taxes – Looking Forward

September 28, 2017

Horseless Carriages And Taxes

I noticed that the White House unveiled today its proposal for many changes in US taxes. I don’t normally comment on current political controversies and am not going to do so now, whatever my private views are on the policies.

But, as someone with an interest in 21st century technology, I did take notice of one thing about the proposal that I’ll comment on– admittedly something not as important as other aspects of the plan, but something that seems so outdated.

It is another example of how, for all the talk about technology and change, far too many people – especially public officials – are still subject to what the media expert Marshall McLuhan called the “horseless carriage syndrome”. When automobiles first getting popular a hundred years ago, they were seen as carriages with a motor instead of a horse.

Only much later did everyone realize that the automobile made possible a different world, including massive suburbanization, increased mobility for all generations, McDonald’s and drive-ins (for a couple of decades anyway), etc. Cars were really more than motorized, instead of horse-driven, carriages.

Similarly, tech is more than the sometime automation of traditional ways of doing things. Which brings me back to taxes.

In pursuit of a goal of simplifying the tax system, the White House proposed today to reduce the number of tax brackets from seven to three.
(This image is from the NY Times.)

And that brings me to a question I have previously asked: why do we still have these tables of brackets that determine how much income tax we’re supposed to pay?

The continued use of tax brackets is just another example of horseless carriage thinking by public officials because it perpetuates an outmoded and unnecessary way of doing things.

In addition to being backward, brackets cause distortions in the way people make economic decisions so as to avoid getting kicked in a higher tax bracket.

But we no longer have to live in a world limited to paper-based tables. Assuming that we don’t go to a completely flat single percentage tax – and even the White House today doesn’t propose that – there is nothing in a progressive tax that should require the use of brackets. Instead, a simple system could be based on a formula which would eliminate the negative impacts of bracket-avoiding behavior that critics of progressive taxation point to.

And all it would to implement this is an app on our phones or the web. An app could the most basic flat tax formula, like “TaxOwed = m * TaxableIncome” where m is some percentage. It could also obviously handle more complicated versions for progressive taxes, like logarithmic or exponential formulas.

No matter the formula, we’re not talking about much computing power nor a very complicated app to build. There are tens of thousands of coders who could finish this app in an afternoon.

Again, the reduction of tax brackets from 7 to 3 is not among the big issues of the proposed tax changes. But maybe we’d also get better tax policies on the big issues from both parties if public officials could also reform and modernize their thinking – and realize we’re all in the digital age now.

[OK, I’m off my soapbox now 😉 ]

May 3, 2016

Why Do We Still Have Tax Brackets?

We’ve just passed the tax deadline and reflecting on it I was vexed
again by this question: why do we still have these tables of brackets
that determine how much income tax we’re supposed to pay?

I can
understand there was a time, many decades ago, that the government
wanted to keep things simple so each person could easily determine the
tax rate that would apply. And I know that the continued use of tax
brackets is not the biggest problem around. However, tax brackets are
just another symptom of government’s failure to see the widespread
deployment of technology in the public and its failure to use basic
technology for simple improvements that are appropriate in this century.

Brackets
cause some problems. Politicians who advocate a single flat tax rate
often start with the argument that their approach would be so simple
people could just send in a postcard. Putting aside the merits or
demerits of a flat tax, for the moment, there is something retro about
telling people to use a postcard in 2016.

From 2000 to 2015, postcard usage dropped by more than two thirds, an
even greater drop than in first class envelope mail. The Washington
Post even had a story last year with a headline that asked “Are postcards obsolete?”

Where would we even find these postcards? Would the IRS mail them to us? 🙂

Those
who argue for flat taxes or lower taxes in the higher brackets
implicitly say that people will work less if it means an obvious jump in
tax rates by shifting into a higher bracket. There are also those who
advise people how to avoid this problem, as did a Forbes magazine article
last month which started out saying that

“the key tax challenge facing
retirees: being helplessly catapulted into rising tax brackets [because
our] tax code is progressive.”

Indeed, with the current set of progressive tax rates, your percentage of tax goes up as your income goes up.

But we no longer have to assume we live a world limited to paper-based tables.

There
is nothing in today’s world that requires the use of brackets in a
progressive tax system. Indeed, a system based on a formula instead
would eliminate the negative impacts of bracket-avoiding behavior that
critics of progressive taxation point to.

There are a few possible
formulas that might work. The most complex would be a logarithmic or
exponential curve, which a computer can nevertheless easily compute. If
you want to make it even simpler, another formula would set the
percentage tax rate as a percentage of income. (Remember school math?
TaxRate = m * Income where m is some small fraction.)

No matter
the formula, computers can handle it. The IRS could make a formula
available on line or over the phone — just enter your taxable income and
it will tell you what you owe. It can be built into the calculator
function of cell phones. There are tens of thousands of coders who
could finish this app in an afternoon.

Of course, the IRS says that it now offers an app, but it doesn’t take advantage of the computing power of the mobile device nor help you figure out the amount you owe.

While
we’re at the effort to bring government into the modern technological
era, let’s also consider where those taxes go. Why do we still have
fixed budgets?

The budget reform of the 1920s was developed in a
world that did not have the ability to dynamically make calculations.
So every year, government officials make their best guess on the
condition of the economy, the demand from an unknown number of
potentially needy citizens and other factors that determine the ebb and
flow of public finances. Since the budget process is lengthy, they make
this guess well ahead of time so they could be trying to predict the
future more than 18 months ahead of time.

A rolling budget would
work better by automatically adjusting each month to the flow of revenue
and the demands on government programs — and all you need is a big
spreadsheet on a not-so-big computer. However, the budget makers would
have to decide what their priorities are. For example, for every
percentage of unemployment, we need to put aside $X billion dollars for
unemployment insurance payments. It would take work to do this for each
of the promises the government makes — although maybe not as much work
as trying to guess the future.

(Of course, the real obstacle to a
rolling budget model is that policy makers would be forced to make more
explicit their priorities.)

I could go on, but you get the idea.
Buying billions of dollars of technology products is not enough.
Government needs also to bring technology into its thinking and design.

[Note: this is an update of my blog
post in 2012]

[http://njacknis.tumblr.com/post/143790789669/why-do-we-still-have-tax-brackets]

December 5, 2012

What Should Local Gov Do About Corporate Incentives?

In my presentations on economic growth, I’ve pointed out that, given the new rules of the 21st century economy, the typical incentives that government uses to get corporations to bring new jobs to their area are rapidly declining in effectiveness. Yet these incentives add up to a huge number – now estimated at $80 billion a year.

Instead, I’ve suggested that at least a fraction of that money be spent in more effective, future-oriented ways. These alternative ways include connecting local entrepreneurs to global partners, resources and markets, as well as efficient lifelong learning opportunities for adults so they can increase their potential incomes as individual players in the economy.

Some of these ideas are parallel to the small, but growing, movement of local officials called “economic gardening” in contrast to the industrial era “economic hunting” strategy that is still the normal approach.

So it was with great interest to see the front page of the New York Times this Sunday, which began a three part series on the “UNITED STATES OF SUBSIDIES – A series examining business incentives and their impact on jobs and local economies”.

Part 1 was entitled “As States Vie to Lure Companies, the Winners Are Often the Losers” and began with this story:

Today, General Motors’ Willow Run plant in Ypsilanti Township, Mich., stands empty and silent. The storied facility made bomber planes during World War II and then automobiles after being bought by G.M. Ypsilanti gave G.M. more than $200 million in incentives for Willow Run and another plant there — which has also been closed.

In the end, the money that towns across America gave General Motors did not matter. When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves G.M.’s business partners were among the targets.

Other highlights included:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies.[The combined amount federal and state governments give up for incentives each year is $170 billion.]

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

“If you’re looking at the competitiveness of a region, the most important thing a region can do is to focus on education. And this use of incentives is really transferring money from education to businesses.” Donald J. Hall Jr., Hallmark C.E.O.

Workers are a vital ingredient in any business, yet companies and government officials increasingly view the creation of jobs as an expense that should be subsidized by taxpayers, private consultants and local officials said.

For towns, it became a game of survival, even if the competition turned out to be a mirage.

[http://njacknis.tumblr.com/post/37261748800/what-should-local-gov-do-about-corporate-incentives]

July 18, 2012

The Three Legs Of Traditional Economic Development Strategy Are Breaking

I was asked to lead a panel on economic development at the Annual Meeting of the National Association of Counties last Friday. My task was to provide some background on economic trends for the panelists who were to speak on what their communities are doing.

I presented what have been the three main legs of the traditional economic development strategy of state and local governments:

1. Provide incentives for big companies to bring lots of jobs to your community

2. Encourage the creation and development of physical clusters of the same kind of businesses

3. Subsidize the building of places that concentrate a large number of jobs, like office buildings, factories, etc.

Then I pointed out that these three parts of the traditional strategy are being undermined by the consequences of:

a shift in employment from making things and food to intangible services and digital goods and
increasingly available communications

As a result, incentives to big companies don’t work well because those companies can no longer deliver or move lots of jobs. In addition to explaining why this is, I gave examples of the failure of incentives.

In a sense, there is a movement away from the world of Coase to the world of Shirky. Ronald Coase, an economics Nobel Prize winner, developed the theory of the firm – why large enterprises emerged in the industrial era and were more efficient in many ways than the marketplace itself. Clay Shirky of NYU has written about how the Internet can provide the means of collaboration today that only the large industrial corporation used to provide.

As a result, in their thinking about economic growth, governments should focus on small companies and fluid teams as the individual increasingly becomes the key unit of economic activity.

The second part of the traditional strategy has been to create clusters. However, as some major economic studies have made clear, the value of physical clusters of the same industry is waning. Moreover, the more recent talk of “innovation clusters” would seem to fly in the face of what we have learned about how innovation happens. Innovation is more likely to occur from people in diverse fields exchanging ideas than people who are all narrowly focused on the same domain of knowledge.

Then finally there has been the practical equation of real estate development with economic development. As noted in an earlier blog, companies require less commercial real estate space per employee. Work at home and flexible co-working spaces are the substitutes and these don’t look like traditional office towers. Physical real estate itself is changing and become more a blending of virtual/physical. So perpetuating more traditional office or other industrial real estate projects would not seem to be a good future-proof investment of public funds.

I suggested that public officials needed to shift their thinking about what is economic success. Is it the total revenues of companies that might happen to have an address in your county OR is it the amount of income and wealth of its residents?

To put it another way: if you had to choose, which is the better economic picture for your community – corporate skyscrapers or headquarters in downtown, but a median household income of $40,000 per year OR no skyscrapers, but a median household income of $100,000 per year? To me the answer is clear – the latter option to both questions.

My talk was followed by presentations from the two coasts of the US. First, Ira Levy of Howard County, MD described that county’s approach with its emphasis on entrepreneurs, education, etc. We didn’t do any coordination ahead of time, but his presentation was very much in line with the ideas I presented in the opening talk. And, of course, he had to point out that Howard County has a median household income of $105,000.

A similar story came from Robert Ross of the San Mateo (CA) Council, who referred to the trends that I had outlined. These required a change in strategy even in the heart of Silicon Valley.

Please feel free to contact me at njacknis@cisco.com if you want a copy of the details of the presentation.

[http://njacknis.tumblr.com/post/27476032969/the-three-legs-of-traditional-economic-development]

July 11, 2012

Why Do We Still Have Tax Brackets?

It must be the warm summer that has made me wonder about silly things like: why do we still have these tables of brackets that determine how much income tax we’re supposed to pay?

I can understand there was a time, many decades ago, that the government wanted to keep things simple so each person could easily determine the tax rate that would apply. And I know that the continued use of tax brackets is not the biggest problem around, However, tax brackets are just another symptom of government’s failure to see the widespread deployment of technology in the general public and its failure to use basic technology for simple improvements that are appropriate in this century.

There are some problems that brackets cause. Politicians, like Steve Forbes and Rick Perry, who advocate a single flat tax rate often start with the argument that their approach would be so simple people could just send in a postcard. Putting aside the merits or demerits of a flat tax, there is, of course, something really backward about telling people to use a postcard. From 2000 to 2010, postcard usage dropped by half, an even greater drop than in first class envelope mail.

There are also those who observe people trying to game the system by adjusting their income so they don’t get into a higher bracket. Those who argue for lower taxes in the higher brackets implicitly say that people will work less if it means an obvious jump in tax rates by shifting into a higher bracket. Similarly, US News published a story earlier this year on “How to Avoid a High Tax Bracket in Retirement”.

With the current set of progressive tax rates, your percentage of tax goes up as your income goes up. There is nothing in today’s world that requires the use of brackets in a progressive tax system. Indeed, a system based on a formula instead would eliminate the negative impacts of bracket-avoiding behavior that critics of progressive taxation point to.

There are a few possible formulas that might work. The most complex would be a logarithmic or exponential curve, which is nevertheless easily computed by a computer. If you want to make it even simpler, another formula would set the percentage tax rate as a percentage of income. (Remember school math? TaxRate = m * Income where m is some small fraction.)

No matter the formula, computers can handle it. The IRS could make a formula available on line or over the phone – just enter your taxable income and it will tell you what you owe. It can be built into the calculator function of cell phones. We no longer have to assume we live a world limited to paper-based tables.

While we’re at the effort to bring government into the modern technological era, why do we still have fixed budgets? This budget reform from the 1920s was also developed in a world that did not have the ability to dynamically make calculations. So every year, government officials make their best guess on the condition of the economy, the demand from an unknown number of potentially needy citizens and other factors that determine the ebb and flow of public finances. Since the budget process is lengthy, they make this guess well ahead of time so they could be trying to predict the future more than 18 months ahead of time.

A rolling budget would work better by automatically adjusting each month to the flow of revenue and the demands on government programs – and all you need is a big spreadsheet on a not-so-big computer. However, the budget makers would have to decide what their priorities are. For example, for every percentage of unemployment, we need to put aside $X billion dollars for unemployment insurance payments. It would take work to do this for each of the promises the government makes – although maybe not as much work as trying to guess the future.

(Of course, the real obstacle to a rolling budget model is that policy makers would be forced to make more explicit their priorities.)

I could go on, but you get the idea. It’s about time that government not only buys technology (which it does, sometimes, in large volumes), but also brings that technology into its thinking.

[http://njacknis.tumblr.com/post/26971606341/why-do-we-still-have-tax-brackets]

June 6, 2012

The Shrinking Office

Last week, as part of its regular reporting on the real estate market, the New York Times had an interesting article, entitled “More Room For Ideas In A Smaller Office”.See http://www.nytimes.com/2012/05/30/realestate/commercial/gaining-savings-and-productivity-from-smaller-offices.html

The article highlights the greater collaboration and innovation that have resulted from the use of smaller, less traditional office space.

I do have the sense, though, that these newly discovered desirable features amount, in part, to making a virtue of necessity.

The Great Recession of 2008 made people think that the vacancy rates of commercial office space was a reflection of the poor condition of the economy. But the reduction in the need for traditional office space has been a trend for a while.

Not mentioned in the Times was a recent survey by Jones Lang LaSalle, a major real estate firm. A report about that had these findings, as well:

40% of IBM employees work from a location other than an office at IBM. [The same is true for Cisco and many other organizations, not only IT companies, but those in any kind of intangible service. Indeed the TImes article featured 22squared, an Atlanta advertising agency.]
The current rule of thumb concerning office space per employee – 200 square feet per employee – is shrinking to just 50 square feet by 2015.
As early evidence of the trend, office tenants renewing their lease nowadays often cut their total space by around 10%-30%.

In past blogs, I’ve pointed out how, traditionally, city plans and taxes have heavily depended upon office space. Commercial real estate has been the goose that has laid the golden eggs for local governments around the US.

The trend of reduced space per employee will clearly have consequences for those cities that do not start shifting their assumptions about the way the economy will increasingly work.

Those cities will also find their own financial success increasingly misaligned with the financial success of their residents, who are quickly adapting to the new work environment in the home and other places that don’t look like offices. That is not a good situations for mayors and other elected officials.

[http://njacknis.tumblr.com/post/24536576324/the-shrinking-office]

August 18, 2011

The Misalignment Between The Economic Success of Local Government and Their Residents

As you can see from some of the other posts here, at the request of the US Conference of Mayors, I’ve been focusing on an economic development strategy that will work in the future. As a result of that work, I’ve been presenting my ideas in many places and before many audiences, generally including mayors or other senior officials of local government.

Without going into the whole line of reasoning, I discuss the combined effects of (1) a future with ubiquitous high quality communications and (2) the shift of the labor force to providing ideas and other intangible services. One implication of these trends is the disaggregation of the monolithic big company that would concentrate jobs in a city and, as an alternative, the empowerment of fluid teams of individuals.

To drive the point home, I argue that the true measure of the economic success of a city is the sum (or the median?) of the income and wealth of its residents – and not the total sales of companies that might have a local postal address there.

In what sometimes comes across as a provocative statement, but isn’t, I put up an equation: economic growth does not equal real estate development. I say that because a large part of the economic development expenditures of local governments have been about real estate development.

A few times in recent weeks, I’ve met with mayors or economic development directors who understand exactly what I’m talking about and see the future as I present it. Then comes the response: “We should be thinking about the amount of money in the pockets of our residents, but you’re missing something here. Our business – the city government – is mostly dependent upon property taxes and commercial real estate is the golden goose that lays most of those tax eggs. We focus on real estate development because that’s where we get the return in the form of taxes later.”

That’s a fair argument for the year 2011, as far as it goes. Of course, often what is a key part of the incentive package is a reduced property tax bill. More important, commercial real estate will have a hard time maintaining itself in the face of the trends that I discuss. Indeed, over the last ten years, many big companies have found that they need half the square footage per employee that they used to. Even now, many employees telecommute or operate remotely somewhere out of the office. So in the long run, this equation between real estate development and economic growth will break down.

This raises a more serious public policy question, though. How did we get into such a situation where a smart mayor realizes that the economic success of the city government is misaligned with the success of the city’s residents? And, for the viability of our democracy, how do we align these?

Or, if you want to ask a related and more pragmatic question: if the goose that laid the golden eggs – commercial real estate – is getting ready to retire, what replaces it?

Either way you look at it, local governments in the United States need to shift away from their dependence on commercial property taxes. There are various alternatives that cities have been forced to pursue and may have to depend on more. Some examples: income taxes, property taxes on residences (which the Internet has now also made places of work and shopping) or even sales taxes on the goods/services that are sold directly into residences. I’m not suggesting that any of these is perfect or even good, but they all share one characteristic – the revenue base grows as the city’s residents have more money in their pockets.

Whichever of these or other possibilities is selected, cities and counties will be forced to align their financial success with the economic success of their residents. This is a good thing for their residents because their local government will then emphasize the development of each resident’s income potential. Even from the narrow interest of the government as a business, this is a good thing because government will have a more assured revenue stream that is appropriate for a 21st century economy.

[http://njacknis.tumblr.com/post/9079495075/the-misalignment-between-the-economic-success-of-local]

July 1, 2011

Get The Most Out Of Your Construction Money

[Note: This was originally posted on a blog for government leaders, February 23, 2009]

Construction is a major expenditure for state and local governments. This is going to be the case even more as many billions of dollars will go into infrastructure from the Federal Recovery and Reinvestment Act.

It’s also important to realize that construction costs are a major factor in projects that are not officially called construction projects. For example, over the last few years, many governments have invested in public safety radio projects or broadband projects. While these are about communications and technology, often the construction costs associated with these projects are larger than the cost of acquiring the technology.

So the key question is whether you are getting the most from every dollar spent on construction. The answer is that, if you just let the construction proceed as it always has been done, you are increasingly wasting money.

The construction industry’s productivity picture is below that of US industry, in general. According to the US Bureau of Labor Statistics, productivity in the construction industry has declined since 1968. Stanford University Professor Paul Teicholz reports that”construction work per hourly work hour has gradually declined – over the past 40 years at an average compound rate of -0.59%/year.” But there is hope on the horizon.

A few forward thinking architects, engineers, builders and computer experts have banded together to create a new four dimensional approach to construction projects, which goes by the name ”Building Information Modeling” or BIM. Despite the name, BIM can be used in any construction project – highways and sewers, for example – not just buildings.

BIM is still a developing technology and approach, so the most dramatic benefits are still in the future. Already, though, those who have used BIM have seen substantial reductions in costs and shrinkage of project schedules.

Some have reported reductions of as much as a third over the traditional construction approach. A significant cause of these reductions is that BIM results in a reduction in claims for errors, which traditionally have meant costly rework and ad hoc redesign on the job site. Since BIM coordinates the work of all the trades on a job, it virtually eliminates the problems that ensue when, for example, electrical wiring and water pipes are put in the same place.BIM also enables the prefabrication of customized components.

This gives you the savings of pre-fab manufactured buildings, without the need to conform to the manufacturer’s stock designs. For example, a 50 foot component wall could be built off site from the specifications and just be put into place.

The US General Services Administration (GSA) has started to require firms who construct federal buildings to use BIM. Hopefully, State and Local governments will also start to require BIM of their construction bidders.

For further information about BIM, the best starting point is a 12 minute video that GSA prepared about their”Journey Into Building Information Modeling” at http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_BASIC&contentId=24256– This video is part of a general GSA website devoted to BIM at http://www.gsa.gov/bim. It includes all kinds of publications that you might want to pass along to your public works or other construction staff.

The buildingSMART alliance is the organizational leader of BIM. Its ”focus is to guarantee lowest overall cost, optimum sustainability, energy conservation and environmental stewardship to protect the earth’s ecosystem.” http://www.buildingsmartalliance.org/

Wikipedia, of course, has an entry on BIM at http://en.wikipedia.org/wiki/Building_Information_Modeling- An introductory article, ”Intelligent Design Through BIM” can be found at http://www.allbusiness.com/technology/software-services-applications-computer/11579683-1.html