Once
again, for the umpty-umpth time, Congress is going to come up with
'Tax Reform'. What we are likely to get again is (maybe) a slightly
simplified version of the current tax law monstrosity, which will
last until the next batch of politicians engage in the next round of
vote-buying. The likelihood of meaningful reform, which would
require eliminating the Income Tax, is remote.
The Income Tax, a treachery so heinous that it required amending the
Constitution (the 16th Amendment) to be legal, should be temporarily
eliminated. I say temporarily since the only way to effect even a
semi-permanent elimination is a Constitutional Amendment, and as was
shown by the 16th Amendment, even that can be undone. In any case, a
law temporarily eliminating the Income Tax could be the basis of true
Tax Reform. One could further hope that the wisdom of such an
improvement would be sufficiently apparent to promptly re-amend the
Constitution to eliminate the possibility of it reappearing with the
next Congress.
To
fully understand the virtues of eliminating income taxes it is
helpful to consider the problem in somewhat different terminology.
An income tax is primarily a tax on labor, with a secondary emphasis
on taxing investment. Since taxing something is, in a sense,
equivalent to penalizing it, income taxes penalize labor and
investment, neither of which is a desirable policy.
Consumption,
on the other hand, could easily withstand a modest tax burden. In
fact, an alternative view of the consumption tax, or sales tax, is in
part a tax on products. It seems fairly obvious that taxing products
rather than labor is a more rational approach in general. But in
terms of current American concerns it also has other desirable
characteristics.
Taxing
the product puts the American producer on the same playing field as
foreign producers. Imported goods would suffer the same tax burden
in the American market as domestically produced goods. In addition,
by not taxing labor with the income tax, American goods would be more
competitive in global markets. All the taxes on the American worker
that are paid by him directly and by his employer directly and/or
indirectly must be added to the price in and out of the country. No
wonder we can't compete in international markets.
Another
benefit relevant to current American concerns is how to level the
playing field between the American worker and automation. By taxing
products instead of labor, there is less of an advantage of replacing
workers with machines unless efficiency is considerably enhanced, and
one does not have to consider 'taxing robots' as one wag has
suggested. In fact, the American worker then has an advantage over
the foreign worker due to his higher productivity, and thus can
command a higher wage without restricting trade imports.
Consumption
taxes, or sales taxes, have of course been a favorite of State
Governments for a century or more. These, however, have several
drawbacks in their current form. Since American States are a common
market, the main drawback is that different sales taxes in different
localities cause considerable distortion to interstate and even
intrastate commerce. There is a temptation to consumers to deal with
retail outlets that are in low or zero taxed states, or by mail with
out of state companies. States with higher taxes try to avoid this
by supposedly requiring their citizens to forward a 'use' tax to the
State tax authority, but in practice this is rarely done. A similar
problem is found in State income taxes, where people with high
incomes tend to move to low income tax states. Since the higher
taxed states also tend to embrace more socialistic and welfare
oriented policies, they will ultimately end up with all welfarites
and no working schmucks, and therefore severe financial problems. Of
course, the extreme example of this is the current influx of
low-skilled indigents who may or may not seek menial labor jobs, but
are also drawn by the lure of multitudinous welfare services and
giveaways.
Another
drawback with sales taxes as currently implemented by States is the
collection method. Adding the sales tax at the point of sale is an
annoyance both to the seller and the buyer. With electronic payment
extracting small percentages on small sales is easily handled by
computers, but sales taxes on cash sales are why we still have
pennies in our currency. Due to inflation, the value of a penny is
near zip, but to the state a penny extra from each sale is more loot
to waste.
So
implementation of a National Sales Tax should be carefully designed.
Since the tax on a given product would be uniform across all States,
the tax on retail products could be computed and remitted by the
manufacturer, leaving the States to implement their point of sale
taxes as is currently done. Federal Income Tax would be eliminated,
but the States again would be free to keep or change their income
taxes to compete for residents. Taxing new products is reasonably
straightforward, but it is not obvious how to define 'services' to
tax without in effect taxing individual income.
Notwithstanding
the drawbacks and implementation challenges of a national consumption
tax, the benefits far outweigh the negatives. It must be appreciated
that most of the difficulty is due, as is often the case, with having
the bad solution (income tax) to have gotten such a deeply embedded
existence in our country. Any thing short of purging that demon and
its burdens that have hampered American economic health for a century
will not result in meaningful 'Tax Reform'.
The
'Fair
Tax Act' is legislation which has been proposed to every Congress
since 1999. It temporarily eliminates income taxes, estates taxes
and payroll taxes and creates a National Sales Tax on all retail
sales of new products and services. Since it includes provisions for
refinement and includes a 'sunset' provision after a trial period if
found lacking, it should be considered for a serious candidate for
this iteration's 'Tax Reform'.
My
book, Musings and Rants - 1985-2016
addresses the tax problem with several essays.
(c)
Copyright 2017 Marcus Everett
marcus.everett@citlink.net
