Category Archives: Taxes

So far just Tax Freedom day. Any discussion about taxes or tax theory can go here.

Why the Chinese are getting divorced

An interesting phenomenon is occurring in China, according to CNN’s global public square.

Save your money: divorceA new tax law in China states that there will be a 20 percent capital gains tax on the sale of second homes. This law can be argued to have various consequences, which usually vary depending on whether you agree with the tax or not. Some might argue that this is a good way of taxing richer people, since it is only on second homes. Others may argue that a 20 percent tax on a house is too high and will be a disincentive to sell, thereby stagnating real estate markets.

I doubt many pundits would except it to lead to a rise in divorce rates, however.

But apparently this is exactly what is occurring. If a married couple owns property they want to sell (that is not their first home), they can get a divorce. Then one of the divorcees can claim they only own one of the properties, sell it, and then the couple can get remarried, presumably without paying the tax.

This extreme form of pragmatism may seem odd to many, but is it wrong? In a manner, these couples are finding a way around a system they obviously feel is unjust. They are confident enough in their relationships that a dissolving government confirmation of their marriage will not jeopardize whether they want to stay together or not. And in the process they get to keep quite a bit of hard earned cash. The main opposition points to this would be:

A) It destroys the sanctity of marriage.

B) It subverts what the government is trying to achieve.

These are obviously valid points, with the first being personal, and the second merely stating the government left a loophole people are willing to take advantage of.

In a way, however, it is reminiscent of an extreme form of pragmatism not seen in the United States since the frontier days of P.T. Barnum through to the roaring 20′s. Of course, that all ended with the stock market crash of 1929, so who is to say what will happen in China’s future? In the meantime, however, the Chinese seem to be nothing if not resourceful and pragmatic.
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Happy Tax Freedom Day India!

No More Working for the Govt. India!Today is the 71st day of the year and, with a 20% burden rate, marks Tax Freedom Day in India, the first of the countries being tracked (this one by the Center for Civil Society).

Tax Freedom Day is the day when the average tax payer has stopped working for the government and has started working for him or herself.

As a sneak preview, the latest data puts the U.S. Tax Freedom Day on April 17th and the U.K. on May 30th (we should mention that the United States’ tax freedom day isn’t calculated each year until the end of March). The latest Tax Freedom Day we found was Belgium’s, which occurs on August 3rd. This means 58.5% of Belgium’s income gets taxed.

A Lottery for All

Another interesting take on lotteries, following on an older post regarding lotteries and savings accounts. If you recall, there we mentioned Prize Linked Savings, or a savings account that took interest payments, pooled them together, and doled them out as lottery winnings. Despite very successful pilot programs (by successful we mean they made savings rates increase) in places like Michigan and South Africa, the government has a problem with tem. Usually 40% of lottery winnings are taken by the government, which is much harder to do with savings accounts since they are privately owned.

Enter a model used by the Dutch, wherein a whole postcode will win each month’s lottery. The winnings are divided up between all residents within that postcode, meaning all winners receive around $13,000. So everyone in the community can be that much better off.

So how can these two ideas be combined? Well theoretically, the 40% of winnings taken by the government should be used to benefit its citizens, correct? What if these citizens received the winnings themselves? Could this allow the government to decrease (or eliminate) the amount of taxes taken out of the savings’ winnings?

As an explanation, people would be able to open bank accounts, knowing the interest they earned would be directed toward a pool of money. This money would then be doled out in a monthly lottery but, rather than have one individual win the full amount, a whole postal code could win it. Of course, this probably means winnings will be in the $10,000 range rather than the $1,000,000 range, but it also means 40% wouldn’t be taken out as taxes, since these would constitute a form of payment to citizens regardless.

The devil, as always, is in the details. Would the bank accounts still be private or state owned? And exact amounts of earnings, winnings and (eventual) tax payments would have to be calculated. But if it encourages people to save and not to spend their own earnings on lottery tickets, might it not be worth checking out?

How America is like You

If you are in the United States you are probably aware that the debt ceiling has been raised and the country’s rating has (so far) maintained its high status. That’s nice, but what does it mean in real life? It might be easiest to treat the country like a person, say you or me.

The US, by raising its debt ceiling, has basically extended its own line of credit. This is as if you had maxed out your credit card but then raised the spending limit (don’t expect VISA to offer that option anytime soon) so you could keep on buying. This is good if the money you then spend earns you more money, so you can start paying back what you owe and you never have to default on your monthly payment. Likewise, if the economy picks up the US can use future gains to pay back what it owes. If the economy doesn’t pick up, however, the US will just accumulate more debt and will have the same problem (albeit more severe) in the near future.
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Tax Freedom Day UK

Yesterday was Tax Freedom Day in the UK, and for a word about what that means I direct you to Allister Heath’s editorial in City AM today: Time to celebrate tax freedom day.

As he states: “to think that every single penny earned by every single person working in the UK so far this year has all been spent on paying for the public sector does put matters into perspective.”

Let’s celebrate the first day of the year we actually work for ourselves. As we do this, let’s hope that more people realise how hiking up taxes will only serve to slow down the economy, and will not move us out of debt.

Taxation and “Fairness”

Do you ever get the impression that people see taxation as an end in itself, rather than a means to an end? We are struggling with empty state coffers: well just raise taxes. But for what? Why tax people at all? What is the money being spent on, besides front-line services? And why should producers be paying for those things?

Chris Dillow writes at the Stumbling and Mumbling blog about “The Fairness of 50p” tax rate.  [To be honest I take issue even with the title of this post: “fairness” is not an absolute, and what is fair to one is not fair to all.]

In a nutshell: he is saying that the rich (which he says can mean various things, but which he does not define here) should pay more taxes to the state because it is the state that has made them rich to begin with (I should have warned Ayn Rand fans to brace themselves for that one).

In any case, he presents his argument in 3 main points, and I choose the space of a post, rather than just a comment on his site, to give my own opinion on each. His first point reads:

“1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.”

“Even if the state did not educate you”, he says, “chances are it educated your customers”. Although he does not explain why that education is central to these customers purchasing my product, service or labour. And I apologise for sounding sarky, but if I can prove that most my customers were not educated in state schools, may I pay less taxes?

The state also provides peace, in which the economy can flourish. I wonder: without the state are we all crazed animals who feed on each others’ wealth and fear? Did not trade come first, the state second? The state is not detached from peace, of course: it helps maintain peace, more or less effectively. However: we have the same amount of state all over the country, but not the same amount of peace (or safety).

And thirdly within this point: the state helps sustain capitalism. In fact more often then not: when the state gets involved in business corruption and market distortion ensue (automotive bailout, anyone?)

His second point seems to imply that business is corrupt by definition:

“2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful.”

In other words man is powerful first and rich second, and at that point holds undue influence to extract money from the state. I dare say wealth tends to precede power. Even in politics: wealth helps get you elected. In fact generally the more one grows in wealth, the less he extracts from the state. He will move from state to private health care, send his children to private schools, not depend on public housing, and much more.

In point 3 we look at markets, and so of course we find a negative:

“3. Inequality is a form of market failing.”

This appears premised on the idea that people become rich because of luck or talent, which I presume he associates closely with luck (you are either born with it or not). So this argument can only stand if we deny that wealth can and usually does come from work. Providing a good service, creating a great product, making fruitful decisions: these things generally come from training, work and dedication; not luck.

In any case I find this point moot, as equality is not, nor should be, the goal. Everybody has different desires, different pleasures and different priorities. The goal, to paraphrase Ocean, is that you get out as much as you put in, and you choose how much you put in.

I strongly believe in equality of opportunity as the only desirable equality, and this is achieved by less intervention, not more.

In summary: according to Dillow the state gives us all that is good (governments make you rich!) and the markets all that is bad (inequality is, we presume, bad). The more you have, the more you should contribute towards MPs second houses.

Imaginary Drug Taxes

One of the arguments put forth by proponents of drug legalization is that, if taxed, drugs would provide enormous revenue to the state coffers. Purely from an economic point of view, this would make sense (which may be why so many economists tend to be pro-legalization, or at least decriminalization). From a political perspective, however, it can be suicide to state that drugs should be legal in the streets and towns where our children walk and play every day.

Some states have now tried to have the best of both worlds by requiring that drugs carry an “Unauthorized Substances Stamp”. Yes, the drugs are still illegal, but they require the stamp nonetheless. Admittedly, the lawmakers don’t expect people to apply the stamps to their drugs, but they do hope to be able to receive more in fines if they can claim another crime on top of illegal substances.

To us, this seems very much like double jeopardy since, in essence, drug users are being punished twice for the same crime. Since drug usage is illegal, they could just raise the fines for illegal substance use. Or, of course, they could try legalizing and control its use.

Via article in the Economist, available here.