Washington State Debates Taxing Software Creation

zzyzx writes: "An article in the Seattle PI discusses the existing tax on software creation in Seattle. The law was clarified recently to allow the taxing of the software that was created in Seattle, even if the manufacture of the discs occurred elsewhere. Some Washington state lawmakers are working to overturn these changes. The issue at the heart of the matter: Should an intellectual activity such as programming be taxed in the same way as manufacturing is?"

Comments

Well, duh.

[cperciva]

Why should intellectual property be treated any differently than physical property when it comes to tax laws? If businesses are taxed based on their revenue, they should be taxed separately in each jurisdiction based on the value of goods they produce in said jurisdiction.

I'm reminded of the Cola bottling cases, where syrup was manufactured in a low-tax locale and "sold" to bottling companies (wholely-owned subsidiaries). The syrup price was being set in order to ensure that the bottling companies never made a profit, in order that profit would only be reported in the locale where it was almost tax-free. It was ruled that the sale had to take place at market rates -- in other words, you can't hide money from the taxmen by transferring property from one jurisdiction to another. This is exactly the same issue.

Re:non profit

[FatRatBastard]

I think you've got the wrong end of the stick. It looks like Seattle are trying to levy something that smells awfully like a property type tax, in which case they'll tax you on their percieved value of the software, not on revenue you generate from selling it.

Re:is software akin to solid state machinery?

[medcalf]

The only tax that makes sense is income tax. Even sales tax doesn't make sense, let alone all these weird specialized taxes.

OK, you obviously have not thought through taxation very well, if you make this statement. So let's walk through it a bit.

A government (theoretically, anyway) provides services to its citizens. Universally, these include infrastructure development, provision for the common defense, a criminal justice system and so on. Some countries provide more, and some countries have failed, and essentially the government is an armed gang of extortionists. Other than the latter, though, governments generally exist to provide services to their citizens. To do that, a government must have access to resources (people, property, material, etc). To get those resources in a basically free-market system, such as is prevalent in the developed world, requires money, because money is the medium of exchange and because we don't like the government to show up unpredictably with guns to take things from us that the government needs.

This need to raise funds for the government can be met with:

• tarriffs and the like - essentially, money paid to the government to bring goods into the country
• export duties - money paid to the government to be able to send goods out of the country
• sales or value-added taxes - payments to the governnment to sell something or provide a service, based on the market value of the product or service
• user fees - payment for use of a government service, such as admission to a park
• property taxes - payments to the government for services provided for the property (such as keeping foreign armies from seizing the property), based on the value of the property
• income taxes - payments to the government for services that allow you to earn a living, based on the amount you earn (and typically relatively higher if you earn more)

The amount of funds raised depends upon which taxes are imposed, and how much money is behind each source of funds. So let's look at the government's incentive with each tax, the relative amount of funds behind it, and the impact on the society of collecting funds in a certain way.

• tarriffs - The government's motivation is to increase exports and tarriffs, in order to generate more funds. But there is a balance, because excessive tarriffs result in less exports, and thus less funds. As a result, the government will normally keep such a tax low. The increase in exports generates jobs in the economy, and the impact of excessively raising taxes is directly felt by the government in lower revenues. There is no impact on individual liberty, because an individual can avoid the tax by not exporting goods.
• import duties - The government's motivation is to restrict imports (to protect domestic jobs) and to raise tarriffs in order to maximise funds. However, this again is a balanced tax, because excessive import duties make it difficult to bring in necessary goods, and thus cost jobs as well as consumer spending power. There is no impact on individual liberty, because a person can avoid the tax by not importing goods. It is my understanding that the funds raised by current US tarriffs and import duties is sufficient to run a government similar to the one initially created for the US, but sized for the current US. That is, these funds couldn't support an expeditionary army or a welfare state, but could support a defensive army, police force, treasury, Congress, etc.
• sales taxes - The government's motivation is to set the tax as high as possible, to raise maximum revenue. However, people would buy less, causing loss of employment and loss of revenue at the same time. As a result, sales taxes tend to be low. There is no impact on individual liberties, because the tax can be mitigated by buying used goods, less goods or making it yourself (you can grow your own food, build your own house if you have wood or stone on your property, etc).
• user fees - The government's motivation is to set these fees as high as possible, to raise the most funds. However, setting the fees too high will result in people not using optional government services, and thus will decrease revenue. The built-in feedback keeps this tax low. There is no impact on individual liberties because an individual can refuse to use the service, and thus avoid the tax. This is not a big revenue generator, but can be used to pay for government services of real use, like parks, maps, weather data and the like.
• property taxes - The motivation is to set the tax as high as possible to maximize funds. However, doing that causes people to not own property, which reduces the revenue stream. Thus the tax tends to be reasonable. In addition, the US originally made real property ownership a requirement in order to vote, thus providing an offsetting incentive and allowing the property tax to be higher than it otherwise would be. There is a small impact to individual liberties, since the government has to know what property you own and what its value is. However, they don't have to know what you do with or on the property, so the impact is fairly low. This is the main funding method for many states still today.
• income taxes - The government's motivation is to set the tax rate as high as possible without sparking a revolution, in order to maximize funds. Since there is no feedback loop (you have to work to eat, after all), these taxes tend to be very high - particularly so since the higher income earners are disproportionately taxed. (Putting 50% of the taxes on 3% of the voters is not likely to get you kicked out of office.) Further, the government needs to know how much you earn, which is an invasion of your privacy. On top of that, they have to look through your bank account records to prevent cheating, regulate the use and transfer of your money to prevent tax avoidance, and many, many other tyrannies. It is for this reason that direct taxes, except based on head count, were prohibited in the US Constitution: to prevent the govenment from invading every aspect of your life.

In the end, it is the income tax that allows the government to control your life. It is the income tax that makes possible a government of barely-restricted size and power. It is the income tax that allows the government to bribe the majority with money coerced from the minority. It is the income tax which spawns most of the tyranny that the US government practices (admittedly, still less than most places in the world). It is the income tax which sterilizes citizenship by removing the ability of citizens to control their government's behavior by changing their own behavior. It is the income tax which poisons public debate by allowing people to obtain benefits without costs, and thus makes the incentive for an individual to go along with a government program - lest their own government teat be attacked by the beneficiaries of another program - unless they are in the unheard minority who have to fund whatever the latest government program might be. It is the income tax which is LEAST useful and sensible to a free people.

One further point, on bonds: the government can raise money in the short term by taking on debt. This is not a valid long-term means of financing the government, however, because that debt eventually has to be paid back, with interest, thus reducing future funding abilities.

-jeff