- Real property use tax
The Real Property Use Tax (RPUT) is a tax system with assessment based on the size, level of development, and time-in-use of real property, and designed for general revenue acquisition. The tax system is a proposed replacement for the federal
income taxin the United States. [Gillis 1999, p.162-163.]
Developmental impetus and historical background
A major, privately funded research project was initiated in the late 1990’s to look at the problems endemic in the federal tax system in the United States. [Gillis 1999. p. 11-12. The research project and thesis were compiled and presented in the referenced, publicly available book.] It was believed that while the economic problems associated with the federal income tax were significant, many contemporary social problems were also related to governmental fiscal policy—with taxation being the base—and the key to both successful tax reform and social improvements was understanding fully the philosophy and principles underpinning federal revenue operation. [Gillis 1999, p.62-84.]
Americans, historically, had been protected by the Fifth, Tenth, and Thirteenth Amendments to the United States Constitution—even the government could not seize a person’s property merely because it was produced. [Gillis 1999, p.83.] However, the Sixteenth Amendment—implemented in 1913—gave government the power to tax personal income. Thus, wages and profits could then be taken whenever they were created—just because they were created—through mere statutory edict. [Gillis 1999, p.35-38.]
American tax policy, in the generations after 1913, moved increasingly toward economic management, social engineering, and
redistribution of wealth. [Webber and Wildavsky 1986, p.441-454.] There were, by the end of the 20th Century and the beginning of the 21st, an estimated 17,000 special interest lobbyists in Washington, D.C., [Birnbaum 2005, There were by 2005, an estimated 34,750 registered lobbyists in Washington, D.C.] . and a 75-million-word federal income tax code. [Armey 1996, p.7.] The compliance and operating cost of the federal income tax system—an amount in addition to actual tax revenue—has been estimated, including disincentive to production, at sixty cents for every dollar of collected revenue. This is—on a $2.6 trillion dollar budget—a $1.6 trillion cost to the American economy per annum. [Payne 1993, See Chapter 10. The ratios in Payne’s earliter calcuations are used to calculate the compliance and operating cost of the later budget sample ($2.6 trillion).]
The study found the income tax system rife with design and operational problems including definition of income and expense, interpretation, record keeping, tax avoidance and tax evasion. [Gillis 1999, p.52-84.] And the income tax system did not meet one of Adam Smith’s Maxims, or Canons, for a sound tax system. [Gillis 1999, p.126-128.]
Major reforms had been proposed in the prior twenty years in the United States, including the
flat tax—a single-rate income tax with reduced deductions and exemptions. However, even with less complexity, original problems endemic in the income tax system remain with the flat tax. [Gillis 1999, p.118-120.]
Another reform proposal has been a national sales or consumption tax. A national sales tax could eliminate personal (but not business tax filings) and could substantially reduce the size of the tax code and tax complexity. However, for many, a national sales tax would merely be an inverted income tax, where instead of being taxed when the taxpayer received his income, the same money could be taxed when he spent it, possibly at a much higher rate depending on the tax base. [Gillis 1999, Sales tax p.97-101, FairTax p.115-118. See also the VAT—a modified Sales Tax—on p.101-103.] A national sales tax also provides artificial favoritism toward
imputed income, [Gillis 1999, p.99,116-117. Higher sales or income taxes can induce internal production (imputed income) and reduce trade (buying).] and could induce tax avoidance through inefficient barter, or tax evasion through the underground economy. [Gillis 1999, p.117.] There are also design and operational complexities that do not exist in a relatively low-rate state or local sales tax that would exist in a high-revenue national sales or consumption tax. [Gillis 1999, p.116-118.] (See also Sales tax, FairTax, and Consumption tax.)
The underlying problem of the income tax system and the reforms above, however—in the view of the research study—is that they are all based on the problematic principles of
primacy of the state[Gillis 1999, p.135. Primacy of the state.] and equity of condition. [Gillis 1999, p.122. Equity of condition.]
The RPUT study first looked at the human condition and the purpose of government. Both the Enlightenment and American History were reviewed, and the conclusion was drawn that
natural rights were paramount in the application and administration of good tax law. [Gillis 1999, p.39-51.] Specifically, an individual had the right to peacefully produce and utilize the fruits of his labor, to engage in peaceful trade with his fellow man. Government was an agent to help preserve that condition, and taxation was a mechanism to fund government and its mission. [Gillis 1999, p.35-38.]
The particular activities of government and how much those activities should cost were not within the scope of the study. The issue was taxation—how to apply the cost of government after spending decisions had been made. The basis of assessment (what was being taxed) and the relation to the assessed (why the taxpayer was being charged), the study found, had to be fully qualified to construct a fair assessment. It was determined, then, that
rational economic exchange[Gillis 1999, p. 161-162, 265. Rational economic exchange.] and primacy of the citizen and taxpayer[Gillis 1999, p.135. Primacy of the citizen and taxpayer.] should be applied in the developing sound tax law. [Gillis 1999, p.135.] Further, the "Five Principles of a Sound Tax System" were developed as a specific guide. [Gillis 1999, p.129-132. Five Principles of a Sound Tax System; additional Wikipedia article pending.]
The summary conclusion is that aid and subsidy should not be extended through the tax code, taxation should not penalize productivity, and assessment should be based on an
implied level of government service, [Gillis 1999, p.130,134-135,145-147. Implied level of government service.] with general governmental expense and welfare liabilities proportionately applied. Taxation should be separate from spending, but there should be a clear accounting link between the two, down to the individual taxpayer’s personal remittance. [Gillis 1999, p.141-143.]
Tax system design
The Real Property Use Tax (RPUT) is a tax system designed for general revenue acquisition, with assessment based on real property. Real property is the term that denotes land and the permanent structures affixed to it, such as houses, office buildings, factories, swimming pools, parking lots, etcetera. [Gillis 1999, p.162-163.]
RPUT theory does not hold land to have any special value over other assets, as might be suggested in the economic theories of Classical economists
Adam Smith, David Ricardoand John Stuart Mill, or in the later writings of 19th Century economist Henry George. [Groves 1974, p.123-126.] Rather, land—and the permanent structures on it—were found in the RPUT study to serve as a stable and reliable assessment base for calculating, proportionately, the relative cost of government for the taxpayer. [Gillis 1999, p.133-135.]
The conventional property tax was reviewed and found to have some advantages—simplicity, stability, and open record keeping—but also disadvantages, first of which was market value assessment. Market value can change dramatically due to the fluctuating real estate market, and the current assessed value can be unrelated to any implied level of government service. The second disadvantage was selected assessment and visibility—rent and leaseholders are not directly taxed. [Gillis 1999, p.106-111.]
There was found, in developing RPUT theory, a logical relationship between the implied level of government service and developed land and its use. A higher implied level of government service exists for larger, more densely used properties, and a lower amount for smaller, less densely used locales. RPUT theory, then, shifts the focus from arbitrary redistribution of wealth, as in the income tax, to an objective assessment schema related to rational economic exchange. [Gillis 1999, p.133-135.]
The challenge was to find a sophisticated and mathematically elegant way to integrate the property ownership-and-use condition into a reliable assessment system, while also providing simple and easy functioning for the taxpayer. The solution was to build an assessment mechanism with a consanguineous, or interrelated, relationship between the size, level of development, and time-in-use of real property, and the total cost of government. Simply put, an objective service ratio is provided which can be applied to a taxpayer’s property base and with which he can—almost instantaneously—calculate his personal tax. [Gillis 1999, p.135-143. This section provides a conceptual overview of RPUT theory.]
Both landowners and renters or leaseholders (land users) are assessed under the RPUT. Land use parameters and four "Basic Rates" are set by Congress to reflect a relative, proportional Service-to-Ownership and Service-to-Use liability. The government’s budget, or that portion of the budget to be taxed through the RPUT, is applied, via algebraic calculation, to the four Basic Rates to produce a budgetary "Master Rate" at the end of the year, or whenever RPUT assessment is denoted. The Master Rate can then be applied to the individual taxpayer’s property base to calculate his tax. Individual tax calculation could be done in a couple of minutes with pencil and paper, or instantly with a computer. [Gillis 1999, p.159-257. This section provides a technical review of RPUT theory.]
Governmental tax billings would be automatic, similar to the conventional property tax. Full use of property by the owner is assumed and taxed accordingly, unless property is rented, leased, or vacated. Taxpayers would be required to maintain records to substantiate the latter conditions and report them with their tax bill to relieve use liability. Special filings can be made for construction, demolition, or other reasons that change liability status. [Gillis 1999, p.213-217.]
RPUT design allows “drill-down” capabilities so individuals and businesses can immediately determine their share of the cost of government, if desired, down to the line item level. Additionally, proposed spending can be calculated to determine potential tax, allowing individuals and businesses increased planning capability and opportunity for feedback to legislators prior to appropriation bills being approved. [Gillis 1999, p.140-141.] The Master Rate also serves, effectively, as an economic barometer for the cost of government. [Gillis 1999, p.140.]
• Master Rate [Gillis 1999, p.175-177 Master Rate Formula.]
• Basic RPUT [Gillis 1999, p.178,180-181 Basic RPUT - Formula.]
• Rental Property [Gillis 1999, p.190-191 Rental Property - Formula.]
• Base-Land-Status Types [Gillis 1999, p.196-197 Base-Land-Status Types - Formula.]
Real Property Use Tax Law (draft)
• RPUTL [Gillis 1999, p.239-261 RPUT Law (draft).]
The study suggests these operational advantages for the RPUT:
* "Assessment is based on and limited to the actual cost of government".
* "Neither income nor sales are taxed, so there is maximum support for trade and heightened productivity (creation of wealth)."
* "Individual assessment is proportional, including liability for general governmental and welfare expenses."
* "Aid and subsidy, when warranted, is done in the daylight of direct appropriations and not through political manipulation of the tax code."
* "Tax system conditions are standardized and long term economic planning is thus supported, while still allowing for increase or decreases in appropriations (government spending)."
* "The RPUT is politically neutral; it provides a stable and objective mechanism for applying the cost of government after the type and level of government spending has been decided."
* "Deficit spending is not precluded, but future individual liability can be projected."
* "The assessment mechanism is objective and simple to operate."
* "Tax avoidance and evasion would be difficult or impossible, preventing unjust cost shifts to other, paying taxpayers."
* "Calculation of both proposed and actual taxes for the individual taxpayer can be almost instantaneous, delivering efficient financial management and fiscal review."
The RPUT does not address the type and level of government spending. Rather, the tax system is designed as a stable mechanism for applying the cost of government to the tax base once government spending has been decided. However, since the RPUT allows a direct and visible link between the cost of government and the assessment for it, that visibility may improve review of warranted spending and reduce the likelihood of unwarranted, or pork barrel, government spending. [Gillis 1999, p.144-154.]
RPUT theory has been presented to the public, the media, academics, and private groups, and formal presentations have been presented to the United States Congress, including formal presentations for Senators
Dianne Feinstein, Barbara Boxer, Rick Santorum, and House members Duncan Hunter, Randy Cunningham, and Brian Bilbray. RPUT theory was also presented to the President’s Advisory Panel on Federal Tax Reform in 2005. There are, however, major political factors related to reform implementation.
A huge amount of political power exists for politicians to collect and redistribute private sector wealth under the federal income tax system. Congressional members have been averse to visibility and accountability in the spending process with earmarks, [Andrews and Pear 2007, Washington earmarking.] and income tax policy parallels that disposition. [Gillis 1999, p.52-84.] And the RPUT is antithetical to the tax policies advocated by many economists who believe human behavior should be influenced and modified through proactive economic policies of the state, specifically through the federal tax system, rather than utilizing taxation as a neutral agent for applying the cost of government, as in RPUT theory. [Gillis 1999, p.85-120.]
Many lobbyists, lawyers, accountants, and large parts of the electorate also benefit from operation and subsidy under the current income tax system—at least from specific segments of the tax code if not in aggregate. [Gillis 1999, p.57-81.] While the benefits of reform would also accrue to these groups long-term, complete public vetting from elected officials of significant reform proposals—like the RPUT—can be politically problematic. Significant proposals to change the income tax system, if demonstrated as viable, are only likely with significant public education and strong political leadership. [Gillis 1999, p.155-158.] [Mack 2005, See the results of the Advisory Panel’s review of various tax reform proposals. Note that the panel did not address the "principles" on which the state should apply assessment; "a priori", the income tax remains.]
Implementation and transition
Political requirements satisfied, the RPUT would require carefully planned technical implementation and transition from the legacy income tax system. One of the first tasks would be to fully identify the physical tax base.
Land and the developed space on it would have to be identified. Existing legal description may be sufficient for undeveloped land, but developed elements would need external surveys to determine developed space. Contemporary GPS and laser sighting tools might reduce surveys for smaller properties to minutes, larger properties would be more involved. [Gillis 1999, p.155-158.]
A major task would be the financial transition between tax systems. The RPUT study suggests creating a new federal tax agency, the Federal Tax Service Agency (FTSA) to administer the RPUT, and run the current federal tax agency, the
Internal Revenue Service(IRS), concurrently with the FTSA for a given number of years, gradually transferring personnel and resources, as appropriate, to the FTSA. [Gillis 1999, p.247.]
Additional public review, academic inspection and advanced computer modeling should be applied to The Real Property Use Tax (RPUT) to determine its ultimate practicality. Significant social and economic benefits would accrue to the United States with effective tax reform, and the RPUT is an interesting option. [Gillis 1999, p.158.]
Income tax in the United States
Sales taxes in the United States
Taxation in the United States
*cite web |author=Andrews, Edmund L. and Pear, Robert |title=”With New Rules, Congress Boasts of Pet Projects”. |date=
2007-08-05|work=The New York Times |url= http://www.nytimes.com/2007/08/05/washington/05earmarks.html
accessmonthday=January 17 |accessyear=2008
*cite book |last= Armey |first= Dick |title= Flat Tax: A Citizens Guidto the Facts on What It Will Do for You Your Country |publisher= (New York: Fawcet Columbine) |year= 1996
*cite web |author=Birnbaum, Jeffey H. |title=”The Road to Riches Is Called K Street” |date=
2005-04-30|work=The Washington Post |url= http://www.washingtonpost.com/wp-dyn/content/article/2005/06/21/AR2005062101632.html/ |accessmonthday=January 17 |accessyear=2008
*cite book |last= Gillis |first= Timothy J. |title= Taxation and National Destiny: A Tax Systems Analysis and Proposal |publisher= (San Diego: Maximus Profectus) |year= 1999 |isbn= 0-9667434-1-5
*cite book |last= Groves |first= Harold M. |title= Tax Philosophers: Two Hundred Years of Thought in Great Britain and the United States |publisher= (Madison Wisconsin: The University of Wisconsin Press) |year= 1974
*cite web |author=Mack, Connie, III (Chairman), et al |title= “Final Report” |date=
2005-11-01|work= President's Advisory Panel on Federal Tax Reform |url= http://www.taxreformpanel.gov/final-report |accessmonthday=January 17 |accessyear=2008
*cite book |last= Payne |first= James L. |title= Costly Returns: The Burdens of the U.S. Tax System |publisher= (San Francisco: Institute for Contemporary Studies) |year= 1993
*cite book |author= Webber, Carolyn, and Wildavsky, Aaron |title= Tax Aaron |title= A History of Taxation and Expenditure in the Western World |publisher= (New York: Simon and Schuster) |year= 1986
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