Civic Engagement and Tax Reform
As Congress turns its jaundiced eye toward tax reform, we can hope for simplification while expecting the rewards to go instead to those who can afford to hire accounting departments. But now, for something completely different, I propose fundamental changes to our tax code through persistent data collection and feedback control. Once we implement persistent data collection, our laws can work in an environment in which they have continuous feedback signals from the populace. When we’re ready, we can achieve simplification for individuals and corporations through behind-the-scenes (but transparent for those who want to look) feedback-controlled tax algorithms.
To move toward feedback-controlled tax algorithms, I recommend that the near-term tax reform efforts include
1. A browsable, expandable menu of the US budget by which any US citizen can vote yes or no on a line item or aggregate of line items. This would be a non-binding vote.
2. The IRS should compute expected taxes for each tax paying entity and supply those results to the tax payer.
3. The IRS and HHS should coordinate on a national credit card by which negative taxes and government benefits for low income individuals can be consolidated and inexpensively disbursed.
The following notional methods use web and/or mobile user interfaces. Any practical system would also require staffing and support for phone, fax, and snail mail voting.
Differential Taxes
Suppose that our tax laws can make use of a “persistent vote”, which would be a permanent Monte Carlo survey. Every citizen can provide a response at any time and can change their response at any time. Today I vote “yes”; yesterday I voted “no”; maybe I’ll change my vote again later today. This possibility is one of the most interesting things about digital governance: persistent votes would not have been practicable before the modern era.
Give us a menu: Suppose in the persistent vote every citizen can set a check box for each item in a the US budget. With this interface, each voter can give a yes/no vote for each budget item. Checking the box means that you think the US budget should include that item. Uncheck the box if you think the US should not pay for that item. Perhaps some of us would vote to eliminate one of our aircraft carriers, or eliminate PBS, or make no changes at all, but we would each get an up-or-down vote on each item. The image to the left gives an example of a top-level summary (from here). A whole-budget checklist would start like the image at the left, and would be expandable down to the finest levels of detail, so the users can vote at whatever level of detail they want.
An expandable menu interface for voting on the budget would support a control scheme in which, for example,
A. We pay a flat tax to cover the items that 80% of us agree on; and
B. We pay a progressive tax to cover the items that 40% — 80% of us agree on; and
C. We pay a voluntary tax on the remaining items. These would be progressive taxes that are only levied on the tax payers who support the program. The taxes would grow very large for expensive programs with little public support, thus providing a strong source of pressure for the budget reductions that republican voters say they want but even republican governments cannot deliver.
The default budget vote would be “yes” on all items, so it would take some exertion to drive up the cost of a program. The computed tax rates would also have to be enacted by Congress; they would not be automatic.
How would this play out? If 80% of all citizens either did not vote or said “yes” to everything, we would end up with a flat tax of about 20% to cover the current taxes of about $3.4T. If fewer than 80% of all citizens said “yes” to half of the budget (by dollar value), then all existing progressive taxes are reduced by half plus all tax payers would pay a 10% flat tax. Like other flat taxes, this is regressive for low incomes. The shape of the progressive tax rates can be steepened to adjust for the impact of the flat tax at the low end. All else being equal, halving the progressive tax and adding a 10% flat tax would have no net effect for a tax payer with an effective tax rate (including deductions, etc) of 25% on $100,000 with $20,000 in deductions. Above that, the net effect is to flatten the rise of the progressive tax rate.
The “voluntary tax” loading for programs with low support should help re-balance the budget. Suppose that there were a concerted effort to kill something expensive, such as the $1T wedge for Medicare & Health, and 62% of us are somehow persuaded to vote against Medicare. In this case the computed tax rate for the remaining 38% who vote “yes” for Medicare would be about 72% higher than current tax rates (assuming no benefits from a partial flat tax or from voting “no” on other things). During the period before the Congressional vote that sets the actual tax rates, there would be efforts to convince people to support Medicare. There would likely be a re-balancing — for example, part of the country would support the Military but not Medicare and vice versa. Alternatively, the added expense of Medicare might inspire more people to vote against Medicare, which would drive up rates for the remainder, and so on until everybody votes no. In that scenario, many would be voting “no” because they feel forced to by the expense, and Congress might override the voters or open discussions on how to restructure the programs in that part of the budget.
Give us a dial: Suppose we each had a little thermostat with which we could set the tax rate we prefer. Maybe everybody would just set the dial to zero, but maybe not. After all, Warren Buffett supports the Buffett rule. The expectation from the Wisdom of the Crowd is that the average of all our dials will be “the right” number. There is no “right answer”, of course, but it would be interesting to see how the average dial setting varies: would higher income tax payers give themselves higher income tax rates? How would the tax rates come out for other classes of tax payers, such as corporations or investors?
Give us a menu of dials: Suppose every voter had a line item budget menu described above but with dials instead of checkboxes. The dial for each item would be set initially to the dollar amount that the voter’s taxes would contribute to that line item: $30.14 for the Joint Strike Fighter; $1.37 for PBS; etc. One could set the dial to $0, which would be like voting “no” in the menu of checkboxes, or one could set the dollar amount to something other than its default setting. Feedback control laws can be built into these dials, so that, for example, the individual’s default dollar amount for PBS would represent a flat tax if there was 80%+ agreement that PBS was worth more than $0.
Again, the dollar averages across all tax payers should display the Wisdom of the Crowd effect, with each line item funded at the “right” level. This would presumably be helpful information for Congress. If the individual tax amounts given by our dial settings were enacted in law, we should quickly settle into a state in which taxes come into line with ideology without having to reference ideological distinctions in the law. In other words, people who value PBS will pay more for PBS, and people who value the JSF for pay more for the JSF.
A menu of dials interface could also be a helpful device to further public policy discussions in the national town meeting. To implement the menu of dials, it will have to be possible to compute each person’s next tax bill. However quickly we can do that now, it will be 1000 times faster in 15–20 years. As politicians propose changes to the tax code and/or the budget and/or the structure of programs, a hypothetical set of next-year tax bills can be computed, so that voters can see the impacts of the proposal and give feedback. Such a device would expand the range of the politically feasible. With fast feedback, citizens could demonstrate the popularity of a tax loophole worth millions for their region (or occupation, age bracket, income bracket, etc) without realizing in advance that that’s what they wanted. This contrasts with the current system in which they would need to coordinate explicitly to hire lobbyists or organizers. Conversely, citizens may be able to coordinate implicitly (by turning up their dials) to pay more taxes for certain services.
Give us functions over time: Once the IRS can compute our tax returns, it should be possible to provide every tax payer with a graph showing how much that tax payer is expected to pay in taxes each year over the next decade. It would be helpful to add to this a graph of the expected government benefits over the same year. For example, as a tax payer approaches retirement, their individual graph would probably show the lines crossing: post-retirement benefits exceed post-retirement taxes.
A voting interface can be built on graphs of taxes and benefits over time. The user would “bend the curves” to indicate how the curves should change over time. One person might indicate higher taxes now but then a drop to zero after retirement; another might indicate decreasing taxes and decreasing benefits. The graph of tax bills depends on information the IRS already collects on us, but the graph of benefits depends on a lot else besides. Accordingly, a citizen might interact with variations of this timeline interface: the timelines as a citizen; timelines as a business owner; timelines as a member of some profession (IE personal taxes displayed against government investments that impact a given profession); timelines for employees of a company, hobbyists, neighborhoods, districts, etc.
Give us a menu of functions over time: Finally, it is much harder for the government to respond to our tax dial settings for next year than it is to respond to dial settings that manage the change in behavior over the next 10 years. The best interface will enable us to drill down into the budget and interact with a graph that shows our individual tax bill for that item over the next 10 years. The interface can have a single dial — so that setting the value to $0, for example, turns yields a graph that drops 50% each year and then drops to $0 and stays there three years from now. The graph can have other feedback logic built in. For example, if 80% of us agree on an item but it will take 5 years to shift over to the flat tax, then everybody’s individual graphs for that budget items (and all budget categories that subsume that budget item) will show a shift at 5 years when the new flat tax kicks in.
“Tax” is not just a four-letter word
Assistive taxation: The word, “tax” is synonymous with words like task, work, and exercise. Taxation, like exercise, can make us stronger and healthier. If presented with options, the largest tax payers might be willing to pay more than their required taxes if the excess were arranged as an investment with potential returns. For example, what if the IRS devoted some employees to helping billionaires find government programs that served those billionaires’ needs — infrastructure, education, community development, research, policing, major procurements, etc. “Pay the full taxes on your billions that your accountants have determined will be $0.25 , but then pay an additional $250,000 into this research project in exchange for 1% ownership”. Yes, the billionaires will be paying more taxes than if they just played an accounting game to keep the tax bill low, but by working with the IRS they can direct those extra dollars to programs that they want. Corporations could benefit from similar government staff support. The government is now led by an expert deal-maker, so this should go very well.
Notionally, the progressive tax code could extend to negative taxes, wherein the government would provide cash payments. Negative taxes are another positive sense of “taxation”. Negative taxes would equate in the extreme to a guaranteed basic income, a notion that is coming into vogue as a counter to the expected ravages of AI.
In an assistive taxation arrangement for lower incomes, the IRS would help coordinate the services that those citizens need. This would look something like a basic income floor and something like a generalized Civilian Conservation Corps arrangement. For example, given every one of the 1.5M people living on minimum wage a credit card to help them gain their targeted subsidies. When they take public transit to work, they pay with their credit card and there is no cost. They get cash benefits (negative taxes) and big discounts on child care, health care, etc. Instead of a massive, isolated infrastructure for government programs and a massive, isolated infrastructure for computing taxes, the government could conceivable combine (or cross-talk) IRS and HHS to facilitate negative tax rates in the form of a smoother path to existing services. The required coordination would not have been practical in an earlier era, and may not yet be possible without upgrades to the government’s computational infrastructure and integration of our government processes with that infrastructure.
Taxation and control theory: Feedback control can be used to alter any system’s dynamics. Feedback control laws on tax rates can be used to alter the dynamics of markets and other processes so that they are more socially beneficial.
To my (perhaps naïve) view, the tax expenditures in our tax code seem to be attempts at feedback control. For example, the investment tax credit for solar is a successful mechanism that has helped increase the demand for solar panels. If implemented as real feedback control, instead of a fixed tax credit, the level of the tax credit would have been computed from a simulation of the evolution of the market for solar panels (which might have been done), and the size of the credit would be a function of how strongly the market needs added stimulus this year and/or which segments need stimulation (as clearly was not done). Now that there is a strong demand for solar panels, a tax credit implemented as feedback control would automatically reduce to zero. There would be no need to sunset or repeal the credit.
The Investment Tax Credit for solar was created in the Energy Policy Act of 2005. Section 1335 adds a new paragraph, 25D, to a section of title 26 (the tax code). Paragraph 25D has three individual tax credits, including: “30 percent of the qualified photovoltaic property expenditures made by the taxpayer during such year”. That’s the bit of law that creates a -30% tax for solar panels. With feedback control, instead of “30 percent”, the law might say, “an amount given by the target demand minus current demand, as defined in paragraph 25E”. This carries the complexity of a new paragraph, 25E, that explains how we set target demand levels. But that’s not so bad, and if written as a function of target demand, this law would have the benefit of turning into an actual tax once the market has reached and surpassed that targeted level of maturity. In other words if the target demand is 10 units and the current demand is 0, the tax is (10 minus 0) times -3 = -30%. Later, when current demand is 12, the tax is -2 times -3 = 6%, and we are using the same law to generate revenue as we previously used to stimulate the market.
Tax reform has the potential to simplify our tax code. Much of the complexity occurs at tax time when we go to look up rules. Taxes could be simpler and yet depend on even more complex rules if we were not required to use those rules in computations ourselves. Once we implement persistent data collection, our laws can be simplified and operate in an environment in which they have continuous feedback signals from the populace. To move toward feedback-controlled tax algorithms, I recommend that the near-term tax reform efforts include
1. A browsable, expandable menu of the US budget by which any US citizen can vote yes or no on a line item or aggregate of line items. This would be a non-binding vote.
2. The IRS should compute expected taxes for each tax paying entity and supply those results to the tax payer.
3. The IRS and HHS should coordinate on a national credit card by which negative taxes and government benefits for low income individuals can be consolidated and inexpensively disbursed.
