From: jim@netlink.cts.com (Jim Bowery)
Newsgroups: sci.econ,misc.taxes
Subject: Net Asset Tax White Paper (part 7 of 7)
Date: 16 Apr 92 15:27:05 GMT
Article-I.D.: netlink.u4XBJB1w164w
Organization: NetLink Online Communications, San Diego CA

So now we have lost our corporate feudalism and are groping to find
something to replace it with in this country.  Attempts are even being
made to legislate corporate feudalism back into our business
community, such as mandatory healthcare plans paid for by employers. 
Such attempts fail to recognize that feudalism is simply incompatible
with the American character.
 
While we are groping around for a new business paradigm, Japanese
feudalism is alive and well.  Naturally they are gaining on us.
 
The NAT will provide us with the new American business paradigm, which
urgently needs acceptance.  
 
It is a highly interconnected and redundant network of small to medium
sized businesses that form and dissolve based on the requirements of
rapidly evolving markets and technologies.  In such a system, security
resides not in the loyalties of a single feudal hierarchy, but in the
social contract and statistics of the economy as a whole.  The
inefficiencies of bureaucracy are traded off against the
inefficiencies of independence.  Social mandates against unfair
discrimination in the workplace are achieved, not through government
regulation, but, through the ruthless justice of fair business
competition combined with social programs creating equal opportunity
for all children as they enter adulthood.
 
The net gain of the NAT paradigm is in a society of free men with
their greater incentives and creativity.
 
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APPENDIX IV
 
ECONOMIC EFFICIENCY  
 
Imagine a sole proprietorship in which the proprietor simply offers
advice to people from his home via his home telephone.  He has few
assets, except the investment he has made in acquiring his skills.  
 
The taxable assets of this sole proprietor are less than the NAT
exemption hence there is no NAT liability for this business, as it is
simply the income producing activity (ie: labor) of a person.  This 
person is not an asset.  He cannot be put on the market.
 
He is encouraged to make maximum use of his assets by placing no
taxation on his profits or gains in whatever salable asset value 
might accrue in his sole proprietership.
 
From this example, it is clear the NAT favors the independent 
entrepreneur, growing his business out of his own unique skills.
 
If a business is to be treated as an asset, then we have to look at
the investment entity that owns the asset, how accurately it
calculated the net present value of the asset at the time of purchase,
and what it did with the asset to improve on that value after
purchase, since capital gains in the asset aren't taxed under the NAT. 
Only in that way can we decide whether the relevant business is
"efficient" or not.  In other words, "efficiency" means we are getting
a high return on our assets, however we define them.  
 
Here is a mathematical argument:
 
Let's say ROR is the BEFORE TAX rate of return an entity can typically 
get from its assets including capital gains as well as profits.  Let's 
say ITR is the income tax rate and ATR is the government debt rate
and therefore would be the hypothetical asset tax rate.  Let's say
the entity owns net assets with a market value totaling MV.  
 
For simplicity, let's ignore the standard exemption and assume
that the capital gains tax rate is the same as the income
tax rate:
 
The income I = ROR*MV  
Income tax IT = I*ITR  
After income tax income AITI = I-IT
After income tax rate of return AITROR =  AITI/MV
Asset tax AT = MV*ATR
After asset tax income AATI = I-AT
After asset tax rate of return AATROR = AATI/MV
 
Now we can ask:
 
How efficient does a business currently have to be in order
to prefer the NAT over the current tax system?
 
This is the same as asking:
 
At what values of ROR is AATI>AITI?
 
First let's set AATI=AITI:
 
I-AT = I-IT                             ; Substituting for AATI and
AITI
I-MV*ATR = I-I*ITR                      ; Substituting for AT and IT
MV*ROR-MV*ATR = MV*ROR-MV*ROR*ITR       ; Substituting for I
ROR-ATR = ROR-ROR*ITR                   ; Dividing by MV
1-ATR/ROR = 1-ITR                       ; Dividing by ROR
ATR/ROR = ITR                           ; Subtracting 1
ROR = ATR/ITR                           ; Solving for ROR
 
So if your BEFORE tax rate of return on net assets is greater than 
the hypothetical asset tax rate divided by the income tax rate, 
you want the NAT.  If it is less, you want the present system.
 
In terms of current AFTER INCOME TAX rates of return, this translates
to:
 
AITROR = AITI/MV                        ; Definition of AITROR
AITROR = (I-IT)/MV                      ; Substituting for AITI
AITROR = (I-I*ITR)/MV                   ; Substituting for IT
AITROR = (ROR*MV-ROR*MV*ITR)/MV ; Substituting for I
AITROR = ROR-ROR*ITR                    ; Simplifying
AITROR = (ATR/ITR-ITR*ATR/ITR)          ; Substituting for ROR
AITROR = ATR/ITR-ATR                    ; Simplifying
AITROR = ATR*(1/ITR-1)                  ; Collecting ATR
 
In other words, if our current after tax (ignoring social security
tax) income (including capital gains) is more than AITROR of our net
assets, we benefit from the NAT.  We'll call the AITROR at which we
prefer the NAT over the current tax system the "Critical AITROR".  For
each Critical AITROR there is an implied "Critical AITI" which is
simply the level of after tax income one must be making under the
current income tax system, in order to prefer the NAT.
 
If we factor in the standard exemption (E) as well (still ignoring
social security tax relief) the Critical AITROR is given by the
formula:
 
Critical AITROR = (1/ITR-1)*(1-E/MV)*ATR
 
The Critical AITI is given by:
 
Critical AITI = MV * Critical AITROR
 
This formula is most relevant to wealthy retirees and other
individuals who pay no social security tax.
 
The most regressive of all taxes, Social Security payroll tax, is
at 15.3% of your income (I) up to $53,400 (split 7.65% for you and 
your employer half and half).  Taking this into account, for 
incomes (I) up to $53,400, ITR is close to 40%, so adjusting
for social security, the critical AITROR without the exemption
is only 9%.  With the exemption the formula is:
 
Critical AITROR = (1/ITR-1)*(1-E/MV)*ATR
 
This formula is a good approximation for MV's up to approximately
$500,000.  As MV values rise beyond $500,000, the Critical AITROR
factor of ITR decays, approaching .28.
 
This formula is most useful to businesses and people who are presently
paying social security tax.
 
It is critical to note that current distributions of wealth and
national debt have created an out-of-equilibrium condition which the
NAT will bring back into equilibrium during the first few years of its
implementation.  This will occur because the Critical AITROR
calculation will cause the liquidation of assets currently held by
individuals and corporations who are not making efficient use of them.  
 
As this occurs, the national debt is paid down and the deficit shrinks
as a percent of GDP, the economy will come into equilibrium and the
critical AITROR for very wealthy individuals will begin to approach
the long term GDP growth rate while the AITROR for moderately wealthy
individuals will be proportionately less.

--                    
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