Tax Reform

by Ingrid Naiman

I have been surprised by the warm reception to my previous posts and encouraged to continue with my story, which is neither a memoir or war story, rather my effort to share from personal experience what I believe is highly relevant to the current world situation.

Though my personal motivation for going to Vietnam was to be on the inside so as to find a way to stop the war, I actually had a job and something resembling a job description. My job involved finding ways to narrow "the gap" so that Vietnam would have enough revenue to finance its own governmental operations.

In lay terms, I was involved with taxes. The Vietnamese had inherited a French system of taxation that depended on voluntary submission of financial information and then an audit by employees of the Ministry of Finance. If no bill was received within three years of submission of the declaration, people were not required to pay taxes for the year in question. Obviously, there is much room for graft in a system were a few strokes on the palm could miraculously cause tax information to go to the bottom of the pile of papers . . . and there was no revenue without auditors, all but a few of whom had been drafted. In short, the system was not working and my job was to find a way to fix it.

 

One day, a man phoned my office and spoke in extremely heavily accented French. He said he wanted to see me immediately. I asked where his office was. My boss stopped me at the door and asked where I was going. I said, "I'm off to the Ministry of Finance to meet someone." He explained that the person whose name I repeated was the Minister of Finance. I decided that if this were the case, I had better bring my assistant, Lily.

When we got to the Ministry, we saw a small man behind an ordinary desk with very little clutter and a red phone. He hurled a document at me and asked if I had written it. I said, "Yes, but how did you get it?" He said he had ways and then said, "I like it, you work for me." He pulled up a chair and pointed at some extra space in his office and told me that I could work mornings for the U.S. Government, but he wanted me to work afternoons in his office. I said I wanted Lily to work with me. He looked her up and down and agreed.

Lu Van Tinh was the only high ranking South Vietnamese in the entire Saigon government; and, as I mentioned before, Lily happened to be one of the only South Vietnamese in our enormous office. When I got back to my office, my boss demanded a full report. He said no American had ever met Mr. Tinh and that he was suspected of being a communist. I Iaughed: "Does everyone who resents our presence in this country have to be a communist?"

Lily and I were basically given a free hand to draft entirely new tax laws. This was truly an amazing experience because we could consider all the many ways to collect taxes along with what would be equitable and just—and all the old laws would simply vanish. We decided to propose a system of taxation based on consumption rather than income. Basic necessities would be exempt from taxation: rice and medicine. Luxury items would have higher taxes so a very expensive car, such as a Mercedes, would be taxed more than a basic Japanese car such as I drove. Imported items could be taxed at the port of entry or upon sale to the consumer or both, but all import documents would have to be more carefully examined than we believed to be the case at that time.

Once we had listed everything we could imagine, everything from equipment needed to build factories to exotic perfumes and fabrics, we presented our suggestions to Mr. Tinh and he assigned some of his staff to go over each item. This became a phenomenal exercise in diplomacy and compromise since individual spending habits are often associated with very strong opinions. We soon learned that if we refused to budge on items we believed to be important that we could yield on other items and everyone would not only be happy, but we would all save face.

Since I believe the American tax system is in equally great need of reform, I will mention some of the salient points of what Lily and I developed for the Minister of Finance in Vietnam.

Most people would agree that there are services that the Government is best suited to provide. Ironically, reasonable minds would probably not agree on much of what we today presume the U.S. Government—and by extension other governments—should do so as to meet its responsibility to the people of the country. Most who bother to think about such matters would agree that governments should provide for the defense of their countries. No brainer that this may seem to be, Japan has functioned since WWII with just a Self-Defense Force, no real military such as we generally understand the military to be. This is entirely adequate if a country renounces war and truly only seeks to defend itself. Trustworthy alliances, reasonable deterrents, and good intelligence make for less need for huge national defense corps.

Second, we probably can agree that national governments are the only ones suited to engage in diplomatic relationships. So, governments need embassies and foreign ministries. They also need judicial and legislative bodies. After this, there is much less consensus than one might imagine. It is not even a foregone conclusion the the government is the only entity that could conceivably print currency and deliver the mail though the mint is usually an operation of national government as is the postal service.

Some countries provide all the health care and education for their citizens; some provide all the newspapers and other information in the form of radio and television broadcasts. Some provide all the bus, rail, and air transportation; and in places like Bhutan, the king provides housing for everyone in the capital. Most governments also have departments or agencies that deal with economic or trade issues, variously called departments of exports and imports, departments of finance, economics, labor, etc.

Because we are so accustomed to how things are, it takes a little effort to think outside the box and ask whether the government is really the one most suited to provide certain services. Do we need a patent office, a department of agriculture, a drug enforcement agency, an energy agency, and so on and so forth.

I'm not going to address all these issues right now, just the question of how to pay for governmental operations.

Basically, revenue has to come from individuals or "other entities" and the revenues that are collected are some kind of tax. There are lots and lots of different kinds of taxes, but they are all taxes. A customs duty is levied on imported goods and constitutes a kind of punishment for spending your money in another country. Though it is widely accepted that governments can charge import taxes, these taxes are heavily negotiated in international trade summits and they are easily interpreted as political, hostile, and discriminatory by the countries seeking to export their goods. So, it takes lots of businessmen and bureaucrats as well as lots of sources of tax revenue to negotiate most favored nations clauses into trade agreements.

It would be really simple to eliminate such tariffs as if borders did not exist—because, in fact, the global economic community is much more united than it sometimes seems on the surface. This said, what Lily and I proposed to the Vietnamese Minister of Finance is that the government impose duties on imported goods because such taxes are relatively easy to administer when most dutiable items are coming through a single port of entry. Remember, our challenge was partly lack of manpower. I vaguely remember that there were exactly three tax auditors who had not been drafted, and we had to make their lives a lot easier.

Anyway, besides customs duties, people and "other entities" such as corporations pay income and sales taxes. In America, we are not used to thinking of sales taxes as federal income, but "sin" taxes on cigarettes and alcohol are federal taxes. Technically, they are something like "value added taxes" in that they are typically collected at the transaction point where the goods are wholesaled to a retailer, who then, of course, passes the tax levy onto the consumer who usually pays a state sales tax on top of whatever hidden taxes are already part of the item.

Complicated? No, not really. Gasoline is a case in point because you generally see a breakdown of the taxes when standing at the pump. In the public mind, there is a vague understanding that Big Brother wants a piece of the action and that the price of such federally taxed items is jacked up so that the retailer can pass his costs along to Mr. and Mrs. Consumer.

However, for the most part, when thinking of taxes, most individuals think of income taxes and a host of other burdens such as payroll taxes and so on and so forth. Income taxes are paid to the federal government which may or may not actually have the right to levy these taxes, and some states also have income taxes as do some municipalities.

The problem with this system is just what I described as one of the shocks of my first real job, in the essay on my Wall Street experiences. In the U.S., there are so many diverse write-offs and quirks in the taxation system that it is true that the burden is disproportionately heavy on the middle class, which is being eroded by the system, and too easy on the rich.

The Enron scandal is bringing some of this to light. We realize that corporate America is almost without conscience, but it is also in collusion with government. In fact, this particular administration is really an extension of big business, and has so many conflicts of interest that it cannot really function as a government should.

The Green Party, mainly it's captain Ralph Nader, has been tireless in pointing out the inequities, but they would be really simple to solve by measures such as Vietnam adopted after I left. Lily and I worked out every detail of a truly fair system of taxation, and we went over every word with the staff at the Ministry of Finance.

I left Vietnam in the summer of 1968 and while working in India, I learned from the World Bank that Lily had successfully defended every single word in our document before the Vietnamese Parliament. It was accepted, after months of debate and defense, without a single change; and later I heard that when the North Vietnamese took over South Vietnam, they retained both the tax system and the minister of finance, going to show that sensible systems can be used flexibly by whoever is in charge.

I also heard that the World Bank was seriously looking at this plan for use in other countries. Because of this, I have written to many presidents, senators, and candidates for office suggesting something similar by way of tax reform in the U.S.

The essence of the system is a simple system of taxation of consumption rather than income. The main argument in favor of the income tax and all the loopholes is that if the rich do not pay so much in taxes, they will reinvest their wealth in what is called "capital development," i.e. new projects that create jobs for the less fortunate. I never bought that line.

Consumption taxes actually encourage investment much more directly: money is taxed if it is spent. It is not taxed if it is saved and the bank or stock broker reinvests the funds. It is fair because if someone spends money, he or she obviously has money. Personally, I favor a very simple flat rate of taxation with exemption for food and medicine. The rate can be easily adjusted if national emergencies, war or natural disaster, necessitate extra government spending.

There are so many advantages to this system that I can't see how any sensible person would reject it. First, it eliminates all the ill-begotten gains of those with the clout to lobby for favors. Second, it is easy to administer and brings all the black money into the tax system so the government doesn't have to use the IRS to catch drug dealers. It can use law enforcement agents to catch criminals and let the Treasury Department do what treasury departments should do. Third, it eliminates the incentives to create bogus offshore offices to launder funds that are meant to be invisible. Basically, consumption taxes are taxes on the movement of goods, i.e., when items change hands, the seller or buyer pays a tax—and it is a lot easier to tax the seller than the buyer because the points of sale are fewer in number. . .and, yes, this system is not perfect, but it beats whatever it is we have now.

 

Afterword:

I remained in touch with Lily and her family for many years. I bumped into her sister in Rome; Irene took me home to have noodles with her parents. Lily's family managed to get out of Saigon and to settle in Europe. Lily married a European diplomat, and last I heard, which was some time ago, she was in Spain.

 

Poulsbo, Washington

Copyright by Ingrid Naiman 2002, 2006