A New American Tax System

A New American Tax System:

Citizenship, Eminent Domain and Self-Determination

By David Axelrod, Ph.D.

The purpose of this paper is to propose a new, American, tax system. It will be grounded in our county's founding documents, the Declaration of Independence and the United States Constitution. It is intended to satisfy the requirement that such a system adhere strictly to these, as well as embrace both the logic of free-market economics and wealth protection that conservatives seek, and the wealth dynamics that progressives seek. It will provide approaches to the issues of citizenship, corporate personhood, and eminent domain. The key is finding simultaneous solutions, such that each aspect reinforces the soundness of the whole. The system eliminates both the income tax, and the inheritance tax. It includes a prebated use tax, a wealth tax, and a time value tax.

Let us consider the many, and various, criticisms of the current tax system. From the perspective of the Tea Party perspective, it is overly complex, with burdensome levels of taxation, which does not solve the dual issues of budget deficits and debt. From the free-market viewpoint, corporate and business income taxes are create a competitive disadvantage for Americans. Further, there is an issue of double taxation, that income is taxed both at the corporate level, and then again at the personal level (for those that receive income from dividends). The maze of regulations hinder small businesses with substantial accounting costs, and divert owners time away from their core activities of producing valuable goods and services. Moving toward the other end of the political spectrum, the tax system is perceived as benefiting large corporations through its many loopholes, and individuals who have income mostly derived from capital gains (which is taxed at a lower rate). There are deep feelings that the wealthiest do not pay their fair share.

Beyond all of these concerns are questions about whether the government focuses on the well-being of its citizens before that of immigrants (legal or otherwise) and other non-citizens, uses eminent domain too loosely and for private gain, and whether the principle of self-determination is being sufficiently respected. Finally, to maintain an efficient government, while also having a free-market economic system, requires that all potential resources have a price at which its owner would be willing to sell to the government. The following attempts to address all of these.

Founding Documents

The Declaration of Independence states:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed …”

It also states:

“And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”

The Constitution of the United States begins with:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

The purpose of the United States government is to secure the inalienable rights of its citizens the best that it can. Since our government is for, of and by the people, its citizens must invest a share of the value of their rights - their life, liberty and pursuit of happiness- toward the resources necessary for that government to fulfill its obligations. It is not enough to inherit a great mansion, it takes work to maintain and sustain it, passing it onto the next generation. It is the responsibility of the citizens of the United States to honestly state the value of these rights, and to provide the appropriate resources for their defense and promotion. The government is not a miracle worker; it is an institution by which the people join together to improve their lives and that of their posterity.

Principles of Self-Determination

In a nation that strives for equality under the law it is reasonable that each citizen should give an equitable portion of such value. It is also true that the government, being the people of the United States, should also avoid making it more difficult for individual people to generate their own subsistence. This suggests that an individual should only be taxed on that part of the value of those rights that exceed the needs of subsistence. It is counterproductive to tax those with little wealth and income, only to give it back to them in order to survive.

The following principles are key for citizens to be self-determined, and are the basis for the new tax system:

Persons self-declare their status as citizens
Persons self-declare the value of their time and property
When eminent domain is used, the person is compensated for what they would be willing to sell their property
When government employs a citizen, the person is compensated for what they would be willing to sell their services
Enable persons with low income and little wealth to take care of themselves
Reduce disincentives from earning a livelihood
Those that benefit the most from government services should tend to pay the most for those services. Those services include protecting their civil, and property, rights.

Citizenship

A person declares their status as a citizen, if qualified. For living, natural persons that status is conferred at birth, or by naturalization after being born. It may be reasonable for a natural born person to reconfirm their stats as citizen upon reaching majority (typically the age of 18). The importance of this is that citizenship entitles one to the protection of their rights, but also the responsibility of working and providing resources towards those the promotion and defense of those rights. This also includes respecting those rights in others. An affirmative declaration of citizenship is a clear statement of a person’s commitment. For artificial persons, such as corporations, that status is declared at incorporation, if qualified. With respect to businesses, the rights and responsibilities will vary based on what type of entity it is:

Owned business entity (OBE)- This is an entity that is owned and used to advance commercial, or for-profit activity. By its nature, it is not a person since a person can not be owned. An OBE, not being a person, would have neither claim to constitutional rights nor owe taxes. However, it can be used to collect taxes. Owners are fully liable for the actions of an OBE, and directly responsible for the taxes associated with it.

Independent business entity (IBE)- This is an entity that is not owned, and is responsible for its actions. It can be a person with constitutional rights and responsibilities, which includes paying taxes, as any citizen is required to. If an IBE does not have citizen status it pays taxes, as any non-citizen would, for activity and property within the country.

Not-for-profit entity (NPE)- To the extent that it is providing valuable goods and services of benefit to the citizenry, it taxes would be reduced or eliminated.

The purpose of the above definitions is to deal with the legal ambiguities of what rights a corporation has, as well the current inconsistencies involving the 13th amendment concerning the prohibition of ownership of persons. It also avoids double taxation issues as will be seen further on.

Valuing Rights

With the above principles in mind we can derive a tax system from the three most fundamental rights. Notice how the founding fathers pledged their live, fortunes and honor to creating an independent nation. These correspond to the rights above, and are essential part of the responsibility of being an American citizen. They can be valued as follows:

Life is the duration to experience being alive. One way to measure it is by the value of one’s available time.

Liberty is the space to move and act. One way to measure it is by the value of the wealth one owns, controls or influences. That wealth includes land, property and other resources.

The Pursuit of Happiness is the expression of one’s preferences in the world. One way to measure it is by the value of the goods one buys for use toward that expression.

It is here we begin the details of the new tax system. The numbers used below are only intended as examples. The actual numbers used would be based on total government expenses, and what revenues would be necessary to balance the budget. One starting point might be to set rates, levels and exemptions such that each tax accounts for about 1/3 of all revenues.

Use Tax: The Pursuit of Happiness

This would be similar to a sales tax on final goods (and services). A final good is a good consumed for the direct benefit toward a person’s happiness and well-being. Items covered by the wealth tax are excluded from the use tax. Goods that are sold to someone else, or are used in the production of goods intended be sold to someone else, by an OBE are not final goods. The use tax can be collected, and remitted, by the entity that sells the taxable item. Still, it is the responsibility of the person buying the final good to pay the tax. An IBE, having declared itself a person with rights (which includes the pursuit of happiness), are directly responsible for paying the tax. It may be reasonable, and beneficial, to provide business entities a small compensation for remitting the collected taxes. All persons, both citizens and non-citizens, are subject to the use tax for final goods within the jurisdiction of the United States.

However, to avoid making it more difficult for those with low incomes, a use tax prebate is given to each household of citizens, based on household size. In essence, it plays the role of exempting subsistence consumption from being taxed. This also prevents the use tax from being regressive. It has the advantage of providing a slight subsidy to households that are living at, or below, subsistence consumption. This prebate is not dependent on wealth or income. The prebate is available only to U.S. citizens.

Let’s consider an illustrative example of the use tax prebate. All final goods and services not covered by a wealth tax have a 10% use tax paid at the time of purchase. The subsistence consumption is $18,000/yr for a one-person household, and is an additional $9,000/yr for each person above the first. In the case of a household of three persons, subsistence consumption would be $36,000/yr. Their prebate would be 10% of this, or $3,600. The prebate could be received as a monthly payment of $300, or as a credit toward any other tax they owe.

Wealth Tax: Liberty

A wealth tax is applied to real assets (such as land, buildings, and other fixed property), as well as bank accounts and other financial assets (such as bonds, stocks, derivatives). This tax is due whether the owner is a citizen or non-citizen. The taxable value of these assets are set at the self-declared price its owners are willing to sell them for. The government may then buy those assets, for eminent-domain purposes or otherwise, at that price. In essence, having a free-market economy requires that all assets have a price at which its owner would sell. The advantage of such self-declaration is that the government does not force a price on an owner, and that it encourages the owner to value their assets accurately. Setting a value too low allows the government to purchase the asset and then resell at a profit. To further assure an accurate declaration of value, if an owner insures the property for a value greater than the one they state, then the insured value would be used for the purpose of tax calculation.

As with consumption, some wealth is necessary to function in our economy. A subsistence wealth level is set based on household size (although retirement and disability status could also be used). This recognizes the necessity of having a place to live, and enough finances to function. The wealth tax owed would be a percentage of self-declared value of wealth above the subsistence level. It would also possible to have progressive rates of wealth tax. Since there is an annual wealth tax based on ownership, an inheritance tax is unnecessary since whomever receives the inheritance would then be responsible for paying the wealth tax. The wealth tax being paid by the person who owns the tax would apply to both natural persons and to IBEs.

Other considerations might include: an exemption for a primary residence, an educational debt deduction (where the outstanding principal could be used to reduce value of financial assets to be taxed), or a retirement account deduction, where some, or all, of a retirement account (i.e. IRA, 401k, 403b, etc.) could be exempt from the wealth tax. Otherwise, value of assets are not reduced by amount of debt. Non-citizen owners of protected property would pay a wealth tax on the full declared value of the property.

Consider an example of a wealth tax in action. Real assets are taxed at a 1%/yr rate above subsistence level, financial assets are taxed at a .5%/yr rate above subsistence level. The subsistence level of real assets is set at $200,000 for a one-person household, and $50,000 for each additional person. The subsistence level of financial assets is $50,000 for a one-person household, and $25,000 for each additional person. In the case of a three person household that values their home at $500,000 and their financial assets at $200,000, the household would pay $2,500/yr, which equals .01*(500,000 – 300,000) + .005 *(200,000 – 100,000). In the case of a single person who rents and has $20,000 in financial assets, they would pay no tax. In the case of a household of four that value their real assets at $25,350,000 and their financial assets at $200,125,000, they would pay $1,250,000/yr .

Time Value Tax: Life

In essence, this is a citizenship responsibility fee. In lieu of working for the government, the person helps fund the cost of that work based on the self-declared value of time. A citizen self-declares a reservation compensation, at which the government can employ them. Note, this does not preclude the government from hiring employees via offerings through the traditional job market. What it does is set the compensation at which the government can hire that citizen even if they are currently employed elsewhere, or if they are currently not employed. As was the case with the Wealth Tax, having a free-market economy requires that all workers (from day laborers, to teachers, to consultants and CEOs) provide a price for their labor. Note, that the advantage of such self-declaration is that the government does not force a wage rate on a citizen, and that it encourages the citizen to value their time accurately. If after being requested to work for the government, the citizen decides they do not want to work for the government, they are free to raise their reservation compensation to a rate so high the government chooses not to hire the citizen. In this case, the citizen would be responsible to pay an increased time value tax. Likewise, someone who is unemployed and looking for work, can lower their reservation compensation, thereby reducing the tax they owe, while becoming more likely to be hired by the government.

The tax is only applied to compensation above a subsistence income level, based on family size and composition (children, adults, retired, disabled). Persons under the age of 18, retired or disabled can claim exemption from government work if requested. Only citizens would be required to pay the time value tax. The employer of a non-citizen employee pays the time value tax rate on the full compensation of the employee. This encourages hiring citizens where feasible. Non-citizen visitors could pay a per diem tax. This can vary based on proof of various considerations, such as health insurance coverage, and could be paid by the hosting party (such as family, friends, travel service). Another consideration would be that people hired by the government, because they are currently working for the government , are exempted from the time value tax. A further possibility would be a lifetime exemption for individuals who have risked their lives serving in the military.

Let us consider an example of a time value tax. A tax rate of 20% is applied to the combined household reservation compensation above subsistence income. The subsistence income level for a household is $24,000 for each adult and $12,000 for each child. An extra $6,000 is included for each disabled person. An extra $12,000 is included for a single adult household with children. The individual reservation compensation is set at the individual subsistence level for each person claiming exemption from work. A person currently employed full-time by the government is exempt from the time value tax. In this case, a single non-disabled person 24 years old declaring a reservation compensation of $54,000/yr would pay a tax of $6,000/yr [=.20*(54,000-24,000)] .This holds whether they are employed, self-employed, or not otherwise employed. If it so chooses, the government could hire this person at a compensation of $54,000. In the case of family of four with two adults and two children where one spouse has reservation compensation of $120,000, the other of $60,000, the household would pay $21,600/yr [=.20*[(120,000 + 60,000)–(24,000 +24,000+12,000+12,000)].

Final Thoughts

In order to avoid too much disruption, and to adjust to new accounting needs, these taxes could be phased in. One approach would incorporate the use tax and wealth tax, while lowering the current income tax rates and eliminating the capital gains tax. Once that has been adapted to, then the system can transition the rest of the income tax into time value tax.

This new system addresses the conflicting concerns of different ideologies, and political agenda. It eliminates the disincentives of an income tax. It eliminates the inheritance tax. It addresses wealth inequality by having the wealthiest pay more of their taxes based directly on their wealth. It provides some small subsidies to those surviving at poverty levels, which helps children to have food, clothing and shelter, while also stimulating the economy. It allows those that are averse to working as part of our government to avoid it by increasing how much tax they pay to opt-out. It supports those in the military by reducing their tax burden. It provides an incentive to hire citizens over non-citizens. It permits the individual to self-declare the value of their time, and what they own, consistent with free market principles. It reconnects our citizens to democracy as government for, of, and by the people, by being reminded that promoting the general welfare and securing our inalienable rights are directly dependent on our investing some of our life, liberty and pursuit of happiness to those aims.