Table of Contents

Principles of Taxation

1. Tax System Fundamentals

No Tax On Tax

Taxes should not be charged on taxes within the same transaction. All percentage-based taxes should be based only on the actual pretax cost of the good or service at the point of sale. For example, it would be wrong if a $10 product is charged an excise tax of $2 as well as a sales tax of 10% that is based on a $12 cost of the product. If the 10% sales tax is based on the $10 cost of the product, there would be no violation because the $2 excise tax would not be included in the factoring of the 10% sales tax. The correct cost of the product would be $13. If a purchaser (such as a retailer) who bought this product for $13 and resold it for any other amount, say $20, then $20 would become the new base price.  If a 10% sales tax is applied, the product would then cost a buyer $22.  All previous taxes charged during that product’s history would be irrelevant since this is a new transaction.

Party Receiving Payment Must Pay Tax

The party receiving the money in exchange for a good or service should be responsible for paying the taxes on that transaction. This is normally what occurs when people buy things at a store–the customer pays for the items and all applicable taxes, and the store is responsible for properly distributing those tax dollars. This principle should apply to all tax payments.  Nobody should ever be reimbursed for any extra costs they incur for collecting taxes, unless that entity was unjustly required to go through an extra expense of time, money or other resource.

Payroll Tax

For example, all payroll taxes should be paid by the employee–the person receiving the payment. Employers buy labor from employees, so employees are the people receiving the money and they should be the people responsible for paying the taxes. The employer should not be required to pay any portion of these taxes.  Although the employee can request that the employer pay these taxes from the employee’s pay to make life easier, the employer could refuse to do so, or the employer could charge a fee in order to do so. It is the employee’s responsibility to make sure that the tax is arranged to be paid and is actually paid.

Barter Tax

The market value of bartered items should be taxed at regular sales tax rates. Each party to the barter arrangement would be responsible for paying the tax based on the estimated market value of the bartered items. Receipts for bartering transactions would be created, as they should for all transactions, and they should state the estimated market value as well as the sales taxes due.

Estimated Tax Payments Should Never Be Required

Nobody should ever have to pay an estimated tax. Only known tax bills should be paid. By definition, an estimated tax is one which nobody really knows the amount, because it is too early to have finished all the calculations necessary for a definitive determination. If the people charging the tax can’t wait until a final tax amount is determined, they’ll need to speed up the process used for finding how much tax is owed. The best way this could be done is by dramatically simplifying the tax code so that people could more quickly determine any tax obligations and by charging taxpayers as they earn their income throughout the year.


2. Tax Only Active Economic Activity

Tax Active Economic Activity

Since governments are the primary parties responsible for creating and maintaining an environment where fair economic activities are free to take place, it is reasonable to fund this effort and compensate governments by allowing taxes to be charged upon each economic transaction that takes place. Governments should raise the vast majority of their revenues through the taxing of active economic activities (namely, sales taxes on all goods and services).

Proportional Sales Taxes On All Transactions

As a rule, a proportional sales tax should be levied on all active economic activities. Active economic activities would be defined as any activity in which a good or service was exchanged for another good or service. In other words, virtually every good or service sold would be subject to a sales tax.

To adequately illustrate the pervasive nature of this type of sales tax, examples would include labor (wages/income), food, rent, real estate purchases, gambling purchases, stock and bond purchases, investment income (such as stock dividend payments, real estate income, interest income, etc.), utility purchases (water, electricity, natural gas, etc.), business-to-business sales (when sold to distinct economic entities), purchases by non-profits, purchases by governments, and all other goods and services at the point of sale regardless of who the parties to the transaction may be. The sales tax applied to all these transactions would be the same. If governments need more money, they would raise the rate, or if they need less, they would lower the rate. Never should different sales tax rates exist for different goods or services within the same political jurisdiction. That would inevitably lead to unnecessary complexity of the tax code.

Non-Profit Organizations Should Not Enjoy Any Tax-Exempt Status

These organizations (churches, charities, educational, etc.) should pay taxes at the same rate as everyone else.

Passive Economic Activity Should Not Be Taxed

Passive economic activities, which are activities that do not include the buying or selling of a good or service, should not be subjected to any form of taxation. Examples of passive economic activities include the appreciation in the value of goods (capital gains), merely owning goods (such as property), gifts (including tips (gratuities), etc.) under $500,000, inheritance or estate transfers under $500,000, compensatory payments (such as insurance payouts for damages), catching a ball that was hit into the stands or other sports memorabilia gained in such manner, and other such instances in which economic activity takes place without a corresponding exchange of goods or services.

Any gifts, inheritance or estate transfers with a cumulative value of over $500,000 should have this excess value treated as income taxed accordingly.


3. Progressive Taxation

The tax code should be progressive for two main reasons.

#1 Same Basic Needs For Everyone

First, because everyone has basically the same biological needs, thus roughly requires the same amount of physical necessities to live at a basic level of comfort, it follows that everyone requires a certain amount of resources (usually denominated in currency) to provide for these necessities which they have little to no choice (little or no discretion) but to purchase. The lower the income level of an individual, the higher the percentage of their income is dedicated for such basic, non-discretionary needs. As income levels rise, a smaller percentage of such income is dedicated to meeting the basic needs like food, clothing and shelter. Conversely, as incomes rise, a larger percentage of that income is classified as discretionary, meaning that the earners can relatively easily choose to spend it on things other than essential elements.

#2 Those Who Benefit More, Pay More

Second, because governments have the responsibility to create and maintain stable social and economic environments that facilitate economic activity, thus higher standards of living (namely, greater discretionary income), it is reasonable to require those who have successfully worked to enjoy a greater realization of these potential benefits, to pay a higher tax rate as a form of compensation, acknowledgement and gratitude to the government and by extension to the greater society from which the government was formed.

Income Tax Makes Tax Code Progressive

Income, both for individuals and businesses, is the best single variable to target in order to make the tax code progressive. If done correctly, this should be the most significant manipulation of the tax code for purposes of making it more fairly progressive. However, another tool could be a luxury tax applied on luxury items, such as personal yachts and airplanes, mansions, high-end jewelry, etc.


4. Ban Tax Deductions, Credits, Exemptions, Pre-Tax Money, & Other Tax Tricks

As a rule, all of these tax reducing methods should be eliminated. The tax code should be kept simple and any exceptions to the code should be kept to a bare minimum, be temporary, and have very valid justifications. Thus, things like charitable giving should not be allowed tax deductions, neither should the depreciation of any assets qualify for tax credits. Under the closing of these loopholes, child tax credits would also disappear, as would tax-free retirement contributions. The tax-exempt status of all non-profit organizations should also be eliminated so that they are required to pay the normal tax rates required of all other economic entities.

All these tax reducing tricks make the tax code too complicated, and this complexity directly causes the following negative effects:

1. Taxpayer frustration due to too many rules to follow and things to research to make sure they are not missing some ‘hidden’ benefits that apply to them
2. An increase in the taxpayer’s amount of time and/or money necessary to figure out and prepare taxes, or to pay to have someone else prepare them
3. Such complexity produces a regressive tendency to the tax code because the wealthy can afford to find the tricks to reduce their tax liabilities while the person holding two or three jobs cannot afford the same luxury
4. Increases the need for completing complicated yearly tax forms that serve as a functional framework allowing all these complex tax rules (tricks) to be woven together with some sort of coherence
5. Increases the ability of special interest groups to dramatically warp (and complicate) the tax code
6. Increases the general lack of faith in the fairness of the tax system
7. Wastes paper, postage and labor

Why have a complex tax code, if a simple one will do the job? The complex one will have higher overhead costs and, because of its complexity, will be perceived (whether correctly or incorrectly) as being inherently unfair. In the end, whether the tax code is simple or complex, the government is going to collect all the money it needs to operate. On average, tax incentives for whatever causes do not result in tax savings, because that just means that everything else will be taxed more to make up for the difference. In addition, these tax incentives work to create unbalanced, unnatural market places. A properly constructed simplified tax code could provide many of the benefits that tax incentives were created to provide.  The tax code needs to be consistent and everything needs to be taxed according to the same rules. Otherwise, the free market will not be truly free to function as intended.

Individual/Joint Tax Return

There should be no such things as joint tax returns. Everyone should file his or her taxes individually and separately.


5. Tax Trade Across Political Boundaries

Trade across political boundaries should be taxed. Generally, the more significant the political boundary, the higher the tax rate (tariff). This tax wouldn’t apply to people who buy things within the same jurisdiction or who travel to one political jurisdiction and buy things within that same jurisdiction. It would only apply if the seller ships the item to the customer in a different jurisdiction. Trade across city boundaries would be lowest (perhaps 1%), counties would be higher (perhaps 3%). Interstate trade would be taxed at an even higher rate (perhaps 5%) while tariffs of at least 10% should be levied on all imported goods and services which cross an international border. These taxes would tend to prevent the formation of large super-efficient businesses which often gain very large portions of market share. These taxes would also make it easier for smaller, ‘mom-and-pop’ businesses to open up and succeed.

For countries with human trafficking or other forms of immoral behavior that is not tied to a specific product, import taxes (tariffs) should be levied on all imports from that country so that there is an effective economic incentive to cease such practices.


6. Buyer’s & Seller’s Sales Tax Charged On All Transactions

When buyers and sellers, who are each located in different political jurisdictions, engage in an economic transaction (the buying and selling of goods or services), the sales tax rate in each, the buyer’s and seller’s political jurisdiction, should be applied to the transaction. The buyer should be required to pay the sales tax rates for both jurisdictions in which the transaction is taking place.

For example, if someone in the city of Los Angeles, wants to buy a $20 book from a company in New York City, the buyer would be required to pay both the 9.75% sales tax rate of Los Angeles plus the 8.875% (for example) sales tax rate of New York City. In other words, the buyer would be required to pay a 18.625% sales tax on this purchase, bringing the cost of this transaction to $23.73. The seller would be responsible for distributing the collected taxes to the appropriate governments.

Some states charge ‘use’ taxes which are rarely collected because of the often self-reporting nature of the tax, lax enforcement and general ignorance about this tax. This proposal would standardize this tax principle for all transactions, wherever buyers and sellers reside.

Such a tax structure would tend to encourage more local economic transactions, thus favoring smaller, ‘mom-and-pop’ businesses as opposed to larger, more efficient business.

Sales Tax Apply to Portion Actually Paid

A sales tax should be applied to only the actual price paid for a product or service.  When there are special discounts, coupons, promotions, 2-for-1 offers, rebates, contracts, etc., the sales tax should only be based on the actual price that customer ended up paying. If a merchant gets reimbursed by a third party (like the manufacturer) for the value of the rebates or discount, then it should be the merchant that would be required to pay the sales tax on the portion for which they reimbursed the merchant.

For example, tax regulations concerning a cellphone (e.g., $600 full value) sold at a discounted price (e.g., $200) as part of a contract for one or two years, should only only require the customer to pay a sales tax based on the actual price the customer paid ($200) for the phone.


7. Distinct Nested Entities Treated as One for Tax Purposes (Revenue, Market-Share, Profit Taxes)

Corporations, companies and other business entities as well as their wholly-owned subsidiaries or portions thereof should be treated as single entities for purposes of tax law. A corporation, company or other business entity which has acquired, merged with, or otherwise controls one or more other corporations, companies or business entities, should be treated as one entity referred to by the name of the top controlling economic entity within which all these other entities are nested. Revenue taxes, market share taxes and profit taxes would all be based on the combined revenues, combined market shares (within each market category), and combined profits of all of these distinct nested businesses.

If a daughter company is owned only partly by a parent company, say 60%, then only 60% of this particular daughter company’s revenue, market share figures, and profit should be added to the parent company’s figures to determine the parent company’s tax obligations. Conversely, the daughter company would only have to pay these same kinds of taxes based on only the 40% of its own company which it owns.


8. US Territories and Possessions: Representation and Taxation

US territories and possessions should be guaranteed one seat in the House of Representatives for every twice the average number of people represented by each Representative of the 50 states. For example, if 600,000 is the number of people represented by the average member of the House of Representatives, then, for a US territory or possession to be allowed a representative, it would need to have a population that rounds out to 1.2 million (2 x 600,000) instead of rounding to zero. In other words, territories and possessions would be entitled to one representative for every 1.2 million people. Thus, they would be required to have a population between 600,000 and 1.8 million to get one representative. To get two representatives, their population would need to average to 2.4 million, or fall between 1.8 and 3.0 million people, and so on.

Under this formula, only Puerto Rico would be eligible to elect a Representative, in fact, it would be entitled to three Representatives because it has a population of nearly 4 million. All other territories and possessions would not be eligible because of insufficient populations.

Because these territories and possessions are not fully permanent members of the US, they should not be entitled to full representation. But because they are part of the US, they should be entitled to some representation. Half as much representation compared to the regular US population seems fair.

However, because these areas are part of the US, and because these territories do receive half as much representation (regardless of whether or not they actually have Representatives due to rounding), all territories and possessions should be subject to half the federal tax rates charged in the US. For example, if a federal tax on something is 2% in the mainland US, then these territories and possessions would be levied a 1% tax.


9. Export Taxes

As a general rule, special export taxes or tariffs (as opposed to standard Political Boundary Taxes) should not be levied, although each country has the right to impose whatever level of export taxes or other restrictions it wishes on any of its exports.

Export taxes should ideally be levied on products which the national government may want to reserve for domestic supplies or use for other internal purposes. Petroleum and other mineral reserves are perhaps some of the clearest examples. High-end computing equipment, and other advanced technologies are other examples.

Export taxes should also be levied on products or services (mainly military) which may negatively contribute to political or military stability elsewhere around the world. Such a tax may help slow the speed of military escalations and reduce the intensity of arms races. A ban, rather than export taxes, may be the better option for many categories of military equipment.