Sunday, September 27, 2015

Reasonable Taxation: Is It Possible?

In a recent Econlog post, Scott Sumner questions a number of government taxation policies for capital, and I want to highlight his first point.
It's difficult to think of a more bizarre and foolish policy than the practice of taxing capital. Consider:
1.  If it were appropriate to pay taxes on capital gains, why wouldn't it be appropriate to pay negative taxes on capital losses? Economic theories tend to be symmetrical. And yet capital losses do not result in negative taxes, except in certain limited cases. And why only those cases?
The reason my focus is somewhat narrow for this post, is that I will likely need to approach thoughts regarding tax policy in small chunks. Like it or not, tax policy has important implications in the "blank slate" of local corporate structure, which would need many exemptions in order to create new organizational capacity. Having gotten halfway through "The Great Tax Wars" (Steven R. Weisman), for instance, the only thing I can say with any certainty is that I am going to have to reread the book again, once I finish.

Scott's post points to an asymmetry in risk sharing. How many are deterred from making investments which include the possibility of substantial loss, given the investment rewards which accrue to government? Of course only governments involved in nationalized companies would play roles in placing bets (proactively assuming risk), which is not desirable either. Just the same, tax policy would be far more rational if investors were compensated when they incur losses.

Rigid tax structures - wherever they are placed - can present real problems for wealth creation and long term growth. Too many in government assume relative constants in terms of marketplace activity, even though much of what occurs is not possible to maintain for any length of time. Too much investment for skills capacity now faces this problem, as well. If only the average individual could count on the marketplace to grant certainties! Of course this does not stop special interests and governments from trying to create their own certainties, but the result is by no means a free marketplace. Life is always going to change, as is resource availability and consumption preferences. Hence no arbitrage position can be expected to remain the same, in spite of the human desire to make it so.

Local corporations need a simpler framework for all concerned, in order to share responsibility for local infrastructure and services. These groups would share risks as combined local investments, but each participant would build over time a diverse portfolio. One could liken this portfolio to a garden. Some crops stand a chance of failure in a given year, yet there will still be other crops to sustain both individuals and the group.

While there's nothing unusual about diverse portfolios, until now they have applied for far flung business investment, rather than a unique setting of local non tradable sectors. Plus, local corporations would have the added benefit of services through coordinated time aggregates. This services network would take the place of pensions in most respects. Rather than an income tax, one's time would be available for group services in ways which also allow personal choice. Direct democracy can be a viable option for local services formation, even though it is not well suited for centralized forms of government.

For local corporations, the costs of infrastructure needs would be built into shared local investment holdings, instead of existing separately as taxation. Likewise, time arbitrage would mean no need to tax property for education. In the above linked post, Scott Sumner once again voiced his wish that the whole taxation system could be scrapped for a progressive consumption tax. While this potential solution seems unlikely any time soon, at least efforts can be made at the margins, to find simpler means to achieve the desired ends between public and private endeavor.

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