the insiders are all trying to pass the buck to the next guy, the poor patsy set up for the fall holding the bill in his hands with his "friends" nowhere to be seen. Or maybe the debt wizards have another bag of tricks up their sleeves or down their trousers, but only if everyone claps very loudly and truly believe in them.

The proposed tax allocation system in the meanwhile appears to be only for income taxes and personal taxes that can be tracked. There are other types of taxes to consider as well. For example, how would corporate tax play into this? Corporations are treated as "people" and generate a large portion of the revenue. Maybe those and others such as sales taxes should not be allocatable and must go to those mandatory services. Havens and loop holes should likely be plugged as well to force the bigger fish pay their fair share into the public system. Also to even the playing field somewhat, the percentage of allocatable tax should be lowered as the income rises and maybe even be cut-off at a certain point. That way, the lower income strata would have more power in contributing to those projects that matter to the regular people and hopefully raise the standard of living for those at the bottom of the ladder.
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By G.I. Bergstein
That's exactly it. The amount of tax one pays and how much of it goes into the projects that concern the individual can be a tool for balancing power. If the voting system can be compromised by the wealthy through "campaign donations" and "charities", then it's necessary for the plebeians to be able to have an equal amount of influence using their money to curb that shift. So I concur that larger income individuals should have less say in how much of their tax contributions go into the projects of their interest. Not only this, but the people should be able to allocate how much of their contributions go into their local projects versus state or national projects.

Allocating the personal tax in this way supposes that debt is not part of the equation and that governments must make do with only the funds available to them. Oftentimes such an approach may not be enough and likely many projects will need additional liquidity. To support such a model, several avenues can be explored. For example, excess funds left over from primary projects can be reallocated to other secondary choices. Or the tax payer can choose to let the fund management software choose how to best allocate the money, as long as it meets general preference guidelines set by the user, like "education" or "water" etc. Discretionary spending can be easily covered in this way without resorting to taking on additional debt. The rest of the 66~75% mandatory spending can come from corporate taxes, sales taxes, capital gains and other contributions by the wealthy.

Speaking of which, the proportion of the tax paid by the wealthy is purportedly very low in comparison to lower income or salaried people since the majority of their wealth comes through other channels that incur less tax penalties. This is considered legal but it's also obviously very corrupt and unfair. Rather, all their earnings should be normalized to a common system if there's to be even a semblance of egality. By normalized, I mean exactly that. Let everyone's income be tallied and plotted on a graph. It should resemble a bell curve, albeit it will appear quite a bit skewed towards the left, almost like a hockey stick. This alone should give an indication as to what the state's policies should be to fix its problems regarding income inequality. Then apply a taxation measure that would shift this bell curve to the right and broaden it out. For example, the tax function can be a simple linear line, an exponential curve, or a logistic flattening curve such that the wealthier ones to the right pay a larger share that is in proportion to the rest of the population. Therefore the amount of tax paid by a citizen would be relative to everyone else rather than fixed tax brackets or some other pre-determined and unmovable metric. In this system, the incentive for the wealthy to pay less tax would be to shift the entire curve upwards such that the tax function's profile results in less penalty for those on the right hand side of the distribution. i.e. bringing their fellow countrymen out of poverty would give them tax benefits. A perfectly balanced middle-class majority bell curve would then result in a horizontally linear (after logarithmic function, which would still apply to account for those who are very poor) tax line such that everyone would pay the same amount. i.e. a flat tax rate for all who are middle class and above. If income inequality rises, then so would the share of taxes payed by the wealthy. Surely this is only fair as the wealthy have a fiduciary duty to keep the republic functioning and to keep the lower rung members of society from bottoming out. After all, we're supposedly on the same boat, aren't we?