What are the principles of taxation

what are the principles of taxation

10 Sound Tax Principles

To create an excellent system of taxation, it is necessary to first establish a set of high standard principles for taxation. Little or no attention has been paid by governing bodies to establish such important principles. The lack of principles of taxation has resulted in the most rediculous systems of taxation in the countries where special interests and politicians had the most to gain from manipulating taxation to their advantage.

The following 10 principles are largely ignored by all systems of taxation in existence and also by most tax reform proposals. Only Automatic Tax follows all 10 tax principles almost exactly.

The first 4 principles of taxation are by Adam Smith (1776 Wealth of Nations ). Adam Smith can be regarded as the "Godfather" of economics. T he additional 6 principles of taxation are by Alf Temme, author of Automatic-Tax (2005) and other subjects related to economics such as www.UniversalDemandLaw.com 1975 ):

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Actual complete text of Adam Smith maxim nr.1:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned, is necessarily unequal in so far as it does not affect the other two. In the following examination of different taxes I shall seldom take much further notice of this sort of inequality, but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally even upon that particular sort of private revenue which is affected by it.

2. The tax which each individual is bound to pay ought to be certain, and not arbitrary.

Actual complete text of Adam Smith maxim nr.2:

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gathered, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.

3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

Actual complete text of Adam Smith maxim nr.3:

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or, when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes.

4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Actual complete text of Adam Smith maxim nr.4:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime. Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it. It is in some one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign.

The following 6 maxims of taxation are authored by Alf Temme:

5. A tax should not be used to give favorable tax treatment to different people for any reason or purpose no matter how well intentioned. Any reduction in taxes to some will necessarily increase the rate of taxation to all other taxpayers. There has been always great sentimental debate and implementation of lower or no taxes for people on the lowest rungs of the social economic ladder. This is and always has been one of the greatest mistakes and it most often amounts only to shameless vote buying by politicians. The fact is that the paying of taxes by "the poor" gives them the equal dignity of all other taxpayers who contribute equally to the running of their government. The equal paying of taxes does not create the class strife that has been created by the politicians who pretend to care for the poor and the under-classes they are identifying in their election campaigns and whose votes they endeavor to "buy" with money they "steal" from all the rest of the taxpayers by having to increase their tax rates in the process.

6. A tax should be as broad based as possible, resulting in a low percentage rate that offers little incentive for tax evasion and tax avoidance and all the unproductive activities people engage in efforts to lower their taxes or evade or avoid taxes alltogether.

7. A tax code must be formulated in simple language easily understood by all who are subject to it. To be able to make longterm individual and bussiness planning possible It must be a stable, predictable and reliable system that cannot be subject to multiple interpretations and constant change.

8. To keep it as simple and clear as possible, a tax must have no exemptions. Rather than exemptions, government subsidies and grants can be substituted for exemptions.

9. An optimum tax replacement must be able to be phased in very incrementally to create as little economic and political disruption as possible. People and their politicians are very risk adverse and will not easily accept a proposal that will create sudden drastic economic and political changes over a short span of time.

10. The optimum tax replacement proposal must be attractive enough to accept it as optimal by all other proponents and promoters of competing tax replacement proposals.

The 10 principles in more detail:

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Taxation Principle #1 deals with the subject of dignity and justice and fairness in taxation. There is dignity in the paying of tax by “the poor”. In most current tax theory and legislation it is erroneously held that poor people do not deserve respect and belong to an underclass that needs special tax treatment and cannot function with dignity as respectable full function citizens that proudly will contribute to and participate in the financial support for the running of their own governments. That sort of paternalistic thinking places "the poor" into a class by itself, rather than an integral part of society with the same rights and duties of everyone else. That sort of undoubtedly well meaning but divisive class strife baiting and paternalistic thinking gave rise in the past to the notion that only those who pay taxes should have the right to vote.

The warped justification leading to progressive taxation shows a total lack of understanding of taxation to believe that excluding “the poor” from this or the other tax makes them exempt from taxation. It is wrongly thought that "the poor" need tax breaks financial support and that "the rich" should foot the bill for that financial support by paying higher taxes. It is a complete hoax and fallacy to propose to exclude "the poor" from taxation and that taxes should be structured according to the arbitrary socialistic doctrine of "ability to pay". Under all systems of taxations “the poor” pay taxes embedded in every product or service they consume. The embedded taxes they pay are in direct proportion to their spending.

The exclusion of “the poor” from certain taxes is arbitrary and the establishment of “tax brackets” is not only arbitrary but also out of proportion "to the revenue which they respectively enjoy under the protection of the state". The concepts of current tax theory are in gross violation of Adam Smith #1 maxim and Automatic Tax is in total compliance with Adam Smith #1. Moreover, the vast majority of people who are classified as "poor" are young and will make a natural transition to all the higher levels of economic success with a proportional percentage distribution to all levels of economic wellbeing including the ascension by a small percentage of them to the level of "the rich".

2. The tax which each individual is bound to pay ought to be certain, and not arbitrary.

This "Adam Smith's tax maxim #2" requires a very simple tax rate that applies to any and all economic transactions without exception, so that everybody knows what the tax rate is and that there is certainty of the tax and. very importantly, that there shall be no arbitrary exceptions to the tax (no matter how persuasively any proposals for exceptions may be presented by special interests and by well meaning political leanings.) Automatic Tax is in full compliance with Adam Smith's tax maxim #2..

3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

This means that a tax should be levied with the least amount of inconvenience to the tax payer. Need I say more, there is zero inconvenience for the tax payer with the way in which tax is paid under Automatic Tax. The Automatic Tax is automatically collected through the banking system exactly at the same time when any money transaction takes place. No records need to be kept by the tax payer, no tax forms need to be filed and no audits will be conducted. Many other tax replacement proposals seek to reduce the inconvenience somewhat or often even a great deal, but none reduce it to ZERO inconvenience as does Automatic Tax which is "levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it". In fact, the taxpayer has to do absolutely nothing because the tax deduction is completely automatic without human interface. The great thing of Automatic Tax is that it not only replaces the federal tax, but also replaces State, County and Local taxes with the single low tax percentage of around 5% tax collected by the banking system.

4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

This means that the total direct and indirect cost of paying and collecting the tax should be as little as possible. The direct and indirect cost and burden on the total economy and society as a whole cannot be expressed in money alone, but with the 17000 page USA income tax code the total, direct and indirect, cost could be as much as $900 billion in 2005 dollars. The direct and indirect cost of collection for Automatic Tax is certainly less than $25 billion. As such Automatic Tax keeps "out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state".

5. A tax should not be used to give favorable tax treatment to special interest groups.

Legislators are generally subject to enormous lobbying efforts by special interests and political groups to modify the tax codes in favor of special tax treatment for these groups and the special interests. The Automatic Tax can be easily protected from manipulative use for social engineering and favorable tax treatment by prohibiting any exemptions from the tax for such social engineering purposes and only allow changes or amendments to the tax with a 90% majority vote.

6. A tax should be as broad based as possible, resulting in a low percentage rate that offers little incentive for tax evasion or tax avoidance.

Automatic Tax is enormously broad based. It is a tax on all forms of fund transfers except the transfer of funds involved with financial instrument trades such as stocks, bonds and other financial "products". Only the profit portions of such financial transactions are subject to the tax. Also transfer of funds between accounts owned by the same account holder are excluded. In addition there is a provision for refund petitions on certain transactions deemed eligible by an Automatic Tax refund authority (as detailed in the full 92 page disclosure of the Automatic Tax).

7. A tax must be formulated in simple language easily understood by all who are subject to it.

The complete Automatic Tax can be stated in easy to understand language as shown in the "Short Introduction". A total of fewer than 5 pages of writing are needed to state the full rules of the Automatic Tax law.

8. A tax must have no exemptions. Rather than exemptions, subsidies and grants can be given and there is a special provision in Automatic Tax that provides for an office that handles tax refund requests that may be granted for transactions deemed eligible for such refunds.

Automatic Tax f ollows Adam Smith’s and Alf Temme's principles of taxation as closely as possible to create a very simple and effective tax replacement for www.GlobalTaxReform.com .

9. An optimum tax replacement must be able to be phased in very incrementally to create as little economic and political disruption as possible. People and their politicians are very risk adverse and will not easily accept a proposal that will create sudden drastic economic and political changes over a short span of time.

The best feature for any tax replacement proposal is if it can be phased in gradually and incrementally without causing more than just minor economic and political discomfort during a almost "painless" transition from the existing tax system to the new proposed tax replacement system. The Automatic Tax can be phased in at 0.1% for the first year. The federal tax revenue can then at the same time be reduced by 2% to offset the amount collected through the 0.1% Automatic Tax. The objective will be to reduce the 17000 page long Federal Income Tax Code by as many pages as is possible to bring about the reduction of 2% in Federal tax revenue that will approximately match the revenue collected through the 0.1% Automatic Tax. The Federal Tax code can already be reduced by a few hundred pages only on account of the first 0.1% step in the Automatic Tax.

An additional bonus is that the 0.1% automatic tax will determine nearly EXACTLY what percentage rate the eventual full Automatic Tax needs to be to cover the budget requirements for all levels of government for which it becomes the single combined replacement tax. The following year the Automatic Tax can be raised by an additional 0.3% and Federal tax proceeds can be reduced by another 6% and additional pages of the income tax code can be eliminated to approximately offset the tax collected through the additional 0.3% Automatic Tax. This process can be continued with 0.3% additional Automatic Tax for each following year with matching decreases of additional 6% of the taxes collected through the Federal income tax, and of course additional pages eliminated from the Federal Income Tax Code. This method of phasing the Automatic Tax in and phasing the current income tax out is completely transparent and predictable and will cause the least amount of economic surprise and disruption. It will provide for about 15 to 20 years of total tax predictability that provides for tremendous economic stability and long term economic planning for individuals and businesses alike. This form of phasing in Automatic Tax is less risky for legislators to enact into law because it cannot create the large unexpected economic impact that these legislators could be blamed for later. Both legislators and the general public are very risk averse. That is the reason why normally bold tax reform proposals do not have much chance to be enacted into law.

10. The optimum tax replacement proposal must be able to be demonstrated to be superior to all other "competing" tax replacement proposals so that much needed support behind the optimum tax replacement proposal can be consolidated into a single strong tax replacement organization ( www.UnitedTaxReform.com ) and it must be proven that the proposed new tax will indeed bring in enough revenue to adequately replace the total revenue collected under the tax system it seeks to replace.

It is quite conceivable that proponents and promoters of other tax replacement proposals may wish to join ranks to promote a tax replacement proposal that can be proven to be superior to the tax replacement they are currently promoting. To demonstrate the superiority of Automatic Tax as the optimum tax replacement proposal it must be shown to be superior in terms of testing all "competing" tax replacement proposals against these 10 sound tax principles. Additionally some of the current tax-myths misconceptions about taxation must be debunked in clear language that is easily understood by all. Catchphrases such as "ability to pay", "regressive, proportional and progressive taxation", "tax fairness or equitability" and other such misconceptions of current forms of taxation have been adopted by well meaning governments that have pushed the United States into the quicksand of socialism and also have promoted class and racial strife where there was none before. Very sad developments promoted by governments everywhere because of lacking understanding of basic economic and taxation principles.

NOTE ON TAX REFUND PROVISIONS AND CHANGES UNDER Automatic Tax.

Automatic Tax h as provisions for tax refunds made by a special State tax office empowered for that specific purpose. Legislatures may also bestow subsidies and grants as they may deem appropriate but they will be strongly reminded not to tamper with the tax collection side of Automatic Tax, lest they want to run the risk (actually the certainty) that they will create once more an incomprehensible mess like the current 17,000 page USA income tax code. Such vote-fishing lures as "no tax on poor people" or "no tax on life necessities" or "no tax on medications" or "no tax on old people pensions" etc. are all sham politics or they reflect total ignorance on the part of the politicians of the workings of economics and taxation. Shame on us, the people, to allow our legislators to create such a mess. We have to be vigilant at all times now and in the future. As soon as a single special tax treatment has been permitted by a legislature the armies of lobbyists will start crowding the halls of congress again to procure special tax favors for their special interest clients. To completely or largely prevent reccurring tax-law complications toward these incomprehensible and very costly systems of taxation we currently are suffering under, I propose that a requirement for a 90% majority vote to make any changes in the Automatic Tax code other than one time increases or decreases of smaller than 0.25% in the percentage rate of the tax within any 10 year period.

Source: www.electronicflattax.com

Category: Taxes

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