new chpt.8 broken tax system fm. socialcapitalism (eng.ver. 2015)

From’ Socialcapitalism’ www.socialcapitalism.dk Book FREE DOWN-LOAD

Below chapter is from the English translation of ‘Socialcapitalism’ by Klaus Riskaer Pedersen (2014) by re-written and re-introduced. The whole book can be down-loaded for free at www.socialcapitalism.dk

8. A broken tax code

Benjamin Franklin has been widely quoted for his remark in 1789, that “nothing can be said to be

certain - except death and taxes” , and history seems to suggest so. 1

Historical Background

Around 3000BC, Sumerians living in Southern Mesopotamia invented writing in the form of a

simple, partial script suited for data-processing, but not usable for writing in the sense of full scripts

such as Latin, ancient Egyptian hieroglyphics, and Braille.

The first known message left by our ancestors to man was not poetry or words of wisdom. It

simply stated; “A total of 29.086 measures of barley were received over the course of 37 months.

Signed, Kushim”. This ability to store information outside the human brain for the first time 2

coincided with the first known use of ‘money’ as a universal medium of exchange in the form of

Sumerian Barley. The first known messages to humanity were records of tax payments, the

accumulation of debt, and the ownership of property. In the actual case, the record was in reference

to the receipt of taxes over a period of 37 months.

Under the Inca Empire, the ‘quipu’ system of data recording was used for thousands of years until

the Spanish conquest of South America. Each quipu consisted of cords and colors and could

measure into the thousands. It was essentially a simple bookkeeping ‘script’ for the purpose of

recording taxes and property ownership. Thus, taxes have been around for a long time, and are 3

likely to remain so.

Insurrection and revolutions have followed the application of incorrect taxation or collection

mechanisms, which has resulted in revolt.

Plender, John (2015), ‘Capitalism - Money,Morals and Markets’ (Biteback Publishing Ltd)1

Harari, Yuval Noah (2015), ‘Sapiens - A brief History to Humankind’ (Harper Collins)2

Harari, Yuval Noah (2015), ‘Sapiens - A brief History to Humankind’ (Harper Collins)3

CC2.0 LICENSE Klaus Riskaer Pedersen 2016

http://www.socialcapitalism.dk


The Boston Tea Party was a revolt against tax farming by the English Monarchy in the United

States, and ultimately led to the US Declaration of Independence. There is no universally definitive

theory of why the French Revolution came about. However, a significant factor behind the events

leading up to the summer of 1789, was the royal financial crisis of 1787-1789.

The political revolution coincided with King Louis XVI’s chronic financial difficulties and

attempts to fiscal reform. Matters escalated out of control under the reforming minister Charles

Alexandre de Calonne. In 1787, he was responsible for an abortive reform program designed to

remodel the ‘ancien régime’ monarchy based on new taxes, including a universal land tax, while

accommodating the existing elites (nobility, clergy, and judicial aristocracy). The rest is history. 4

Throughout the 1st millennium BC, one of the principal codes of conduct where humans as a single

unit were governed by a single set of laws, was the monetary order. With this emerged the ability to

plan and collect taxes. Henceforth, tax revenues were derived from indirect rather than from direct

taxes, which were collected by nobles or tax-farmers. 5

This was considered the most appropriate and least intrusive way of tax collection. Montesquieu

wrote in 1748 that ‘duties on commodities are the ones least felt by the people because no formal

request is made for them. They can be so wisely managed that the people will be almost unaware

that they pay them’. However, direct taxation was needed to finance centralized government 6

(Royalty), and direct tax-rates of 5-10% was customary throughout ‘ancien régime’ France and

Germany. From 1707, the tax code was formalized by ordinary people paying ‘royal

dixième’ (1/10th of their income to the State). In revolutionary France, this was replaced with index-

based taxation in order to introduce progression in taxation, as taxes were collected based on the

number of windows and doors in the taxpayers’ primary residence (‘the door and window tax’).

However, more importantly was the introduction of property taxes in 1792, based on the rental

value of all real estate owned by the taxpayer. It took almost another 100 years before taxation

(under the Third Republic in France) was levied against interest, dividends, and other financial

revenues. In Germany, it was only in 1906 when an insignificant property tax was levied on

taxpayers. In the United Kingdom, a tax on estates was applied from 1896 at a rate of 8%,

increasing to 15% in 1908. In the US, federal tax on estates and gifts was not instituted until 1916,

Israel, Jonathan (2014): ‘Revolutionary Ideas’ (Princeton University Press)4

Tax farming was established by States licensing out tax collection to private tax collectors, who paid a lump sum or share of 5revenues for the exclusive right to collect taxes.

Montesquieu (1748) ‘The Spirit of the Laws’ (Cambridge University Press p. 217).6




but rates quickly increased above those found in France and Germany. 7

‘Progressive taxation’, as we know it today, was one of the major creations of the twentieth century,

and was required in order to allow for financing of the expanding democratic society. Progressive

taxation was introduced in Denmark in 1870, Japan in 1887, and Prussia (Germany) in 1891. In the

UK, it was adopted in 1909 and likewise in the United States in 1913.

Taxation is the natural offspring of democracy and universal suffrage. The moral logic behind

taxation is well summed up by Will Hutton: “As human beings associate in society and build public

and social institutions that represent their collective aim, social purpose, and human ambition, while

sharing risks – not least in an effort to counter brute and bad luck, share brute good luck, and show

empathy to one to another.” 8

Progression was in fact implemented much earlier in time. In ancient Athens, citizens were divided

into four classes. Those who received 500 measures of liquid or dry fruit from their goods paid one

talent to the public. Those who received 300 measures paid half a talent. Those with 200 measures

paid one sixth of a talent, and all citizens of the fourth class paid nothing.

The use of progressive taxation was applied to a full extent during the 1930’s in the United States,

as the top tax rate was increased from 25% to 63% in 1933 and to 79% in 1937. Later in 1942, rates

were increased even further to a top rate of 88% (The Victory Tax Act). For almost half a century

(1933-1980), the federal income tax rate in the US was at an average of 81%. Only tax rates in

Britain were higher. During the 1940’s, the top rate on unearned income passed 98%; a level

attained again in the 1970’s. In countries such as Germany and France, top rates were between 50 to

70% from the late 1940’s to the beginning of the 1980’s. However, confiscatory taxation on

unearned income dropped back down during the period between 1980-2010, where US and UK

rates dropped to the 30 to 40% range; a level maintained until the present, and also followed by

Europe and Japan. 9

Today

Piketty, Thomas (2014), ‘Capital’ (Harvard University Press)7

Hutton, Will (2015), ‘How good we can be’ (Little, Brown Book Group)8

Piketty, Thomas (2014), ‘Capital’ (Harvard University Press)9




For taxes to be collected over the long-term, it is imperative that the populace considers them

effective, transparent, and fair. A few things seem to suggest that this is not the case at present, and

that the tax code must be reconstructed in its entirety as part of the move toward Social Capitalism

in society.

For a tax system to be effective, it must tax everyone on equal terms. For a tax system to also be

transparent, no one should be able to explore advantages that are not available to everyone else (as a

matter of practical reality). In addition, for it to be fair, any progression must capture inequality and

serve to establish an identical relative cost of taxation to everyone, excluding only the economically

disadvantaged.

Analyzing the present reality of taxation against these benchmarks establishes a clear understanding

of why the present tax paradigm is neither effective, transparent, nor fair. To illustrate this

statement, I have made an analysis of two different tax collection practices: one in relation to the

welfare state of Denmark, and the other in the tax-restrictive political climate of the United States.

Besides Sweden, Denmark has the second highest effective taxation as a proportion of income, in

the world. The figures show that global individual and business taxation in the country in 2013 was

975 billion Danish kroner (approximately US$150 billion). Of this, including all income tax,

payroll taxes, social insurance, retirement receipts, and excise taxes, business and corporate taxation

totaled 115 billion Danish kroner, corresponding to 11.6%. Therefore, 88% of all direct and indirect

taxation was levied on individual taxpayers (private individuals and households) in Denmark in

2013.

In the United States, we see the same imbalance between the impact of taxation on the general

population on the one side, and corporate and business life on the other side. In 2014, total

government revenue from federal, state, and local taxation was US$5.8 trillion. Of this US$2.1

trillion came from income taxes, and US$1.5 trillion from payroll taxes (OASIR - Old Age Survivor

Insurance, and ERISA - Employee Retirement Insurance). Ad valorem taxation (sales and property

taxes) contributed US$1.3 trillion, and miscellaneous fees and business taxation contributed US

$900 billion.

Looking at the part of total direct and indirect federal, state, and local taxation that can be CC2.0 LICENSE Klaus Riskaer Pedersen 2016



contributed to corporate taxation and business contributions, a total of US$370 billion was paid in

corporate income tax, and US$500 billion in ‘Business & Other revenues’.

A total of US$1.04 trillion was collected and paid by business in the form of the OASIR and

ERISA programs, which in this context is considered a tax levied on the working population though

the payroll taxes. Consequently, a total of 15% of all taxes collected on all levels of the United

States Government could be attributed to business and corporate taxation in 2014. 10

The effectiveness of progression is however working differently in a highly taxed and highly

regulated environment such as Denmark, as opposed to an environment like the United States,

which by European standards is still considered a low-tax region. As part of the total tax regime, not

only income taxes etc. are considered, but also the level of taxes on estates and property, special

duties levied on petrol and fuel consumption, and value added tax in general. In this respect, the

United States is still considered a low-tax environment.

However, the effectiveness of proportionality in the income tax system is considered important

when overall fairness is judged. Duties on consumption and payroll taxes are considered regressive,

as they tend to penalize low and middle-income taxpayers more than high-income taxpayers.

In the United States, the progression seems to be working to its intentions. Without going into a

very detailed analysis at this point, the top 20% of income earners in the United States earning in

excess of US$100,000 a year, have been paying 48.8% of federal, state, and local taxes in average 11

over the period between 1991-2004. Therefore, 80% of the income earners are paying about half the

global taxes on individuals and households.

Denmark is generally referred to as an example of a just society in relation to the income inequality

being one of the lowest in the world. This however, does not conform to the facts.

Household income in Denmark in excess of US$100,000 applies to 9% of income earners as

opposed to 20% in the United States. This confirms the notion of equality in the sense that fewer

income earners are earning top-incomes (percentage-wise). However, this is registered in terms of

declared taxable income. A number of tax benefits and tax reductions (among others for interest

costs on the primary residence of living) tend to eliminate income from the taxable income

www.usgovernmentrevenue.com 10

Chamberlain, Andrew; Prante, Gerald (March 2007), 'Who Pays Taxes and Who Receives Government Spending? An Analysis of 11Federal, State and Local Tax and Spending Distributions’ 1991-2004CC2.0 LICENSE Klaus Riskaer Pedersen 2016


http://www.taxfoundation.org/files/wp1.pdf

http://www.usgovernmentrevenue.com


statement.

Despite the fact that a complicated tax code is largely for the benefit of high-income earners, this

does not result in any major contribution to society in the shape of federal, state, and local taxes

paid.

While 20% of the income earners with a taxable income in excess of US$100,000 contributed

48.8% of all taxes paid in the US, the same group of income earners in Denmark only paid 137

billion Danish kroner in taxes, totaling 444.5 billion Danish kroner, or 31% of the total. 12

From the above computations, it appears that the tax code, as it has evolved during the second half

of the twentieth century, efficiently taxes and collects tax payments from individual taxpayers and

households, while the corporate and business sector of the economy contributes only marginally to

total government revenue. In addition, in tax jurisdictions with penalizing top-rate taxation,

something seems to suggest that the tax system is becoming progressively diluted due to the ability

of high-income taxpayers to plan away their tax liability.

As taxes are deemed to be effective, transparent, and fair, it will become one of the major

contributions of the networked social capitalist economy to repair the damage, and introduce a

revised and improved tax system for the benefit of the entire society.

Social Capitalism and Taxation

As more and more enterprises in the social economy produce value of a non-monetary nature, the

boundary between publicly and privately produced common goods becomes indistinct. This

represents a challenge to taxation.

Furthermore, income tax, and to some extent payroll taxes, will be difficult to enforce in their

present form, as part of the high-income producing population becomes more mobile between

different tax residencies and tax jurisdictions, representing a challenge to state and local tax

collection.

An expected increase in the average life expectancy rate will allow for an increasing part of the

http://www.skm.dk/skattetal/statistik/indkomstfordeling/progressionen-i-indkomstskattesystemet-2014 To reach a contribution of 1248% of taxes paid in Denmark, one will have to include taxable income starting from US$60,000 .CC2.0 LICENSE Klaus Riskaer Pedersen 2016


http://www.skm.dk/skattetal/statistik/indkomstfordeling/progressionen-i-indkomstskattesystemet-2014


population enjoying their 'third age', which may effectively span a number of decades (20-30 years)

in which no taxable income is produced besides income from savings and pension plans. In

addition, for more people, wealth creation will be based on cross-generational savings and benefits

from unearned income (housing or estates).

Particularly within the high-income sector of the population, taxation options will be affected by

not being employed in the classical understanding of the sense, and therefore will be difficult to

collect revenue by way of payroll taxes.

These situations are either difficult to tax, or represent a number of moral hazards to tax

effectively and fairly at the same time.

Today, corporate taxation is associated with the declared net income, whereby corporation tax is

calculated against a manageable rate of accounted net profits (after various provisions, depreciation,

etc.). It can be further reduced by choice of the geographical location of any tax liability and

transfer pricing (how goods and services are priced within a globalized corporate structure).

The present model used for the application of corporate tax liability means that tax today is only

charged against a fraction of total value creation by most enterprises (the accountable part that ends

up on the bottom line of the profit and loss account). It seems that by going forward, it is unlikely to

be considered as ‘fair taxation’ to maintain that personal income tax liability and corporate taxation

can continue only to be measured against declared taxable income or net profits. Tax must be fair

and not discriminatory as tax arbitrage and evasion of taxation compromises the assumed fairness of

the tax system. Taxes must not become regressive, resulting in the disadvantaged and low-income

taxpayer becoming subject to the highest effective rate of taxation. Nor should it allow the resource-

rich, high-income taxpayer to secure a significantly lower effective rate of taxation against global

income by applying deductions, tax beneficial investments, and highly skilled advisory services.

There is evidence today that suggests that high-income individuals manage to reduce their effective

rate of taxation measured against their global income. This occurs with the unintended consequence

that the proportionality of the tax system increasingly takes effect for low and medium salaried

incomes, which ideally should be subject to a lower effective taxation.

The tax system, which is intended to be proportional, has instead become inversely proportional.

Low and middle-income earners are easy to tax on a default basis and are, consequently,

experiencing higher effective taxation on their global income, as their global income is generally

similar to their taxable income. However, for entirely different reasons, it will be unlikely to

maintain the income tax system in its current form, and therefore the issue in relation to CC2.0 LICENSE Klaus Riskaer Pedersen 2016



proportionality in taxation will be replaced by other instruments of fair taxation.

Transaction Taxes

As digitalization of transactions and payments become the ‘norm’, one of the possible ways to

tackle these challenges could be to restructure the tax code into a new ‘Transaction and Value based

taxation system’ (‘Transaction Taxes’). This will imply that society abandons the previous

declaration based income and corporate taxation paradigm (‘declaration taxes’). Instead, society

will be required to implement taxation as a seamless and automated tax collection capability that is

enforced wherever transactions takes place in society, and against resource utilization and wealth

artifacts wherever recorded or accumulated.

On the following pages, what I suggest as a natural consequence of the social capitalist economies

is that network integration will break with the assumption that the present tax code, in any sensible

way, can be restored or reapplied to its original purpose.

Wealth-inequality in developed economies arises from the fact that increases in real disposable

incomes by wage earners is a relic of the past. Most salaried income today covers only the basic

needs for individuals and families and are consumed or, in fractions, put into 401(k) saving plans.

For the last few decades, spikes in private consumption have been closely affiliated with increasing

household private debt and mortgages taken out against the value of private property. As inflation

has been squeezed out of the economy, in particular because of quantitative easing by central banks

during the Great Recession (2008-2012), the relative impact of household debt and stagnating

values on private property will establish a very tangible ceiling above any growth in private

consumption. The IMF is forecasting global growth to be a mere 2.7% going into the next decade.

Any idea that accounting practices or the application of known instruments of income based

progressive taxation will allow for any significant increases to real disposable incomes, is lacking

an inspired and innovative second look at the basic construction of the tax system.

In recent times, inspired suggestions have been put forward, but all within the existing framework

of taxation, and all with no real chance of success.

Thomas Piketty, in his impressive historical collection of data, relates to the increase in




inequality , and proposes a penalizing on-going taxation on wealth, with the tangible result that 13

most wealth is actually taxed away over the next generation.

Philippe Legrain also feels compelled to suggest a more just application of the tax code. His 14

suggestion is that tax revenues are increased by taxing ‘socially created values’ in land. He

calculates that a 0.5% annual taxation of land values in Britain would raise 25 Billion Pound

Sterling in incremental tax revenues. The suggestion does not address the moral hazards that this

will present to the property of working people, and housing possessed by the population in

retirement with low or no taxable income.

What is suggested here is that taxes are applied and collected by integrating into new technology

based on transparency toward the use of resources in business life, and registered wealth by

individuals. In addition, it is to be made operational by way of transforming the collection of taxes

and duties from a principle of declaration to a principle of collection at the point of transaction and

use.

‘Transaction and Value based Taxation System’ (‘Transaction Taxes’) against the individual

taxpayer and households will tax both accumulated wealth (financial income etc.) and wealth

artifacts used by individuals (e.g. holiday homes, cars, boats, etc.).

In terms of corporate taxation fees, these will be collected in association with a range of activities

and in relation to community resources that an enterprise consumes directly or indirectly.

Charge level logic is based on the assumption that no individual can or will engage in transactions,

or posses values if there is not an asset or income established to finance its use. In addition, no

company will engage in transactions, consume resources, or hold assets if they do not comply with

the objective of doing business. By taxing transactions, consumption, and access to resources, the

tax base moves up the value chain and takes on the character of an objective, fair, and non-

discriminatory collection practice.

For society, it becomes of less interest how people finance their spending, and of even less interest

how companies achieve their profits.

Piketty, Thomas (2014): Capital -In the Twenty-First Century (Harvard University Press)13

Legrain, Philippe (2014): ‘European Spring - Why Our Economies and Politics are in a Mess’14




By society moving toward a transaction and value-based tax model, it is liberated from its

previous, grudging role as an involuntary 'sleeping partner' in people's economic fate, as the need

for detailed tax declarations is eliminated. It is not what is earned, but what is consumed, that is

taxed. Therefore, society will discretely collect taxes from every transaction that occurs in the

economy or wherever a presence of taxpayer wealth can be identified.

The tax system becomes transparent and establishes a non-discriminatory tax practice that one

cannot escape. Transactions, resources, and values are definable, measurable, and objective. The

system is scalable to very low administrative costs to society, which by the intervention of

digitization will be a constant presence, immediate, and will efficiently collect the resource taxes

required. Transaction taxes are collected from everyone, regardless of tax residence and domicile.

In relation to corporate taxation, ‘Transaction Taxes’ replacing the corporate tax rate of today will

result in an instant 'windfall' to society.

The move from subjective tax declaration to objective transaction and resource-based duties and

fees eliminates any collateral damage to society from the present in-transparent nature of declared,

taxable net income by corporates.

It will be impossible, by corporate tax planning, to escape taxation in any national territory where

one intends to sell products and services. At the same time, it becomes unimportant where

companies have their fiscal headquarters since, while they may move headquarters, their customers

rarely move with them.

Implementing ‘Transaction Taxes’ means that the declaration system is abolished, and with that, a

myriad of tax codes. For a very long period, the treatment of special interest groups, and hidden

subsidies, has been built into the tax code. This will have to be managed by way of transparent and

dedicated, direct legislation, or built into the annual fiscal budget going forward.

In addition, for corporates, the declaration system is abolished. All taxes are levied on national

activity, as it represents the use of resources that have to be compensated for. Penalizing net revenue

generated abroad or by exports does not make logical sense and will be abolished in its entirety.

This will also lead to repatriation of significant reserve funds that global enterprises hold in

accounts in tax havens or other tax jurisdictions, which will provide domestic funds for

investments. During a period of transition, there should be caps on the ability to conduct stock buy

back programs and declare dividends. CC2.0 LICENSE Klaus Riskaer Pedersen 2016



‘Transaction Taxes’ will levy taxes on transactions and the use of resources. ‘Transaction Taxes’

must be understood in perspective of the desire to establish social value creation in society. Fiscal

revenues will consequently have to be in alignment with substantial aspirations, to allow for a wide

range of publicly produced free goods in the form of health-care, care for the elderly or disabled,

equal access to education, unemployment protection, service institutions within childcare, etc.

In this way, the social capitalist agenda also affects the need and desire to collect effective taxes in

society in order to finance justifiable demands towards the collective from the general public, and in

order to establish an equalizer between various segments of the population irrespective of social

backgrounds.

As tax collection becomes effective, transparent, and fair, it becomes a mean to fulfill better social

cohesion in society.

For purely illustrative purposes, the system could include the elements listed below.

• Individual direct income taxes and taxes on property need not remain. The payroll tax

system could be expanded to capture a larger share of first dollar incomes, and could be paid by the

employer on behalf of the employee. Compensation systems could be established between the

federal, state, and local levels of Government. Property taxes could be abolished as they are based

on valuations that are non-transparent and discriminatory.

• The abolishment of property taxes could be replaced by an objective tax calculated on

the square feet of accommodation for primary and secondary residences, and levied on all housing

exempting certain minimum levels of tax-free space available per occupant.

• Corporate taxes need not remain, with the exception of banking, insurance, and other

financial institutions. All first dollar revenue could be taxed at the teller with a small, single digit

percent, and collected directly from the enterprise together with the collection of sales taxes.

• Sales taxes could be increased and differentiated. There could be no sales tax on food

and health care products, but a progressive sales tax increasing with the durability of the purchase.

The sales tax rate could be relatively high, but must be seen in perspective of the abolishment of

income taxes and property taxation. There should be compensatory measures for low-income CC2.0 LICENSE Klaus Riskaer Pedersen 2016



families and individuals with disabilities.

• There could be a tax on financial transactions in the magnitude of a fraction of a

percent.

• Special taxes could be levied on the consumption of petrol and fossil fuel, and special

sales taxes could be added to the consumption of alcohol and smoking together with annual

registration fees for access to firearms, cars, private boats, etc. For enterprises, special taxation

could be applied on the use of energy and with extended taxation on CO2 emissions.

• Special withholding taxes could be applied to savings capital based on the real return

generated and collected directly from the pension plan.

• Real estate for investment purposes, and to a lesser extent, real estate used for

production, could be taxed on an annual basis.

Analysis suggests that by re-organizing the way in which taxes are levied and collected, the tax

declaration system can be abolished in its entirety with the effect that capital owners and corporates

contribute to a larger extent. However, competitive advantages will also result for business as the

disposable income increases, and wage pressure in general will be at a subdued level for a

significant period. Corporations with exports or net revenue generating activities in foreign markets

will not be taxed on any income generated in another tax jurisdiction. For productive business, the

advantages will outnumber the disadvantages, while for financing (banks, insurance, and investment

properties), the switch to ‘Transaction Taxation’ will be considered penalizing, as the new tax

system also taxes values and assets . 15

By applying ‘Transaction Taxes’ to society, taxes and duties become well-aligned to fund costs to

society of shared resources, and will better compensate potential opportunity costs to society. This

will occur by some resources and services being consumed in one place, whilst the more efficient

I conducted a study in the Spring of 2015, which showed that switching to ‘Transaction Taxation’ in Denmark would affect 415 15

billion Danish kroner of existing tax revenues (out of a total of 975 billion Danish kroner), and would lead to reducing tax on individuals with 81 billion Danish kroner, while increasing taxes on Business with 88 billion kroner. Half of the increased taxation on Business was picked up by the financial and investment real estate sector. By this, a more fair distribution of taxes between private and corporate taxpayers was established. The study also showed that 12% of all taxation on individuals and households was moved from low-income tax earners towards high-income tax earners, thus re-establishing the progression in the tax system. http://www.slideshare.net/klausriskaerpedersen/final-oplg-til-transaktions-og-vrdibeskatning-tvs-i-danmark-kopi-22 (Danish version).CC2.0 LICENSE Klaus Riskaer Pedersen 2016



resources and services being allocated elsewhere.

The present declaration tax system recycles tax revenues for use of a general purpose, and in many

ways, replicates some of the problems facing centralized state planning, best known from the

defunct socialist economies of Eastern Europe and the Russian Federation. The present declaration

system does not allow society to conduct taxation at the point of use or the point of consumption,

which is promoting a situation where publicly produced resources and services may be consumed in

an inefficient way. This makes the present tax model fundamentally flawed, leaving room for moral

hazards, and transferring potential costs to the collective that are not justified by the appropriate use

of the public goods.

In principle, all public services and resources used should be paid for by the party that has an

advantage over it. This can only be explained by understanding the nature of transaction cost

economics.

Essentially, society undertakes the long-term contractual obligation to make its people safe,

provide education, supply health care, allow for unemployment protection, deliver service

institutions, elder care, etc.

By the nature of democratic societies, the people have nominated a considerable number of these

tasks and solutions to be produced as publicly produced free goods, available for everyone and in

abundant supply. The whole nature of the tax system, besides national security and a viable law-

based society, has been impacted during the twentieth century by more tasks and solutions having

been reassigned to society.

As society has been taking over a number of long-term contractual obligations, this allows other

sectors of society to benefit. In particular, the business communities are reaping the benefits from

this model.

A society that can secure healthy, safe, and well-educated labor to business, allows business to be

competitive. If businesses do not pay all of the costs associated with the hiring of a well-educated

individual, this is representative of a transfer of value from society to business.

By allowing a business to hire an employee, for example on 2 weeks notice of termination, it

poses the question of who shall undertake the cost of maintaining the quality of labor until someone

needs to re-employ it at another point in time. If businesses are not subsidizing or paying for

redundant labor, and the bill is picked up by society, this is representative of a transfer of value from

society to business. CC2.0 LICENSE Klaus Riskaer Pedersen 2016



If a business employs a number of employees, which are eventually forced to leave the labor

market due to old age, and the business does not subsidize or pay for all of the costs associated with

the retirement of the employee, then society is picking up the bill. This also represents a transfer of

value from society to business. This can be ongoing, from the fire brigade to highways, and from

the police force to various protection agencies. A common factor is that society is undertaking the

long-term contractual obligation to expense a number of costs associated with establishing a well-

functioning and competitive democratic state. Meanwhile, businesses are allowed to access

resources and services on a short-term basis, and are only required to pay a compensation for values

transferred, which is only a fraction of the total costs.

In terms of transaction cost economies, society is financing and maintaining a market supply of a

number of resources and services that businesses can acquire at the time of use, but are not

committed to internalize and produce by themselves. This makes sense, as one would not suggest

that it is ‘bad economics’ to share. Nevertheless, the whole construction associated with a welfare

state and the tax burden associated with it, is a defining and material contribution to society in

general, while production, enterprises, and capital owners are effectively the beneficiaries of a

significant transfer of value every day, every year, and for every generation.

‘Transaction Taxes’, as one of its principal objectives, must repair a situation where it is the people

who ‘pay the lion’s share’ of all taxes in society, while the business and capital owners accumulate

the majority of the wealth associated with it. This imbalance can only be corrected by adjusting the

effectiveness of the tax model in society, if we maintain a market-based economy.

Many of the events forming part of the social capitalist economy are market-based, but redefine

capitalism as such. A new tax code of the nature suggested here will also be seen as an assault on

capitalism; however, it is not the case. No system can be maintained if it is dysfunctional or looses

equilibrium over a significant period, and the tax model has become this way. If not repaired, this

will lead to raising inequality and will eliminate consumer demand and investments in a productive

society. This is also not in the interest of capitalism. Thus, fair taxation is the precursor for

sustainable capitalism, albeit in a new and modernized form.

‘Transaction Taxes’ are effective, transparent, and fair by the nature of being applied when CC2.0 LICENSE Klaus Riskaer Pedersen 2016



resources are consumed. By this method of taxation, duties, and fees can be levied on everyone in

society that uses or consumes something that there is a long-term contractual liability of society

associated. Only by aligning any use with payment for that use, can we ensure that resources are

taxed to a suitable degree, and make sure that sustainability is established in society in a much

broader sense. The tax model can potentially exist as one of the main promoters of sustainability,

not only in economics, but also in a social and environmental context.

There will be expert advice against most suggestions associated with the introduction of a new tax-

code. They will highlight that increased business taxation will result in lower investment and

therefore lower economic growth. Transaction taxes, as opposed to declaration taxation, will

increase costs for start-ups and will constitute upfront taxation on the entrepreneurial community.

The solution to this is quite simple. The transition to transaction-based taxation does not mean that

tax revenues are increased. This is about collecting the same taxes, but simply by other means. The

effect of this will be that everyone will be forced to pay taxes in conformity with their abilities and

resources, but that any abuse of the tax system is effectively eliminated. The principle of

proportionality is reintroduced into the tax system, by a tax system where individuals with high

taxable incomes and businesses cannot plan away their tax liabilities.

The introduction of a new tax code that allows for an increase in the effective rate of taxation by

eliminating gaming against the tax code, while simultaneously eliminating huge costs to manage the

declaration-based tax system, will allow for gains in tax revenue that ensure that the tax

restructuring will reduce the overall tax burden on the economy.

Some would of course argue that those with higher personal income will have an advantage,

because it is actually only the resources they utilize and have access to (private consumption, real

estate, cars, etc.) that trigger the tax payment, and with that, proportionality is pulled out of the tax

system. The answer to this is also quite simple. Even with middle-income earners, prosperity is

linked to the resources consumed in one way or another. For high earners, the reality is that their

effective tax rate today is lower than what it theoretically should be, due to the use of beneficiary

tax treatment and the planning away of taxation. The introduction of transaction taxes on private

consumption would mean effective tax rate increases for a significant number of high-income tax

earners, as most in this category are conspicuous consumers.

For the high taxable income earners of today who have significant earnings besides private CC2.0 LICENSE Klaus Riskaer Pedersen 2016



consumption, the issue is different, and probably surprising to most.

The tax system of the future shall not serve as an agent for redistribution of wealth. This is because

a tax model that is designed with the purpose of redistribution rather than taxation of consumption

and value, has other collateral damage associated with it, and has proven to be a hopelessly

inefficient instrument for achieving this specific goal. All analysis and data suggest that inequality

has increased throughout the twentieth century: a period involving significant political effort to

redistribute wealth by way of progression in the tax rates, but with no tangible results.



new chpt.8 broken tax system fm. socialcapitalism (eng.ver. 2015)

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