Economics and Tax

Neualtenburg will earn an income through rent and taxes and have expenses in the form of land-investor returns, and salary. The goal of the project is to eventually grow the economy to the point where those who are paying US$ for land tiers are reimbursed for their investment. The city has an area of A = 32,768 m^2. The cost of land, assuming most people are in the second tier is approximately US$0.005 per m^2 per month (R = L$1 per m^2 per month). The total cost per month is:

A * R = (32768 m^2)(1 L$/(m^2 mo)) = 32768 L$/mo = 1092 L$/day

Thus to pay for land-tier fees for all contributors, we need a city income on the order of L$1100 per day. (Assuming other costs will be approximately equal to the land-tier fees, we will really need an income of about L$2200 but let's talk about that later.)

Assuming we do not rent property and instead collect all revenue from a tax (t), our daily sales (S) would need to be:

S = (A * R)/t = $L1100/t

For a 10% tax rate this requires sales to be L$11,000 per day.

This seems like a lot but during the Oktoberfest celebration we brought in approximately $5000 in sales in two days ($2500 per day) with a single event and four items for sale. Once the city becomes populated, the stores are in place, and we begin holding regular events, we should be able to hit that target without difficulty. To reiterate we need:

Daily sales: L$11,000
Daily sales density: L$0.34 per m^2

Monthly sales: L$32,768
Monthly sales density: L$10 per m^2


This, of course, is a function of sales tax. By doubling the tax rate we increase the return for the land investors but decrease the return for artisans, who have to split sales with the city. The question is, what would you like the tax rate to be? Do you favor a strong return for land investors so we have continued support or do you favor a lower tax to help stimulate the creation of new products? (Note: we can change this number as we go without difficulty. It's not set in stone. Rather this is a starting point.)

The choice is yours! Vote.

~Ulrika~

My vote is to reach a goal of a 10% sales tax, though we may need to start at a 14% sales tax to goose the economy in it's birth.

Just my 2 cents (Linden)

--Kendra

Kendra and I agreed on 10% between ourselves but I thought I'd see how everyone felt about this (I've always wanted to make a poll).

I think it's an interesting exercise to balance the needs of the artisans (return on RL time invested in making goods) with the needs of the land owners (return on RL money invested in tiers).

~Ulrika~

A 10% tax rate seems reasonable, fair, and easy to calculate for artisans who don't want to spend more time calculating taxes than creating things. At a higher tax rate, artisans might be forced to increase their prices to make up for the higher tax, which would make Neualtenburg a somewhat less desirable place in which to do business.

Personally, I think the benefits of selling from a well-themed area, with its own tax-funded social services, more than make up for slightly less revenue, but I imagine there are merchants who would disagree with me.

I've set the current tax rate in the vendors to 10% for now. You can view the city's revenue on the Vendor Services page. If anyone would like to collaborate on a product, we'll get it in the vendors and put it up for sale.

~Ulrika~

Once the 3rd version of the vendor is complete, we'll have the ability to have a sliding tax rate. I for one am in favor of a progressive sliding tax rate that starts low for avatars with low sales (0-5%) and then increases as a function of total sales (10-15%).

For instance right now I have enough money in my account and bring in enough during a day that I can buy pretty much anything in the game anytime I want. I didn't mind paying 33% to the city before I coded in the ability for the vendor to only take 10%. Since my sales are high I'd happily pay 15% to let those with low sales only pay 5%.

What do you all think about a dynamic progressive tax based on weekly sales?

~Ulrika~

an interesting idea. My first reaction was mixed, as at first glance, it seemed to reward failure

however, the wisdom in it would seem to me to be one that encourages the introduction of new product and experimentation (rather than the selling of what one believes to be a "natural high seller" . I might also add other "tax breaks" into the mix that encourage the type of creativity we are trying to foster in Neualtenburg.

othe possible Tax break incentives:

1) collaborative effort
2) unique item
3) "mixed" media (sound, animation, build)
4) limited edition (can the vendor be programmed to stop selling the item after a certain number has been reached? can it assign a serial number?)

what think?

BTW, Ulrika --have you noticed you and I are the only ones geeky enuff to weigh in on this? LOL

Yes. That's an argument against progressive taxes. It rewards those who don't produce and punishes the highest performers. The counter argument is that those who are making the most are using more city services (the vendor and online server) and should pay more. It's a controversial subject, which is why I gleefully submitted it.

Another way to do it, which hides the progressive tax, is to keep a flat city tax and charge a fee for vendor services or detailed analysis instead of providing it for free. Citizens of the U.S. are especially sensitive to progressive rates and actually demand regressive rates (like LL lowers the cost of land as you own more and more). Governments and businesses usually make up for this by charging huge taxes on luxury goods or providing services with a myriad of minor additional features to restore their progressive return.

Yes! Using financial incentives is a great way to influence behavior. I was looking over European tax tables the other day (whee!) and they have a different rate for just about every product imaginable. It wouldn't be hard to assign a different rate to every product sold.

~Ulrika~

Progressive taxes are a decent incentive to up-and-coming artisans. I'm new enough that I haven't started selling anything yet, and I'm finding that a big barrier to entering the marketplace is the high cost of renting shop space. I could set up a small store on my own property (and I may do that eventually), but it's not in a location that generates much foot traffic, so it would be entirely word-of-mouth sales. I can't afford the weekly rental fees for most high-traffic mall locations (I need that money for uploads and buying new shoes), which makes it hard to build sales momentum for my business.

A low tax rate in a popular shopping area (which I hope Neualtenburg becomes) would make entry to the marketplace that much easier. Once I've started to bring in sales, I wouldn't mind giving more back to the community in the form of higher taxes. Like Ulrika said, she brings in enough to afford just about anything she could possibly want to buy; once I get to that level of personal wealth, I'll be more than happy to contribute it in meaningful ways. I just need a smooth way to transition from a small business to a large one.

As for progressive taxes rewarding those who don't produce, I don't see it that way. Anyone whose goods aren't selling well isn't really being rewarded by the system, anyhow; they're merely being taxed less. If there isn't a demand for what you've produced, lower taxes still aren't going to save your business. Low taxes on the small earnings end do allow small businesses the freedom to experiment, though. Freed from the necessity of making expensive rent or paying high taxes, a small business can tinker with its goods and services until they best fit what the marketplace is looking for.



I'm strongly opposed to regressive taxes, both in SL and RL. The "buy in bulk" mentality of large business is all well and good if you've got the capital to afford it, but it prices small businesses out of the market. There is no natural curve here to allow a small business to transition to a large business, which is part of why we've got a glut of venture capital firms in the United States. Without that injection of capital from those fortunate enough to have already amassed it, it's very difficult to grow a business.



While I agree that specific tax levels for different categories of goods and services does have a measurable effect on the marketplace, I have economic, political, and moral objections to tax incentives.

First, the economics. Governments should not be in the business of legislating what gets produced; that must be a function of a free market. The market itself is the best decision-maker when it comes to determining what should and should not be sold. Those goods and services that are in demand will naturally rise to the top, and categorical taxes only serve to produce friction between what the market naturally wants and what the government is willing to allow. This, in turn, produces pricing that is completely out of line with the actual value of goods and services, which tends to artificially stagnate or inflate the economy.

On the political side, another problem with per-category taxes is that it introduces an unnecessary layer of complexity in the government. It requires a lot of resources (primarily in the form of many, many hours of time from government employees) to keep track of a complicated tax scheme, resources which would be better spent directly on improving the community instead of wasted on arguing over and enforcing arbitrary tax levels. I think this is one of the biggest areas of waste in RL governments, and given that we have an even smaller pool of time to draw from in SL, I don't think it could be anything but harmful to institute such a system. Bureaucracy is not an efficient way to spend a society's resources.

And now the moral objection. Complicated tax schemes make the government into an arbiter of good taste. Governments cannot, and should not, be in the business of making such decisions. Financial incentives, in the hands of a majority-led government, are a powerful tool for crushing individual expression and innovative products. Producers of goods and services must be free to produce whatever they would like, short of things that cause actual harm. Preventing harmful goods and services from entering the marketplace should not be the job of taxes; that's where a government must step in with actual laws, with criminal and civil penalties. Taxes are too indirect a method for controlling anything that's directly harmful, anyhow, and simply serve to create black markets where harmful goods and services are traded without any regulation.



Just had to unleash my own inner geek.

Just my L$ 0.02, the "alleged complexity" on the European Union taxing system is actually that there is an overall consensus that all items and services known as "necessity items" (ie. you need to buy them in order to survive) should be taxed lower than "luxury items" (ie. the ones that you don't need to survive). There are 3 tax levels, and each member state is able to set the levels as they want, as well as which products go under each tax level (this can be more complicated with countries with autonomous regions, which may have different tax levels).

To give you a silly example for Portugal... if you buy raw tuna fish, you'll pay 4% for that, since it's "food", and you need food to survive. If you buy a can of tuna fish, you'll pay 8% VAT, since it's "processed food" - it's not necessary to buy it in cans, but it certainly becomes handy. However, if you buy a tuna patê, French style, it will pay 19% VAT in mainland Portugal or 13% on the islands off-shore. That's a luxury item

Europe has a Value-Added Tax (VAT) that is applied to all products and services (and not only to a few), but actually only the end-user pays VAT. All middle-men just "pass VAT" around. This means that if you're a middle-men, and buy exactly the same amount of stuff that you sell (ie. no profit and no loss), you won't pay VAT at all. If you operate at a loss, you will get money from the State; if you operate as a profit, you'll have to pay the excess VAT to the State. Every quarter, all companies in Europe (as well as self-employed workers) have to file their VAT reports to the State. If the State ends up paying you VAT (ie. you operate at a loss), they will "hold" it into an account for you (ie. you don't get a check for it immediately).

End-users, since they do not provide services and products (they are "merely" employed by third parties...), have to pay VAT immediately when buying products or services (actually, the middle-men act as brokers for the State... they charge VAT and get it from the consumers, and later they will check their account with the State).

On top of VAT, you have Revenue Taxes. This is applied both to people (consumers) as to companies, and levels are different in each case (self-employed people are "companies" and taxed as such - some member states have different tax levels for "real companies" and "self-employment". Usually you pay them anually (some member states allow you to pay them quarterly and monthly) but most companies will pay the revenue taxes for their employees (and, in certain cases, for self-employed people as well). They normally "withhold" the revenue taxes from the salary check, and later do the accounting with the State. Since they usually withhold in excess (like Ulrika mentioned, the calculations are not trivial), the State will send you a check for the excess if you have payed too much

Next, you usually also pay for Social Security. Historically, it's not a "tax", but it's handled separately. This varies widely from state to state and most of them allow you to substitute the whole or part of your social security contribution if you prove you have some sort of insurance policy covering basic health care. I don't think that there is any member state where you can live without making either payments to social security or to an insurance company.

Real estate taxes are also not completely uniformed. Poorer countries tend to feel that putting VAT over renting or buying houses - since you need them to live! - is too much, so they still have older tax systems in place, which are much more "generous". There is currently a trend to try to fit in real estate ownership just under Revenue Tax, and renting under VAT (even if just at the lowest possible level).

Last but not least, you can have municipal (city) taxes (mostly to pay for garbage disposal...) and regional taxes as well. Again, the current model is trying to fit them into a special VAT. But each country has historically its own tax system in place, and they are wildly incompatible You have administrative regions without finantial autonomy, autonomous regions with their own budgets, parliaments, and tax-levying, and federal republics like Germany where each member state is completely autonomous. Putting all of those under the same tax system has been a major pain in the past 2 decades.

Too complicated? Yes, of course Now back to Neualtenburg. Remember that Second Life only has "luxury products" for sale (although you may argue that wearing clothes in a PG sim is a necessity, since you'd be violating ToS if you didn't wear clothes). So it only makes sense to apply one level of sales taxes.

However, on the current proposal, I see "sales taxes" as the only contribution to Neualtenburg's treasury (well, beyond dwell). Shouldn't services be taxed as well? Say, I pay someone to host an event for me in Neualtenburg - an event that will probably increase sales, or at least increase dwell - shouldn't that payment be taxed as well? More than that, what about an "overall city tax" - paying for ongoing expenses with the city (like redecorating stuff, getting new and improved textures, etc.) - that would be completely independent on the sales tax and probably apply to all citizens, not just the merchants?

Last but not least, I think that the "tax system" should be discussed in the Representative Assembly, and not be a part of the "constitution", which should only say "taxes exist to spread wealth" but not say how they should be implemented.

Whew. Now I remember that I'm late for paying my excess VAT in RL Ah well...

Ulrika, Kendra and I were talking about this last night. Services should indeed be taxed. I asked:

If I hire a performer from outside the city, do we tax him on his payment?

The general consensus was yes, and that in that case, it is the responsibility of the citizen (or Gov) hiring the individual to report and pay the taxes. Perhaps we need a special vending machine designed for services.

Here is another service related question: If the event host, is from out of town, and recieves linden support for the event, how do we tax them?

On a different note, I also agree that the specific implementation of taxes shouldn't be in the Constitution.

Hi, Satchmo!


At least, this is something that the current government should be allowed to address.


I would definitely approve a motion to answer "yes" to that


This should be similar to RL:

1. Inform the individual that there will be a X% tax on her services. So, if you agree on a payment, say, of L$ 5000, and the tax level is 10% on services as well, this means that L$ 4500 goes to the individual, and L$ 500 to the City. She will either agree to pay the tax herself, or allow you to withhold the taxes, and expect you to pay them for her.

2. If you want extra bureaucracy, ask her to give you a notecard with something like "I hearby declare that I have been hired for doing this-and-that for L$ 5000, have received L$ 4500, and L$ 500 were withheld by John Doe to pay taxes". This would be sent to the Treasurer at the Guild for accounting purposes (yes, there are SL companies working like that, and they even expect that you sign them as well with one texture containing your signature ).

Too much bureaucracy? Ah well, Neualtenburg is tiny, and we would probably be able to spot easily who's not paying due taxes

Yes, a "tax vendor" makes sense to me. You pay to it, and you could even have a voice command to tell what the taxes are about for tracking purposes.


The host pays taxes in advance and this is the "binding contract" for the City giving the host authorization to use Neualtenburger land to host the event (yes, we could even have a notecard for that as well... "The City of Neualtenburg hereby authorizes John Doe to hold the event so-and-so and gives receipt of payment on the taxes payed in advance".

This is not different than any kind of agreement to host an event on someone else's land. Sure, many do it for free - or even pay the host for increasing dwell - but this is not an "universal rule".

If he doesn't pay taxes and goes on with the event anyway, we can report abuse for hosting unauthorized events in unauthorized spots. I have seen this happening before. Usually the Lindens let them "get away" on the first offense with a "sorry, didn't mean to do that", but not on the second.


I fully agree on that!

It would be far simpler to have the existing vendor sell an "event" permit as a prim based object (pin? button?) and automatically pay taxes to the city. No permit--No parade

Some events are Linden sponsored and some are not. So while the "1800's Bavarian Trivia" event would be taxed on the Linden support, the "Lets drink beer in the Snow" event would not. There's an easy fix to that: 2 different permits. One that is free, and one that costs 10% of whatever the linden support is nowadays (since it's the same for everyone).

How does the permit work if the event host is also getting paid beyond the Linden support?

I like the idea of the "vendor permit", very cool and much easier to implement...

As to events payed beyond Linden support... well, they are "difficult to tax":

1. either the host is payed by a Neualtenburg resident, and the resident is a well-behaved citizen and pays the taxes (say, to the "service tax vendor"
   
2. or he/she has fixed it up with the host, both are hush-hush about the amount of payment, and we really can't tax them in any sensible way. That's tough!
   

We can only hope that one day we'll find out about the "tax evasion" and have the Philosophy branch try the offending citizen in court

But my guess is, this is exactly what happens in RL as well. We can have the rules, and people will try to get away without following the rules. We can only hope that proper "citizen civic education" will get them to pay us by appealing to their guilty conscience

I would assume a binding contract is worthless in SL until proven otherwise. The only benefit of this, is that the city is sure that the individual is aware of thier monetary obligation to the city.


Wether they sign something or not, if someone doesn't pay the taxes it will be up to the Philisophical Branch to decide the penalty.

Perhaps the case against tax evaders is stronger in the eyes of the Philisophical Branch if they can be sure the tax evader understood the obligations to the city. Perhaps the hated "Click Through Agreement" is friendlier than more formal "contract notecards".

since taxes are levied by the guild on all goods and events within the city --penalty for tax evasion would obviously be kicking someone out of the guild thereby effectively preventing them from selling in Neualtenburg.

I think a 10-14%%%% tax is a good starting point. I think permits are the way to go for all events and performances. I don't think the salry of an outside performer should be taxed as they arent part of the community and didnt sign up for that...rather have the tax incorporated into the permit.

Actually, I was thinking that we should not tax performances or events in the city unless objects are sold. The reason is that we all receive income from events in the form of dwell. Second it brings people to the city which invariably increases sales. For example our biggest day of sales was the Oktoberfest celebration. We brought in L$4290, which generated L$429 of revenue for the city.

I think it's in our benefit to remove barriers and bureaucracy to event planning and performances and to reap instead their secondary benefits.

~Ulrika~

1. The "permit chip" solves most problems, I fully agree on that. If people fail to exhibit a permit, they are in fault.

2. People defaulting tax payments, can be expelled from the Guild (now that's a clever one!) and eventually prosecuted by the Philosophy/Judiciary branch.

3. Outsiders working in/for Neualtenburg, and providing services or selling goods in Neualtenburg, are subject to Neualtenburg's Government. This is an universal rule on all modern western democracies - foreign citizens have the same rights and duties as resident citizens. The practical result is that even foreigners "not signing up" for Neualtenburg are certainly subject to all Government laws and rulings - including paying taxes on services and goods sold there.

Uh, this is what happens if a foreigner goes to aby country to work there. She'll have to pay taxes to that countries' government, even if she's not a citizen (and in some countries - if there aren't previous arrangements between both countries - you could be subject to double taxation )

The only exception that I know from my own experience (strangely enough) is when a non-EU citizen buys goods in a EU shop. They are entitled to a tax refund, since value-added tax only applies to EU citizens. This is weird, but true. I think it doesn't apply to Neualtenburg's view on sales taxes, though.

I think Ulrika makes a good point. It's easy to lose sight of the big picture when looking at the nitty gritty details of the Constitution, but we actually need visitors, for promotion, sales, and to recruit new members. A performance/event tax will no doubt keep some of SL's best from performing on principle. It is total anarchy outside the walls of Neualtenburg. If the performer is a citizen, then hopefully they would spend the money within the city walls and taxes would be collected on products purchased.

To summarize, I think we want to embrace the community outside of Neualtenburg. A simpler tax code, makes the city more appealing.

I also think this belongs outside of the Constitution and is a decision for the Legislature. This allows us to change our event/performance taxation policy in the future.

I fully agree, Satchmo. Sorry, I was just getting carried away with my early posts. Yes, the Constitution only needs to address that "taxes are a way of redistributing wealth" (as opposed, say, to libertarian constitutions where taxes are ruled out). All the details are really for the legislature to discuss, decide, and implement.

The reason I think permits are necessary is more than monetarily... but the money coming in can be used for public works and possible salaries for service people.

I think that the event holder should be held responsible for their event. There could be a situation where a citizen holds an event that goes past its alloted schedule and diminishes or disrupts another event by another citizen slated for the time slot just after the first event. In this case there could be a dispute and there could be a monetary damage awarded to the person that was displaced.

Another possibility is someone decides to have a very politically charged event that will draw many supporters but also draw a high number of opponents. I think we should have people involved to keep the peace just in case it gets out of hand . Those people there to monitor the event and step in if it gets out of hand ( possible griefer shooting people) should get paid for this service.

In any event the moneys from the permit would be there to pay for services and or any possible damages arising from the planned event. The permit fee itself doesnt have to be expensive.

I am just curious so please excuse the question because it is slightly off topic. This is not meant to drive this thread deep into a RL political discussion. I am simply intrigued by the fact that nobody appears to have recommended a progressive tax or welfare for that matter.

I know that there are several of you who are liberal thinking who I assume are for a progressive tax in RL as well as welfare yet here you are for a flat tax with no welfare. I am very curious why this is the case when so many liberals are passionate about higher taxes for "the rich"?