The invisible helping hand
The Standards of LIFE taxation system guides the invisible hand of the market to help everyone.
By setting tax rates using the median earnings of the population and by linking the use of tax revenues to the cost of providing the basic services that underpin society, the Standards of LIFE taxation system is a mechanism that aligns the interests of the individual with the whole.
The result is that everyone in society has a close personal interest in both raising the prosperity of the whole population and the extent of, and cost of, the services that are included in the BASE contract. A common assumption today is that we cannot afford to provide basic services to all citizens, so here we set out how taxes are structured to pay for BASE in a way that is fair and achieveable.
Very powerfully, the tax system also supports the development of the micro economy in tandem with BASE services.
There are effectively only three modes of taxation: income, use and property. It is the supposition of the Standards of LIFE that these modes of taxation be used to satisfy different needs of a society.
It is a well understood precept of taxation that it is only effective when it is perceived as fair so that participation is at least voluntary, if not enthusiastic! Furthermore taxation is most likely to be effective when it is administered according to the same principles around the world. Adoption of the same taxation policies across borders is proportionally important to the fluidity with which money flows across those boundaries.
Principles of Taxation
Broadly speaking, personal income taxes should be used to satisfy the basic community contract that binds a society together (BASE); corporate income and use taxes used to fund the aspirations of a society beyond the basic community contract; and property taxes used to provide funding for the local community within which such property exists.
Personal income taxes require the broadest reach, and so it is important that they adhere to and represent the most broadly accepted needs and aspirations of those that pay them. It is for this reason that LIFE proposes that income taxes are based on and used to satisfy the most basic mutual understanding of what underpins the fabric of the society we wish to live in (see BASE). This means that any society’s desire to use taxation to fund aspirations beyond the basic social contract, must be satisfied through corporate, use or property taxes.
Looking back at the principles on which the Standards of LIFE are based, it is fair to determine that anyone earning as much as half the people in the society (median earnings), should be paying sufficient taxes to cover the costs of their BASE services.
It is also fair to note that the success of any individual, in any society, is dependant, in part, on the infrastructure of the society: the education of its people, the transport and communications networks and the peace, safety and stability of the society as whole. For this reason a progressive tax system, that asks those who have derived the greatest benefit from society’s infrastructure, to contribute a higher percentage of their income to fund that infrastructure, is plainly fair and proper.
In order to form a more perfect tax system that represents these principles and is readily adopted and embraced, LIFE proposes an income tax structure that is based on two clearly observable features of a society:
- the median income of the citizenry
- the cost of providing those services that are deemed to be the basic social contract (BASE)
It is a structure that is mechanical in its design, reducing political determination of personal income tax rates. The logic is, simply, that the revenue generated by income taxes shall be sufficient to provide for the social infrastructure that all citizens regard as intrinsic to their mutual membership of society.
The governmental layer at which income taxes are levied should be at the highest layer possible and spent at the lowest layer possible. Ultimately, the social contract is between all peoples of the world but we are some way away from being able to implement income taxes on a worldwide basis. Today income taxes are levied at the State, or national, level and that is the most likely starting point from which to work, especially given that there are ‘nations’ today that are really Transterritories.
Basic Rate Calculation
The calculation of the Basic Rate of Income Tax is the primary variable in the Standards of LIFE tax system that needs to be sorted out. It is bound by a lower and an upper limit:
Taxes must generate revenue to cover the cost of providing all the BASE services for all the people. Given that many BASE services are provided for the entire population and every society has some children, some elderly and some infirm members this will never be zero.
Taxes must never exceed 50% of income, to protect and preserve the right of all people to the rewards of their work and risk
So in any society, the value of half of the total income of all of earners, is the maximum budget for BASE services.
Having determined the bounds of Income Taxes, the next step is to combine the principle of progressive income tax, with the principle that anyone earning the median income (ME, Median Earnings) should be paying sufficient taxes to cover the cost of the services they receive. Because anyone earning the median is already paying for their own services, it is possible to reduce tax rates for those making a little more than the ME and making up for that by raising slightly more from those earning many times the ME. So the Basic Rate of tax can be halved for income between the ME and twice the ME. These citizens are already paying their share of the basic costs necessary to support their society and can expect to keep more of the money they earn. Income higher than twice the ME is taxed at a rate that is increased by a percentage, for each multiple increase of income expressed in terms of the median income.
As an example, if the cost of BASE is equal to 50% of the total income, then the Base Rate of income tax would be 50% and apply to all income up to the median income. Income above the ME, and under twice the ME, could be taxed at 25% and then logarithmic increases in income attract an additional 5% tax rate, up to a maximum of 50%. In this example income between twice (2X) the median and four times (4X) the median would be taxed at 30%, between 4X the median and 8X the median at 35%, between 8X the median and 16X the median at 40% and all income higher than 32X the median income taxed at a rate of 50% – see table below.
|Example 1||Example 2|
|2x||4x||BR/2 + 5%||30%||20%|
|4x||8x||BR/2 + 10%||35%||25%|
|8x||16x||BR/2 + 15%||40%||30%|
|16x||32x||BR/2 + 20%||45%||35%|
|32x||+||BR/2 + 25%||50%||40%
Try the LIFE Personal Income Tax Calculator for yourself and see how it would work for you.
In addition to the understandability benefits of this system, it has built into it two variables that are likely to exert a positive influence on the society:
- a mutual desire to increase median income
- a mutual interest in reducing the cost of providing BASE services.
It will be in everyone’s interest to increase everyone’s income, at the same time as seeking the greatest efficiencies in the provision of BASE services. Both of these would result in lower Basic Rates of income tax.
It is deliberately left open, in this mechanical system, to define what constitutes the basic social contract services. This allows for all of the different circumstances and political persuasions that different societies have. In a modern Western society the basic social contract may well be deemed to include modern healthcare services, advanced education and high-speed rail services while in another society the provision of food security, primary education and basic roads may be sufficient to constitute the social contract relevant to that society at that time. Given a philosophical constraint that income taxes should never exceed a rate of 50%, it is necessary and appropriate that the cost of providing all the social contract services is proportionate to the capacity of the society to afford them.
This system embodies the principles of the society into the most basic mechanism (tax) that enables the government of that society to pursue everyone’s mutual goals.
Keeping the tax code simple is important to its transparency and acceptance. For this reason there should be no allowances, deductions, credits or classifications of income.
Income = all receipts taken in a form which can be spent and includes gains on capital, inheritance and investments. There is an argument that providing for allowances (creating a minimum income before which income taxes are applicable), greatly simplifies the taxation system and helps to remove a large number of people from the administrative burden of reporting and collecting taxes. However the trouble with this is that it comes from a top-down perspective, in which the top is trying to raise money from the others and would rather not bother trying to collect small amounts from those with low incomes (and therefore minimal capacity to enhance revenue). It is often sold as an appropriate mechanism to “free” a significant portion of the citizenry from the burden of taxation. In our opinion, it is both condescending and disenfranchising, as it is a worthy and empowering activity for every citizen to be a contributor to the society they live in, and for this reason we are not in favor of allowances.
Use, or sales, taxes are not to be applied to basic food stuffs, social benefits, public transportation, education, basic healthcare services or any other element of the services and materials that make up BASE.
The most significant use of sales taxes should be to load the cost of products and services with their environmental costs not otherwise accounted for in the marketplace.
Corporate Income Tax
The Corporate Tax Rate on profits should be fixed at the same rate as the Basic Rate calculated for personal income tax.
This removes any penalty or incentive to classify income is either personal or corporate and it also creates the same motivations toward higher median incomes for everyone and greater efficiencies in the provision all BASE services.
In order for non-profit organizations to claim charitable status they must declare their overhead expenses percentage on all materials and all monies paid to any individual are subject to personal income tax for that individual.