Tax coded as standardized protocol for long-term budget stability
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CONTENT:
Preface | Progressive | TaxTypes | Simplify | Postface
Preface
Taxes are mostly boring and usually disliked (especially by Americans), but still are very important and relevant, both for individual person and for the broader community. One can not avoid them, not easily at least, so you should be educated about it and have an informed opinion.
Next to mention that taxes enable society to function at large, to manage shared resources and cover the costs. Some things can not be built and used individually, it is not practical nor efficient, because of scale and logistics. This includes public infrastructure, such as roads and city installations for water and electricity, and in some cases also hospitals and schools assuming there are public ones. Additionally, there are costs of maintaining those facilities and institutions.
Civic society organizes itself as a country of citizens or a nation state. Always remember that the function of all Government Services is to serve the people and community, and never forget that politicians are your employees (servants) and not masters.
Next important issue is the level of taxes and their complexity, as well as how they are implemented and controlled/enforced. Firstly, it obviously can’t be either 0 nor 100%. Secondly, some consider it reasonable to have tax rates in the range between 10% and 50%. 10% or 1/10 (one tenth) was often a historic norm in the past. The 50% or 50/50 model is a common concept of fairness. Higher than half could be counterproductive as most people would be discouraged to work when the state takes too much or their earnings (motivation and incentive matters), and also it becomes prohibitive on economic growth. Even good intent, if not set properly, could lead to negative outcomes (the road to hell is paved with good intentions). Many socialist revolutions ended with economic collapse and failed spectacularly. Still, ethical considerations of redistributive taxation includes viewing it as morally virtuous to reduce extreme inequality and provide a safety net (Kant’s categorical imperative and justification).
In conclusion, up to 50% is considered by many conservative economists as Fair and socially optimal rate for balancing growth, equity, and incentives (even marginal tax rates should not exceed 50%).
More central stance would be to have them in ranges between 20% and 40% or 42% as an answer to the Ultimate Question of Tax. Around 20% or 1/5 should cover 80% of people - in line with Pareto Principle 80/20 rule. Different countries, depending on culture and economic development, could have different limits, or Tiers so to say. For determining rates and tiers or band limits it should be looked into the public record of Statistics. It might take a few iterations to fine-tune them, just always start from first principles thinking. It should always be kept in mind that the proportion of the budget with total public spending and GDP should not exceed a ratio of 30 to a maximum of 40%.
Another issue with too high taxes is that people stop paying it and start actively working to avoid them - The Laffer Curve (optimal tax rate that maximizes state revenue). Some even think it could be as high as 70%, but that would be very unpopular and probably not socially acceptable, and also has some negative externalities with bad consequences.
Progressive model
In general, the tax model should be Progressive (how good is it), with a higher rate for higher income, but still having a maximum limit to be widely acceptable (having precise Highest and Lowest Bracket).
One could ask why such a model, a few reasons:
-1. more philosophical argument with emphasis on humanity (progress of civilisation),
-2. for better social cohesion and solidarity,
-3. enables a more productive population, in other words, healthy and well educated and satisfied people are more fruitful, while those under constant stress lose creativity and fear taking even small risks,
-4. based on ‘ability to pay’ principle, meaning heaviest burden carried on the strongest shoulders (taxation equitable across income groups),
-5. the marginal utility of money drops off the higher it gets;
Reducing inequality also reduces social division and tensions (less group friction and conflict) with more economic mobility due to real and effective equality of opportunity (where each person is then responsible for the outcome). This would also lead to a happier population that could partially help with solving some of the pressing issues, like the housing crisis and low birth rates.
In a political-economic sense this would be a standard capitalist system with a moderate level of social democracy - history shows that this is most stable in the long run, and the least bad we know so far. Somewhat similar to the Nordic model, mixture of a free market with less regulation. But with a strong welfare state, and labor market regulated by negotiations between labor unions and employer unions, where applicable. Another characteristic of this model is ‘Flexicurity’, relaxed hiring and firing regulations combined with strong social safety nets through government grants and social insurance.
Still, this model is not easily replicable in other countries (welfare hard to copy), due to different culture and internal solidarity, but also a fact that they are economically highly developed nation, have small population with relatively high income average. Nevertheless, one can be inspired by aspects of the nordic model and strive in that direction by implementing some elements to a certain level. One good example would be universal state-sponsored healthcare as market mechanisms here might not lead to efficiency, since sick people and in distress can not evaluate the quality of medical services, nor easily compare different hospitals. If compared to the US where it is more expensive but less effective, because of a largely private, for-profit system with a complex insurance structure leading to higher administrative costs and drug prices (denmark healthcare better with less money). America is one of few developed nations with declining life expectancy in recent years. Interesting hybrid model is the Swiss healthcare structure as a decentralized, universal system funded by a combination of taxes, mandatory private health insurance from non-profit insurers and out-of-pocket payments. Swiss have high-quality medical services and advanced technology.
When it comes to maternity leave, the US for example has a very bad record with only 3 months of leave and even that is not a universal benefit. Europe in this regard is much better with around 12 months of parental allowance. Still, it would be best to extend paid parental leave to 18 months where the last 6 month would be funded with average salary. That last half of year ought to be divided equally between both parents for better bonding with the child, either 3 & 3 or each 6 months with working half a week or half a day, depending on job type. After that there should be subsidies for daycare or kindergarten in line with market prices until starting going to school at age 6. Of course it would be the parents’ decision to send it to daycare at 18 months or maybe wait till 24 for example, with the last 6 months taking unpaid leave or hire a nanny, maybe even granny, and cover part of costs with those daycare subsidies.
For estimating all potential effects, check the Income Distribution in a form of very useful visual graph bellow.
In the US bottom 20% of people earn up to 24 000 $ / year, while top 20% earners are above 100 K or even 120 000 $ annually as of 2025.
Tax types
Tax types mostly in effect: 1. Income, 2. Capital gains, 3. Corporate, 4. VAT, 5. Inheritance, 6. Wealth.
Focus will be on Personal Income tax and Capital Gains tax as they are direct and most important. Individual Income from labour but also from Dividends - US_Div (Ordinary or Qualified) and UK_Div with rates not quite the same as income rates. Bear in mind that for dividends that are paid to shareholders, the company already had to pay corporate tax on declared profit.
All tax related things should be Simple as possible in line with the KISS principle. Also there should be minimal difference between Income and Capital Tax, so that there is no distortion of either segment. This in practice could mean that tax tiers in both categories should be similar, while Social and Pension and Medical insurance should have max limit on mandatory part, with anything above to be optional.
On the technical side, tax rules should be simple, and percentages to be round numbers with only a few incremental steps like +- 2% or 5%. There should exist several standardized tiers, for societies with different stages of development, that also could have specific culture and history.
(1) Income Tax Brackets with increments on simplified example - to better understand the concept:
| № | From | To Amount | Step | Model XS | Model S | Model M | Model L | Model XL |
|---|---|---|---|---|---|---|---|---|
| 1 | 0 | 10 000 | 10 K | 0 % | 0 % | 0 % | 0 % | 0 % |
| 2 | 10 001 | 20 000 | 10 K | 10 % | 10 % | 10 % | 10 % | 10 % |
| 3 | 20 001 | 50 000 | 30 K | 15 % | 15 % | 20 % | 20 % | 20 % |
| 4 | 50 001 | 100 000 | 50 K | 20 % | 25 % | 30 % | 30 % | 30 % |
| 5 | 100 001 | 500 000 | 400 K | 25 % | 30 % | 35 % | 40 % | 40 % |
| 6 | 500 001 | no limit | - | 30 % | 35 % | 40 % | 45 % | 50 % |
Tax Models: (X-Extra); S - Small, M - Medium, L - Large (first 10 K tax free in all columns; M as the Golden mean)
Represented as US yearly average $ value, so it should be scaled to each country and specific currency.
Due to inflation, ranges From-To should be updated periodically, like every 5 years or so.
Data examples and comparative analysis of models - Tax Codex data sheet:
(asymptotically approaching top marginal tax rate at highest income levels)
*can be copied on google drive to do further examination and customization
For example, with gross income of 60 and 120 K, total Yearly Tax and Effective Rate in model M:
10K * 0 + 10K * 0.1 + 30K * 0.2 + 10K * 0.25 _ _ _ _ _ _ = 10,000 (eff.rate 16%, US and UK have 12% & 19%)
10K * 0 + 10K * 0.1 + 30K * 0.2 + 50K * 0.25 + 20K * 0.3 = 29,000 (eff.rate 24%, US and UK have 17% & 30%)
Second tab contains sample of progressive scale chart made from cells:
One rule of thumb, based on common sense, would be to have less developed countries start with models that have lower taxes, and then every decade to aim for a higher model until it comes to optimal range. Changes should be gradual, step-by-step movement, to have smooth transition. For example in Denmark the top tier is 56%, which is above our median line, but it still seems to work fine in their society, as they remain a country with high Happiness Score. So the remarkable thing is widespread acceptance of this very high burden and tax regime. Besides Denmark, several other countries could be taken into consideration for comparative analysis including: Germany, Austria, Norway, Sweden, UAE, Singapore.
Currently the US has federal income tax with a top marginal rate at 37 %, while in the UK it goes to 45%. As we can see both countries already have progressive tax system where most are paying their fair share when it comes to Income tax, but Capital tax remains somewhat problematic. Tax expenditures (deductions, exemptions, and preferential tax rates) are a major driver of inequality, due to bad tax policy. Changes post 1980s in the US regarding capital gains and dividends were the largest contributor to the increase in the overall wealth imbalance. Hyper-Financialization, referring to the increased dominance and complexity of the financial sector in the economy, has been a significant trend over the past several decades, particularly since the 1980s. Many argue that such excessive Financialization of the entire economy, with control of the financial sector over everything else, is a major driver of rising income and wealth disparity. On top of this, high inflation and ever growing debt are just making the problem even worse. Essentially, the stock market has become highly speculative with many bubbles, almost gambling alike. High inflation is forcing working people to invest almost all their savings and become traders, but they still lack the time and knowledge, and big market players are extra profiting by taking advantage of this information asymmetry. Even retirees are unknowingly funding those speculative waves, from which fund managers and banks are benefiting the most (small investors pay, banksters play - a Wall Street phrase).
(2) Capital gains - in order to promote prudent long term investments and ventures, the top tier here could be somewhat lower then top income tiers, probably up to 30% as opposed to 40% in model M, but this should be more analysed and requires further discussion. Currently in many jurisdictions long term (longer than 1 year) capital gains tax is mostly around 20% like in the US, while for example in France and UK goes up to 30% and 32%.
Relevant issue with gains tax is when a person never sold the shares and usually there were no dividends either, meaning no realised gains. Instead they just take large credits with stocks as collateral, so called ‘stock-as-collateral tax loophole’, also named ‘buy-borrow-die’ (YT: BBD - The Free Money Loophole and Mother of all loopholes) or ‘buy-borrow-hold’ strategy (BBD explained). Here the interest rate on loan is very low, more than market returns even, and significantly lower then tax rate. For such a situation, legislative consideration should be to have a tax event on realised gains when taking large credit that is secured by stocks and alike. Taxable events could be any time the asset is utilized to receive money from its value (closing the borrowing loophole). Of course it would only apply over a certain threshold and above any deduction. There were even suggestions to go straight to taxing unrealized gains, but it would not be a good nor fair solution and would not work properly so we will disregard it. Instead simply closing the previously mentioned borrowing loophole would be more than enough. This could reduce the recently established unusual practice of shares buybacks for tax advantages. Since this is still a somewhat unusual proposition, regulation could initially be for a limited period, say 10 years. After that the results would be evaluated, before making it permanent or for a longer period in line with concept law expiration, explained below in more detail.
When it comes to real estate, one main property where a person or family lives for more then 2 years ought not to have Capital gains tax (Private Residence Relief) up to some reasonable limit and size (married couple single property with higher limit like 3x). In a high inflation environment, it’s crucial to differentiate between nominal gains (price increases) and real gains (purchasing power increases). Taxes on nominal gains can sometimes distort investment decisions when they don’t reflect true wealth increases. Reason more why we should get rid of inflation as much as possible, making nominal and real gains almost the same.
(3) Corporate tax could also have maybe 3 middle tiers to give support to smaller companies in order to promote healthy competition. Say 2% for small Solo Proprietorship (SP), 12% for smaller firms like statups for first 2 or 4 years if they have revenue below some treshold, and 22% for large corporations (anti-monopoly measure). At the moment, US corporate tax rate is 21%, while EU average is almost the same 21.5% but in ranges from 10% to 30%, depending on the specific country. It should not be too high because when using profits to pays out dividend or even doing shares buyback which drives the stock price up, a taxable event would occur again.
(4) VAT - Value Added Tax on sales (consumption tax) is also quite important. Most EU countries have it from 18% to 25%, the Swiss having it at around 9%, while the US does Not have any on federal level and instead has Sales tax only in some states at 7 or 8 %. Even the UAE, known for low taxes, has 5% VAT. The US deficit (1.8T) could be cut in half with new 10% Federal VAT that would bring about 1 trillion revenue. Remaining deficit could be resolved with 400 billion from increased revenue of capital gains, while the remaining 400 could be solved with spending cuts, 200 from military budget and 200 from other non constructive areas.
In general, many consider the optimal level for VAT to be between 5% and 20%, either 10% (my preference) or 15%, maybe 12% as a middle ground. And it should be paid only on collected receivable with option for monthly or quarterly accounting. Having Differential rates, based on product category, is also beneficial, with a reduced rate of 5% for basic food, some medicaments and baby equipment, while 20% or 25% for luxury goods. Options could be: Op1_0/10/20; Op2_5/12/20; Op3_5/15/25 %. Average would still be around 10 or 12 % but it would have progressive effect. Exclusive items include special jewelry, expensive watches, high-end fashion, sports cars, but also spirit alcohol and tobacco with which there would be no need for additional excise tax and thus keeping it simple.
In the future this revenue might even enable some modest version of UBI - Universal Basic Income, or as some call it Freedom/Civic Dividend. Could be especially beneficial with all the technological progress and automatization including robotics and AI, but funding it to be only from regular taxes (‘trickle-up’ economy), not from debt nor money printing. Point is in using existing revenue and allocating it more directly and efficiently with lower administrative overhead. Another approach would be Friedman’s NIT - Negative Income Tax, to reduce complex social insurance schemes and unnecessary cost of bureaucracy while solving poverty. Furthermore, with NIT there is gradual transition of tax level as the ones income rises, instead of sharp benefits cut off that sometimes disincentivizes working.
Combined sum of Vat and Income tax should still in average stay under 50% for most people. To help with solving housing issues, the first house or apartment could be Vat tax-free up to a defined amount, and in addition to have loans subsidized for young couples buying their first home.
(5) Inheritance tax, exists only in several countries where it is levied only above a certain threshold with different percentages. In some places they are called Death taxes or referred to as Estate taxes.
One example for inheritance is Switzerland where it is not on federal level but cantonal, and applies only above 1 million CHF, and goes from 1 to 7%. On the other hand, the US (above 14 million) and UK (above 325 K) have a rate up to 40%. Personal stance here is that it would be appropriate to be 10% or 20% for values above 1 million $. When making a decision do note that not many countries have this type of tax, so it is not widely used. Having this tax too high could lead to frivolous and reckless behavior during life with wasteful spending on superficial things - bad version of extravagance.
(6) Wealth tax is hard to enforce and could push people to move and migrate into other countries or states, and is not worth it (Super-rich leaving Norway or moving from California to Texas). Also, since it was previously accumulated, on which tax was already paid so there is no justification to tax it again every year, just like there is no excuse for taxing money savings with inflation every few months. Especially, since wealth or money will be used/spent in the future, at which point there it will again be probably taxed via VAT. Some countries, Denmark included, even have a small LVT - Land Value Tax (version of Georgism), from which income goes to local authorities. Similarly, some countries have small real estate tax on value of additional property above some threshold and size on primary residence, ranging from 0.1% to 1%. This revenue usually goes to the municipality, and it could somewhat incentivise productive use of land and buildings.
| № - Code | Tax type | Threshold | Model 1 | Model 2 | Model 3 | Note |
|---|---|---|---|---|---|---|
| 1 - INMC | Income | 6 tiers | S | M | L | select and apply |
| 2 - CPTL | Capital gains | similar | 0/10/20 % | 0/15/25 % | 0/15/30 % | work out further |
| 3 - CRPR | Corporate | 100K / 1M | 0/10/20 % | 2/12/22 % | 5/15/30 % | elaborate |
| 4 - VAT | Vat | per categ. | 0/10/20 % | 0/10/20 % | 5/15/25 % | choose rate |
| 5 - INHR | Inheritance | 1 Million | 5 % | 10 % | 20 % | to consider |
| 6 - WLTH | Wealth | None | - | - | - |
Simplify code
A simpler tax code means simplification of taxes for everyone. Redact 6000 pages tax code to less then 100 where besides main models additionally keeping only an effective set of deductions, with basic short edition in 10 pages (less chance for a bug aka hole). Also, one good technical facilitation would be to use digitalization and advanced software by tax authorities to create and prepare pre-filled tax forms ready for submission with just email confirmation.
Emphasys should be on sustainability and stability, with balanced budget and long-term planning. That is why this would be considered as a Protocol, with standardized rules (an engineering approach to problem-solving). This would make filling digitized reports for the Tax Authority much easier (using API), both for firms and also for accountants. And tax payments could be made automatically using standing orders (tax pay on autopilot). With all that, even ERP systems could then become more Protocol-like (work in progress) and would have most settings parameterized. This would enable them to be easily configured for any country or any tax type. Combination of Smart Money, Smart Taxes and Smart Business.
Still in the long term, all countries should aim towards more unified ranges, as human values should be universal. It could also make civilisation more stable, with less issues for tax avoidance using offshore heavens, also called secrecy jurisdiction. In the meantime more global coordination would be needed (global minimum tax of at least 15%), and special inspection of trust funds. Trusts have high legal expenses (lawyer and paperworks) and practically are only available to persons with very high net worth, privilege of the rich or unfair advantage (how trusts avoid taxes). For closing the loopholes it would be best to call upon experts in accounting, finance, and lawyers that have actually worked on creating these schemes, and use their experience to fix it permanently. Also to have a reward if someone finds a hole that could be exploited, similar to how IT systems often has prizes for white hat ethical hackers that discover bugs or security issues and help with patching it (tax holes bounty).
One thing to have in mind, for future sake, is that if we ever reform the monetary systems to permanently low money inflation (like k-percent rule, say 2%), then currency itself would not rapidly lose value as today. In such an environment monetary premium of non productive assets like real estate would reduce greatly, hence capital gain taxes on those would not be significant, instead income from labour and direct capital like dividends, would be more important, as well as revenue from Vat. This would be good as it would make taxation less complicated and easier to implement.
Postface
Tax marginal rate limits (e.g. min 10%, max 45%) should be set with constitutional law so that it needs a supermajority (2/3) of parliament for change - using existing legal framework. While in that range different models could be changed with simple majority but this should not become regular practices, only if not absolutely needed. Any change should be publicly discussed and debated, also planned in advance with any effects calculated into a model, so that everybody is prepared and knows what to expect ahead of time. Similar to how Linux, open source operating system, has regular yearly version updates in the same month, an ultimate predictability.
Another interesting idea is to have this Law, but also other laws and regulation to be on Github, an excellent collaboration platform, that has great visibility, transparent procedure for update, and detailed history of changes - audit info and track record. This was tried in Washington DC with authoritative digital source laws, sort of like The Legal Repository (Git for policymaking and Version control for law). Of course, a solicitor or legal professional could consult IT experts or tech-savvy individuals for advice using such a tool. To add that such systems need to have data backup with local copies regularly on daily bases to 2 separate safe locations (high redundancy). On top of that to have paper copies as well in a secure archive (document vault), with number and version in the header, where each sheet would be one segment so that only those with changes would need replacement.
In addition, laws themself could have conditional expiration, say 50 years (with exception to constitutional laws), after which they should be reviewed, and discarded if obsolete or renewed(confirmed) with optional amendments. This would help to keep regulation smaller and effective, and at the same time gives each generation a direct chance to express their stance and opinion about matters in question.
Lastly, government spending is important as well. The ideas that have been spreading lately about how fiscal responsibility is absolutely irrelevant are complete nonsense, MMT included. Real economy, as well as resources and production, have natural limits and so does the state budget. Also taxes need to be public and have broad support from citizens. Last few decades we all have witnessed ever growing deficits, with debt ballooning and money printing overuse. Even with all that, there are smaller investments in public infrastructure, and growing wealth gaps over the past few decades. This is due to lower taxes, and higher inflation that acts as a regressive tax because fiat currency has no constraints. Any credit should have such incentives to be used for new investment, and less on everyday expenditures (reduce the consumerism and its bad effects). This statement holds equally true for individuals, companies, and countries. Denmark again, even here, stands as a positive example with very little or no deficit accrual, so Danes live better with less, compared to US citizens. Switzerland is another role model, with s decentralized but efficient government that has historically maintained a low deficit, They have a “debt brake”, a constitutional rule that limits government spending to the expected revenue over the course of a normal economic cycle. This rule helps to ensure fiscal stability and prevent excessive debt accumulation. Overall, at least about 10% of the budget should be allocated for development and investments including new infrastructure projects, not all going to basic consumption.
As always, one should approach the issues with caution, as public companies over a long time are prone to corruption. So either to have multiple strong checks and balances that are independent and separated with mechanisms to ensure they stay as such. Or to have more private sector and contractors, while keeping transparency in public procurement with fair tenders, equal for all participants. Finding and maintaining a delicate balance in such dynamics requires dedication and constant work, as optimal equilibrium is often fragile. Otherwise, it can easily turn into populism in the political domain and crony capitalism on the economic side. If there is too much corruption, and if money from the budget is wasted on unproductive things or misallocated, then people would not see the point in paying their “fair share” to society, and would lose trust in institutions.
I would be very cautious with advocating these changes immediately in very corrupt places, first people would need to curtail it to a bearable level, and only then implement tax changes. Start first with the top income tier as they usually have political connections in those locations. Otherwise it would just be misused. Also too much expenditure on the military is not seen as great utility. While if the system is efficient, where for example all children have good schools with more egalitarian chance for success, then not many would oppose a slightly higher taxes. Still, not too high, that most would pay it willingly, a sensible thing to do. They would know it has a good purpose with noble cause, and will benefit them as well (most people have kids, and they go to school). Young generations deserve a level playing field, especially in education. Lastely, one positive way to look at it is that high earners and those with large income are succesful in their profession and are also biggest benefactor to society, so philanthropy by default or to phrase it as taxative altruism (legacy through taxation - public display of list with largest contributors).
Most ideas and concepts laid previously are not new, just gathered together into one compact model, with few new features for modern age. They are collected from history and by examining the best practices from around the world.
Finally, how could these changes be made? Learn as much about the problem and about potential solutions. Everybody can send notes to their political leaders asking them to incorporate this agenda as an active issue that should be worked on. Then in future elections vote for the party or more specifically for individual representatives that align the most with these proposals and support the objectives. This would not be an easy task and could take a longer time, but one should start now and think about future generations. In the end, the majority can vote out what is in their best interest (although often vote against), but also must look after the entire population and to keep the economic wheel working smoothly. The broader consensus is reached for the selected model, the better. Finding a sweet spot amid diverse political ideologies and opposing views. In the end, implementation of this plan and initiative depends mostly on civic awareness of people and political will of elected officials.
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