This chapter deals with taxes that encourage hoarding. Most taxes are taken from Circulating Money. Almost no tax is taken from Hoarded Money.

Although almost all tax is taken from Circulating Money, some taxes are lower on income that is likely to become Hoarded Money. Income Tax on unearned income escapes Payroll Tax and tends to be earned by the wealthy and is more likely to become hoarded. Gains on certain asset sales obtain a tax discount and are more likely to become Hoarded Money. Money earned through sweat and toil tends to get spent within a week and rapidly enters the Circulating Money. Hoarded Money tends to be owned by people that have ‘more money than they can spend’, so taxes that favour the better off will encourage hoarding.

Taxes modify the spending habits of businesses and consumers. Inappropriate taxation tends to distort the economic marketplace. Inappropriate taxes will lead to losses in efficiency and sometimes to decreased tax collection. Taxes can be revenue-negative which means that an increase in tax rate can cause business activity to fall and consequently create a decreased revenue to the government.

Another unfortunate effect of some taxes is their cyclical nature. When there is a recession, some taxes cause a significant fall in government tax collection.

My Terrible Taxes are taxes that have bad characteristics. I list a few of these bad characteristics here:

• Taxes that encourage hoarding.
• Taxes that discourage active business in the real economy.
• Taxes that have the potential to be revenue negative.
• Taxes that cause a fall in government revenue when the economy slows. This is unfortunate because this is the time that the government needs to tease more money into the Circulating Money.
• Taxes that encourage inappropriate social problems.
• Taxes that encourage inappropriate investment activities. This includes wickedly oversized and energy-hungry houses whilst small business struggles in scrappy tumble-down buildings.

Payroll Tax

Payroll Tax is a tax paid by employers or employees. It is usually calculated as a percentage of the salaries that employers pay their employees. Payroll taxes can be classified as:

• Deductions from an employee’s wages.
• A tax paid by the employer based on the employee’s wages. [1]

Payroll taxes paid by employers are effectively a government mark-up on the cost of labor. Payroll Tax is payable from the first dollar. It is not progressive. It is charged at the same rate irrespective of the incomes of the employees. But this is not the worst element. This quasi-Income Tax is only payable by people working for companies. Someone that makes their money by other means, does not pay Payroll Tax. ‘Unearned Income’ thus escapes Payroll Tax. Those that are earning vast amounts of interest are more likely to be the hoarders and they avoid the added burden of Payroll Tax on their ‘un-earned income’. Thus, Payroll Tax favours the hoarders of money over those earning money from genuine human effort. Land monopolisers living off rent income also avoid Payroll Tax. As those earning interest income are certainly hoarders of money and landlords are likely to be hoarders, we are giving a direct tax advantage to money destined to become Hoarded Money. Those employees operating in the Circulating Money section of the economy get hit harder than those operating in the Hoarded Money section. Payroll Tax encourages an increase in Hoarded Money and is a downward pressure on velocity.

Some Comments about Payroll Tax:

• Payroll tax magnifies the labour component of production. This incentivises companies to minimise the labor content of their product and service. This tends to marginalise the less efficient workers. Only highly efficient workers will get employment. Work will move to areas with less punishing labour costs.
• In Europe, payroll taxes and other mandated contributions are as high as 30% of the payroll in countries such as Sweden, Belgium, France, and Italy. [2]
• In Britain and North American, payroll taxes and other mandated contributions are between 15% and 20%. [2]
• Some jurisdictions apply a ‘Payroll Tax Threshold’. Businesses with a payroll below the threshold are exempt from Payroll Tax.
• Payroll Tax is prone to create higher unemployment by raising employment costs.
• Many states rely on Payroll Tax for revenue. It can supply over one-third of state revenue. [3]
• Inappropriate federal arrangements can make it difficult for states to reduce Payroll Tax.
• Payroll Tax is sometimes criticized as being inefficient because is is a tax on jobs and a tax on exports. [3]
• In 1986-87, NSW payroll tax administration cost was reported to be 0.2% of payroll tax revenue. Land Tax had an administration cost of 2.6% of revenue. [3]
• There is data from Germany that suggests that Payroll Tax decreases employment. As the payroll taxes increased from 12% to 20% between 1960 and 1996, unemployment rates went up from about 2% to around 10%. Labor costs per unit of output increased noticeably. [3]
• Payroll Tax is counter-cyclical. When there is a recession, Payroll Tax collection falls. [3]
• In some jurisdictions, Payroll Tax is exempt on high salaries. For example, in the USA, salaries over $110,000 gain a Payroll Tax exemption. Quite bizarre.

Some Quotes about Payroll Tax:

Warren Buffet: “Well, taxes -- if you make money with money, you get taxed very -- at very low rates; 15 percent dividends in capital gains. No payroll tax. If you make money with muscle or hard work or sweat of your brow, you get taxed at rates that move on up. And most of the people, the middle-class gets taxed at rates of either 15 percent or 25 percent on their income tax, but then they get really hit hard on the payroll tax and that’s what brings the rates in our office up to an average of 36 percent if you leave me out.” [14]

Paul Begala: “Republicans want to punish work and reward wealth; hence the high payroll tax and the low dividend tax.” [5]

Howard Warren Buffett: “I’ve never had it so good in terms of taxes. I am paying the lowest tax rate that I’ve ever paid in my life. Now, that’s crazy. And if you look at the Forbes 400, they are paying a lower rate, accounting payroll taxes, than their secretary or whomever around their office. On average. And so I think that actually, people in my situation should be paying more tax. I think the rest of the country should be paying less.”

Howard Warren Buffett: “I love to tell how I’m suffering because one percent we’re paying 25 percent of the total. We’re not paying 25 percent of the total taxes on individuals. We’re paying maybe 25 percent of the income tax, but the payroll tax is over a third of the receipts of the federal government. And they don’t take that from me on capital gains. They don’t take that from me on dividends. They take from the woman who comes in and takes the wastebaskets out.”

Payroll Tax gives a tax advantage to the hoarders. Payroll Tax is a tax on the transactions between an employer and an employee. Thus, it is a tax on money when money is carrying out its duty of creating transactions. It is also a tax on Circulating Money. This tax is also counter-cyclical for the government. When a recession arrives, tax collection falls.

Payroll Tax also gives a significant advantage to persons with unearned income and thus magnifies the chance that the Hoarded Money percentage will increase. If money is earned in a factory, it is subject to Payroll Tax. Unearned income escapes this Payroll Tax.

Income Tax – Employees

Income tax is a tax on the money transactions between and employer and an employee. It is a tax on an important class of transactions within Circulating Money. It is a direct tax on Circulating Money and a constant drain on Circulating Money. It has another issue in that is counter-cyclical. When the economy retracts, the revenue from Income Tax falls.

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Income Tax is a tax that should be minimised, certainly for lower income earners. Income Tax should be reduced and partially replaced with Land Tax, Wealth Tax, Transaction Taxes and other less damaging taxes.

Income Taxes are notoriously prone to avoidance and evasion. The income tax regulations effectively turn large portions of the population into criminals. The tax encourages great effort into minimising and avoiding the tax. Significant national effort goes into reducing this tax making this an inefficient tax.

Income Tax – Small Business

Small Business pays Income Tax at the same rate as individuals. But the calculation is different. For a business, it is calculated as profit rather than income. The worst component of Income Tax for Business is depreciation. Depreciation delays tax deductions for expanding businesses. Besides discouraging business expansion and business start-ups, it pushes expanding businesses toward bank borrowing. Expanding businesses and start-up businesses should receive tax deductions or tax delays rather than increased taxation. Expanding businesses are increasing the available jobs in the nation.

Depreciation is a calculation on purchased assets. When assets are purchased they are not treated as an expense until some time into the future. This leaves businesses short of working capital. Asset purchases are effectively treated as income. Expanding businesses pay a higher rate of income tax than steady state business or shrinking businesses. Small and medium business have a high tax compliance cost compared to an individual.

Depreciation rates should be set higher than the actual physical life of the applicable asset to compensate for the lack of a compensation arrangement for inflation.

Taxing the small business sector may reduce the likelihood of new businesses taking advantage of business opportunities left unexplored by existing businesses. Barriers to market entry tend to reduce competition in product markets, leading to inefficient production. [3]

Most big businesses start out as small businesses. Small business plays a vital role as the seedbed for future big businesses.

Company Tax

This tax is a tax on the result of all transactions by a company during a year. It is thus a tax on the success of transactions. It is a tax on Circulating Money. Company Tax should be of a level that does not inhibit activity. Depreciation turns the Company Tax into a Profit Tax. Money has been expended, but a tax deduction cannot be claimed until well into the future. Expanding companies depreciate their assets in the future. This forces expanding companies to seek money elsewhere. Rather than borrow money from banks, they tend to sell shares. Depreciation forces companies to sell shares to people with ‘more money than they can spend’ who then get part of the earnings of the company without the daily effort and stress involved with running the company.

One employee of a mining company told me that the company existed for the purpose of creating invoices. He had been well brainwashed. Companies have a much wider role than that and these roles are often given inappropriate priority. They provide employment for citizens, goods and services to citizens and lower down the list, they make income for a few owners and provide tax for the government.

Effectively, the profits of corporate activities finish up as income of individuals so corporate tax is a temporary removal of tax until the profit is taxed as individual income tax.

Corporations have become so skilled at minimising tax that any attempt to charge a high corporate tax will only punish the local business and give favour to international business. Corporate tax should be minimised and depreciation should be immediately deductible. There are so many loopholes and methods for companies to move profit to low tax jurisdictions that high tax rates become ineffective. High tax rates encourage avoidance

Some Comments about Company Tax:

• The corporate tax system is loophole-ridden and full of giveaways.
• General Electric pays a pittance in corporate income tax. Though the statutory corporate income tax rate is 35 percent, GE last year paid a paltry 3.6 percent. In 2009, despite making $10.3 billion in pre-tax income, GE paid nothing in corporate income tax (and, in fact, received $1.1 billion in tax benefits). [7]
• While many corporations have effective tax rates approximately equal to the 35 percent statutory rate, other corporations have effective rates in the low twenties, the teens, and even the single digits. [7]
• The major reason for these low effective tax rates is the ability of some corporations to shift a significant portion of their profits into low-tax jurisdictions. [7]
• Reducing the corporate rate down to 25 percent from 35 percent will not achieve much if companies exploit the system to bring their rate all the way down to zero.
• Large companies have reduced tax charges compared to small companies which creates an unfair competitive advantage for large companies. This creates a tax revenue issue for government. The government then receives little tax from the corporations and the small businesses that pay tax are destroyed.
• The nonpartisan Government Accountability Office released a report which finds that the average tax rate for corporations is 12.6 percent. That’s only a third of the nominal tax rate. [8]
• Profitable corporations are supposed to pay a 35 percent federal income tax rate on their U.S. profits. But many corporations pay far less, or nothing at all, because of the many tax loopholes and special breaks they enjoy. [9]
• In 2003, Congress took a step toward leveling the playing field by creating a special top tax rate for dividend income of 15 percent (previously, it was taxed as ordinary income at rates as high as 38.6 percent). [10]
• The simplest fix would be to equalize the treatment of interest and dividends, either by allowing corporations to deduct dividends or by granting an offsetting deduction or credit to stockholders. Most other large industrialized nations use the latter method. A more far-reaching reform, one recommended by economists for decades, would be to completely integrate the corporate and individual income taxes. [10]
• Ireland’s recent tax cuts are believed to have improved living standards significantly. For many years, Ireland had high unemployment, budget deficits and high taxes. In 1986, Ireland faced a fiscal crisis. The government reduced spending and lowered taxes on both individuals and corporations. Over the next 13 years, Ireland’s per capita income increased 63% of the United Kingdom’s average to exceeding it in 2000. Ireland now enjoys one of the highest standards of living in Europe. [According to a December 2004 article in Celtia.info, as reported by Investopedia] [11]
• Tax cuts in Poland, Slovakia, and Hungary before their entry in the EU spurred economic growth. [According to a May 2007 article in the Herald Tribune]
• In some jurisdictions, the top marginal personal income tax rate exceeds the corporate income tax by a significant amount. This gives a strong incentive to choose the corporate mode of business for tax reasons alone.

Sales Tax

This tax is a direct tax on transactions that involve goods and services. It conveniently avoids asset purchases. Sales Tax is taken from Circulating Money at each and every transaction in the real economy. Transactions in the financial economy manage to avoid this tax. Tax is less noticeable when removed at the time of a purchase. The buyer has already factored the tax into the purchase price as if the tax was part of the cost of the purchase. To the purchaser, the tax is almost invisible. Because Sales Tax is convenient, does not make it a good tax. The tax is still an inhibitor to the activities of money. It depletes the volume of wealth creating transactions whilst allowing Hoarded Money to sit idle at great cost to the nation and its inhabitants.

Some Comments about Sales Tax:

• Sales Tax tends to be regressive. Lower and middle-income taxpayers spend a larger share of their household budgets in tax than higher-income taxpayers. [12]
• Sales taxes tend to be an important revenue source for state and local governments.
• According to estimates produced by ITEP based on Consumer Expenditure Survey data, low-income families typically spend three-quarters of their income on things subject to the sales tax, middle-income families spend about half of their income on items subject to sales tax, and upper-income families spend only about a sixth of their income on sales-taxable items. [12]
• Online sales have damaged the tax collection ability of Sales Tax.
• Japan raised its Sales Tax rate from 5% to 8% in 2014. This sent the economy into recession. This caused the government to delay the second stage of the rate increase by eighteen months. [13]

Compliance Costs

The compliance costs of many taxes tend to fall disproportionately on small firms. A study of New Zealand’s GST found that the smallest firms face proportional compliance costs 500 times those of the largest firms. [3]

The administrative costs to governments of levying very small taxes on a large number of small firms can be prohibitive. In the case of many small firms, the costs associated with collecting, processing and enforcing payroll tax may be greater than the revenue collected. [3]