Real property use tax 

Taxation in the United States

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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 tax in the United States.1

Contents

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.2 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.3

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.4 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.5

American tax policy, in the generations after 1913, moved increasingly toward economic management, social engineering, and redistribution of wealth.6 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.,7. and a 75-million-word federal income tax code.8 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.9

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.10 And the income tax system did not meet one of Adam Smith’s Maxims, or Canons, for a sound tax system. 11

Other reforms

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.12

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.13 A national sales tax also provides artificial favoritism toward imputed income,14 and could induce tax avoidance through inefficient barter, or tax evasion through the underground economy.15 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.16 (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 state17 and equity of condition.18

Philosophical underpinning

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.19 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.20

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 exchange21 and primacy of the citizen and taxpayer22 should be applied in the developing sound tax law.23 Further, the "Five Principles of a Sound Tax System" were developed as a specific guide.24

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,25 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.26

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.27

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 Ricardo and John Stuart Mill, or in the later writings of 19th Century economist Henry George.28 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. 29

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.30

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.31

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.32

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.33

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.34

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.35 The Master Rate also serves, effectively, as an economic barometer for the cost of government.36

Formulas
• Master Rate37
• Basic RPUT38
• Rental Property39
• Base-Land-Status Types40

Real Property Use Tax Law (draft)
• RPUTL 41

Proposed advantages

The study suggests these operational advantages for the RPUT:

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.42

Political issues

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,43 and income tax policy parallels that disposition.44 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.45

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.46 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.4748

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.49

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.50

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.51

See also

Notes

  1. ^ Gillis 1999, p.162-163.
  2. ^ Gillis 1999. p. 11-12. The research project and thesis were compiled and presented in the referenced, publicly available book.
  3. ^ Gillis 1999, p.62-84.
  4. ^ Gillis 1999, p.83.
  5. ^ Gillis 1999, p.35-38.
  6. ^ Webber and Wildavsky 1986, p.441-454.
  7. ^ Birnbaum 2005, There were by 2005, an estimated 34,750 registered lobbyists in Washington, D.C.
  8. ^ Armey 1996, p.7.
  9. ^ 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).
  10. ^ Gillis 1999, p.52-84.
  11. ^ Gillis 1999, p.126-128.
  12. ^ Gillis 1999, p.118-120.
  13. ^ Gillis 1999, Sales tax p.97-101, FairTax p.115-118. See also the VAT—a modified Sales Tax—on p.101-103.
  14. ^ Gillis 1999, p.99,116-117. Higher sales or income taxes can induce internal production (imputed income) and reduce trade (buying).
  15. ^ Gillis 1999, p.117.
  16. ^ Gillis 1999, p.116-118.
  17. ^ Gillis 1999, p.135. Primacy of the state.
  18. ^ Gillis 1999, p.122. Equity of condition.
  19. ^ Gillis 1999, p.39-51.
  20. ^ Gillis 1999, p.35-38.
  21. ^ Gillis 1999, p. 161-162, 265. Rational economic exchange.
  22. ^ Gillis 1999, p.135. Primacy of the citizen and taxpayer.
  23. ^ Gillis 1999, p.135.
  24. ^ Gillis 1999, p.129-132. Five Principles of a Sound Tax System; additional Wikipedia article pending.
  25. ^ Gillis 1999, p.130,134-135,145-147. Implied level of government service.
  26. ^ Gillis 1999, p.141-143.
  27. ^ Gillis 1999, p.162-163.
  28. ^ Groves 1974, p.123-126.
  29. ^ Gillis 1999, p.133-135.
  30. ^ Gillis 1999, p.106-111.
  31. ^ Gillis 1999, p.133-135.
  32. ^ Gillis 1999, p.135-143. This section provides a conceptual overview of RPUT theory.
  33. ^ Gillis 1999, p.159-257. This section provides a technical review of RPUT theory.
  34. ^ Gillis 1999, p.213-217.
  35. ^ Gillis 1999, p.140-141.
  36. ^ Gillis 1999, p.140.
  37. ^ Gillis 1999, p.175-177 Master Rate Formula.
  38. ^ Gillis 1999, p.178,180-181 Basic RPUT - Formula.
  39. ^ Gillis 1999, p.190-191 Rental Property - Formula.
  40. ^ Gillis 1999, p.196-197 Base-Land-Status Types - Formula.
  41. ^ Gillis 1999, p.239-261 RPUT Law (draft).
  42. ^ Gillis 1999, p.144-154.
  43. ^ Andrews and Pear 2007, Washington earmarking.
  44. ^ Gillis 1999, p.52-84.
  45. ^ Gillis 1999, p.85-120.
  46. ^ Gillis 1999, p.57-81.
  47. ^ Gillis 1999, p.155-158.
  48. ^ 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.
  49. ^ Gillis 1999, p.155-158.
  50. ^ Gillis 1999, p.247.
  51. ^ Gillis 1999, p.158.

References