Income Taxes, Consumption Taxes and Tariffs

Currently (April 2018) there is considerable debate raging as to the wisdom of the Trump proposed tariffs. As one more opinion on the subject, I would like to frame the argument in terms of who pays for maintaining the U. S. marketplace rather than in terms of punitive actions and retaliatory reactions in the form of tariffs.

Since the government's income in the U. S. is primarily derived from taxes, and in particular from income taxes, the government's costs of providing the infrastructure - currency, roads, courts, etc. - is paid in this country by the individuals and companies (which again boils down to the individuals) that pay the income taxes. Thus the participation in the U. S. markets by foreigners is a free ride since they do not pay U. S. income taxes. This is why U. S. made goods do not compete in both domestic and foreign markets.

The use of tariffs to level the playing field does provide a mechanism to make foreign sellers contribute to the costs of maintaining the marketplace they are enjoying, but it requires much legislation and regulation to target which goods and who's selling them. This in turn engenders hostility in those targeted and invites the 'trade wars' that are the current concern of the chattering classes. A flat tariff might be preferred in that it would be less 'in your face' to the trading partners otherwise targeted, but it still reeks of hostility to 'free trade'. It also does nothing to make U. S. goods more competitive in foreign markets.

To this author, a better solution is to replace the income tax with a National Sales Tax on all new goods. With respect to incoming foreign goods this serves the same purpose as a tariff - it makes the foreign producer pay his fair share of the support of the U. S. market. It relieves the exported goods from the income tax burden that makes U. S. goods non-competitive internationally. It allows U. S. workers to compete with foreigners as well as non-taxpaying illegals. It invites less hostility since it applies to domestic as well as all foreign goods equally. It requires no additional infrastructure to assess and collect tariffs. And as a huge added incentive, getting rid of the income tax would do more to restore health to the U. S. economy than any other single action.

Replace the income tax AND potential tariffs with a National Sales Tax. A win-win-win solution.

Who pays the National Debt?

With the 'official' national debt over $20 trillion (and many times that in unfunded liabilities such as pensions, Social Security, Medicare, etc.), I keep hearing from the chattering classes that we are leaving our children to pay for our sins. I don't agree with this, although we are in the process of leaving our children with a failed United States which will be much worse that just a debt to pay. However, let's look at the debt claim for now.

Some time about 1990 I wrote an essay about funding government comparing taxing, borrowing and inflating the currency. In discussing financing the government in part with government bonds, I said:

"Since those called on to pay the final tab are likely to be later generations, there are serious questions as to the morality of borrowing to finance any expense of government. It is a cruel joke to buy a Savings Bond for little Johnny's birthday when, in fact, little Johnny will be called on to pay for it several times over when he grows up.

Actually, the above paragraph is not quite correct. Borrowing by the government from either domestic or foreign sources does represent a debt that must be repaid at a later date with interest. However, when the Federal Government ’borrows’ from the Federal Reserve, we are witnessing nothing more than sleight of hand attempting to hide the fact that what is really happening is inflation of the currency. That portion of the National Debt that is held by the Federal Reserve represents only the amount of fiat money created by the government. If it were ‘repaid’, (money removed from circulation by taxes, returned to the Federal Reserve to ‘retire’ the debt, and then both parties burning their little pieces of paper), we would have deflation of the currency. This is just not going to happen."

As this implies, the Federal Reserve portion of the National Debt is not paid by our children in years to come, but in reality is paid now by those of us who are foolish enough to have our savings in dollar denominated investments. The dilution of the currency (monetary inflation) that is effected by the Fed 'loaning' money to the U.S. Government by buying its bonds is paid by savers immediately by devaluing their savings. Paying off the Fed bonds at a later date would deflate the currency, and would be a bonanza for those that had a dollar left, but the political class would rather leave the currency inflated to avoid the effects of deflation.

The parts of the National Debt that are held by citizens and by foreigners will have to be paid or the Government would have to default and declare bankruptcy. If real entities buy Government bonds, it removes the money from circulation that the Government then returns by spending it. When the Government taxes the economy to get the money to retire the bonds, it then returns it to the bond holders. These are net-zero operations - no currency is created or destroyed. Even if the Government defaults in the middle of this, there is still no net change in the currency - the Government spending of the money borrowed from the bond buyers has already returned it to circulation, and this is then effectively paid by the bond holders.

However, default is not going to happen with the Government controlling a fiat currency. Politically the final reckoning can be delayed by monetization of the debt until the currency collapses with hyperinflation. This is the most likely scenario. Little Johnny will be paying for our sins, but not with dollars.

It is worth pointing out that if we had a gold or other commodity backed currency, the scenario would be different. Firstly, there would be no Federal Reserve buying bonds with funny money, so by now no one with any financial savvy would be buying bonds and the U.S. would not be passing trillion dollar 'budgets'. Secondly, the bonds that have been sold would have to be repaid with undiluted currency or the Government defaulting, so our progeny would be on the hook in a more real sense than what currently exists. Of course, even when we had a supposedly gold backed currency, the Government just stole the gold, inflated the currency and ultimately declared the dollar a fiat currency. The end result is always the same. See the previous paragraphs.

Sales Taxes vs Tariffs

With the President pushing tariffs to level the international playing field for American producers, he and his administration should seriously consider a National Sales Tax (NST) as an alternative or at least in concert with targeted tariffs. By getting rid of the Income Tax (IT) and replacing it with a NST, the burden of maintaining the U.S. market is shared by all who participate in it.

Let's first look at the current situation with the cost of the U.S. Government being primarily carried by U.S. citizens under the IT. Even with the new 'tax reform', a dollar earned by a typical citizen is first reduced by 25 cents with federal IT and a nickel for payroll tax. Then in most states, at least another nickel is appropriated by state IT, and a further nickel in state sales tax on the products bought with the 65 cents remaining. Thus the American consumer loses a third of his buying power regardless of where the products originate.

The labor cost for the U.S. producer is the full dollar cited above plus the employer's share of the payroll tax, plus of course any additional overhead for health benefits, etc. If the employee then buys his company's product, he is in effect paying, say, $1.10 (just for the labor costs) for which he netted about 60 cents. His own labor is costing him twice what he received for it.

The additional cost of a tariff on the imports used in making a given product could vary widely, but even for an equivalent product (a TV or an auto) subject to a tariff, the consumer ultimately pays the extra amount with the reduced buying power of his taxed income.

If the income taxes (and payroll taxes) are replaced by a NST of 30% (the rate proposed by the Fair Tax), the consumer will pay $1.30 for the labor share of a domestic product for which he received $1.00, or about 30% more. He will still bear the extra amount of a tariff, but with a net income of the full dollar rather than 60 cents. The tariff will still penalize the foreign producer relative to the domestic producer, but the impact to the U.S. consumer is a third less.

Even without a tariff, a NST taxes the foreign product at the same rate as the domestic product. This not only levels the tax burden between the foreign and domestic producers, but considerably enhances the competitive position of the domestic producer in the foreign markets since there is no taxation on labor for exported products. And, since the product rather than the labor involved in producing it is taxed in the U.S. market, automation and foreign labor (or even undocumented labor) hold no advantage for the domestic producer.

As we see, in many respects the NST achieves the same result as an import tariff, with considerable benefit to domestic production and consumption as well. Since all imports are equally affected, a retaliation in the form of a 'trade war' is unlikely. If, alternately, a penalty is intended for a given country's products, selective tariffs can still be imposed for political reasons.

The use of a National Sales Tax instead of the fatally flawed Income Tax is a no-brainer, but implementation in the short run begs caution based on system engineering considerations. Step functions - a sudden major change in inputs or characteristics in a dynamic system - can produce wild deviations before ultimately settling out to the long term behavior. Thus, although the NST in the long run is to be preferred, ramping it up as the IT is ramped down (say over 5 years) may be necessary. However, in no way must the IT be allowed to exist past the phase-out period. Ultimately the 16th Amendment must be repealed, and ITs forever banished in the U.S.

An Ethical and/or Moral Conundrum

I apparently either read or was aware of John B. Calhoun's mice and rat experiments in the 1960's and '70's and have used the phrase "too many mice (or rats) in a cage" frequently as a comment on the ever increasing problems due to population growth. I had assumed that the problems of Calhoun's mice, their extreme population growth followed by their ultimate total demise, were due to overcrowding, as apparently most people had. There is little doubt that overcrowding played a part in their abrupt change in behavior, but ultimately other factors may have contributed to the final result. A recent VDARE.com post by Lance Welton was an eye-opening re-appraisal of the reasons for the disasters, and their application to human populations.

As was discussed in the post, the affluence of the West made possible by the Industrial Revolution and the attendant decrease in mortality resulting from better nutrition, better medical care and an overall rise in the standard of living has virtually erased natural selection from the first world human population. Now most people think of natural selection as improving a species, or allowing a species to cope with changes in their environment, but there is also a very necessary weeding out of negative attributes. In addition to the occasional mutant resulting from environmental accidents, sexual reproduction intentionally tries many variations of genetic characteristics. In the natural state, defective combinations usually fail to reproduce. But in the modern human Welfare societies, we go to extreme efforts to salvage every fertilized human egg. Thus defectives have a high likelihood of not only surviving, but reproducing. As Welton noted, these defective genes are then able to spread throughout the gene pool, thus debasing it. This does not bode well for Western societies.

There have always been some doubts as to whether 'helping' people is always desirable. The old truth that giving a man a fish feeds him for a day but teaching him how to fish feeds him for a lifetime emphasizes the relative importance of education over welfare. In addition, however, giving him a fish may feed him for the day, but it also encourages him to resort to looking for another handout the next day rather than trying to feed himself. This shows that charity can produce cultural distortions that, if allowed to fester and reproduce, are as detrimental to societal health as genetic defects. One must conclude that charity or welfare for all but the most disabled is not a good idea, and even sparing those that cannot survive without help still poses a question of whether they should be allowed to reproduce.

To paraphrase an old wheeze, it's not nice to try to frustrate Mother Nature. Our culture frowns on the subject of eugenics, where the term is referring to attempts to intentionally improve the gene pool (although animal breeders have been using it for ages). But in effect we have, for the last couple of centuries, been practicing what might be called inverse eugenics, where, by frustrating natural selection, we are unintentionally debasing the human gene pool. What seems to be a noble principle of taking care of the less fortunate members of our society has a dark side. This creates what seems to be a moral or ethical dilemma. We must take steps to counter the reproduction of defective genes, or humans will suffer the same fate as Calhoun's mice, at least in the Western welfare states,. As Welton observes, this seems to be further along than we would like to think.

The moral dilemma is that any attempts to purge defective genes flies in the face of religious and cultural taboos. Even current research trying to edit genes before they can be passed to future generations is under attack, and sterilization or worse is virtually unthinkable, especially if it can be labeled genocide. Yet ignoring the problem may well not be an option. Although termination of carriers of defective genes would be a repugnant and unnecessary extreme, rethinking Western Civilization's religious and cultural proscriptions against abortion, testing of fetuses for genetic abnormalities, and sterilizing obvious mutants might be necessary.

There are some things that can be done to stop making the situation worse. A first mandatory step in the U.S. would be to stop importing defective genes from third world populations. Whether any immigration is necessary or desirable, a minimum response to the problem must be to set the bar for admission very high for genetic traits such as intelligence and industriousness, and against negatives such as criminality and genetic diseases. In their native environments a significant number of third worlders would perish from natural selection, but not only do we keep them alive if they get here, but pay them to breed. This is insane.

The second step of a sane response to the problem is to stop paying welfarites to breed. Although not every welfarite has defective genes that cause diseases, the likelihood that they have undesirable genetic characteristics is sufficiently high that encouraging the propagation of their genes is a poor policy. Trying to test for bad vs. good genes in the welfare community smacks of eugenics, and therefore it would be best to just not provide public reward or even support for welfare breeding.

Forced sterilization is a solution of last resort, although it might be worth seriously considering in the case of those convicted of violent criminal behavior. Short of refinement and acceptance of genetic engineering to eliminate less blatant cases of defective genes, voluntary contraception or sterilization would be commendable, but as a compassionate society one hopes that such drastic measures could ultimately be unnecessary with technology. Currently abortion or sterilization of Downs Syndrome children is tolerated or even encouraged, but ultimately gene editing or other high tech solutions may be able to identify and remove such defective genes from the gene pool.

The problem of affluence frustrating natural selection is sufficiently subtle that its magnitude has only recently come to light. As was pointed out in Welton's post, we are already seeing increases in genetic diseases such as autism, and a decrease in intelligence. Western civilization is already mired in a morass of problems, although many may be related to this one. In any case, as Welton said, we're headed for a disaster, and time to reflect may not be on our side. Some form of eugenics to offset the inverse eugenics of Western civilization's incredible survival successes is necessary.

Tax Reform - Yet Again

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

The Electoral College and the election of 2016

Once again the Election of the President of the United States by the Electoral College is the subject of much whining and criticism by the losers. As with the 2000 Election, the Republicans won the Electoral College but with the official popular vote won by the Democrats. I say official, since the possibility of voting fraud in many large urban areas leaves much doubt as to the validity of the popular total. In any case, in spite of massive Democrat wins in the urban areas, the fact that the overwhelming majority of suburban to rural counties in the country went Republican helps explain the Republican win of the Electoral College.

Which is why the Founders created the Electoral College in the first place. At the time, there were not so many large urban areas, but the fear was that the more populous states would, in a popular voting system, deny any real representation in the Federal Government to the smaller states. By creating the Electoral College system, the smaller states would have a somewhat better chance of having a say in the choosing of a President.

Furthermore, the method of choosing Electors specified by Article II, Section 1 of the Constitution leaves it up to the State Governments. To wit: "Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress...". Thus, as with the original Senate, the President was to answer more to the Sovereign States than to the people as a whole. Although the Senate as the voice of the States has been nullified by the Seventeenth Amendment and made a second House of Representatives, the State governments still have the authority to determine the selection of their Electors for the Electoral College. In practice this has been usurped by Party Politics in most states to a winner-take-all selection of Electors by the Party winning a plurality of the popular vote in the State.

The current implementation of the Electoral College is not in violation of the Constitution, although it is probably not in keeping with the intent of the Founders. I assume that each State has given its blessing in law or otherwise to the current situation. In spite of the fact that the Founders went to considerable ends to give the Sovereign States a meaningful voice in the Federal Government, they have ceded it over the years to the very plebiscite democracy that the Founders abhorred. The Electoral College could easily be the next victim to this tendency by being eliminated altogether.

As usual this author feels obliged, after complaining about the situation, to offer a suggestion for a modest improvement. Since the original Constitutional verbiage cited above is still in effect, the State Legislatures could direct that the Elector authorized by each Congressional District be appointed by the Party having a plurality in that District, with the two Electors granted to each state by virtue of their Senators being appointed by the Party having a plurality in the State, as is currently the case. Apparently this is the system used in two of the Fifty States: Maine and Nebraska. Even better might be to have the State Legislature appoint their two 'at large' Electors to recover a little of the representation of the Sovereign States that the Founders envisioned. Something like this would at least keep the States with large urban areas from denying any representation in the Electoral College to their rural areas. It also would be a minor step toward returning to the intent of the Founders.

Population and Immigration

Most animals instinctively understand that, to the extent that one's territory is necessary to survival and reproduction, that territory must be defended against encroachment by others that would threaten one's survival. All resources are finite, and must not be over-consumed. This is especially relevant to the human immigration problem. Whereas immigration may be easily accommodated if population density is low, and may even be beneficial, once a certain population density is achieved, additional immigration becomes detrimental.

Currently the United States population density is a little under 100 persons per square mile of land, including marshes, swamps, deserts, mountain ridges and other unusable terrain. Although this translates to about 6-7 acres per U. S. resident, probably a quarter or so is unusable, and the remainder must not only provide living space but also supply food and other necessities and absorb the wastes. So far this density has been tolerable, although consumption of water supplies and other resources may be pushing critical limits.

The world population density is somewhere around 140 per square mile, and again this includes all mountains, deserts, and other unusable areas except Antarctica, which we cede to the penguins. Thus we in the U. S. are a little better off than most, but even increasing our density to the world average would not make a dent in conditions elsewhere. China and India, both large geographical areas, have densities in the order of 1000 per square mile, and this in spite of unusable areas in the Himalayas and the Gobi Desert. Again, we could double our population density by absorbing 150 million from each of these two countries, and not make a noticeable dent in the density of either. And since the human population is currently increasing at a rate of more than a quarter million per day, during the time that it might take to move 300 million people to the U. S. the population of the rest of the world could easily increase by more than the 300 million, and therefore nothing would be achieved except basically destroying the U. S.

As I discussed in my essay 'Population'(1), the growth rate of a bisexual species is primarily a function of the female reproduction success rate (the average number of successfully breeding females each female produces), and depends much less on the number of males. This presents an interesting conundrum with respect to war philosophies. In the past, with adequate land and resources, the objective of wars was to annex the opponent's land and resources, including their breeding stock (females). This bluntly translated into killing off or enslaving the males, but not killing the females. One could then spread one's own genes by breeding the conquered females. In this scenario, the invading army consisted solely of male combatants.

The problem facing Western Civilization in the 21st Century differs in several respects. In addition to a horde of invading male 'combatants', e.g., the illegals, refugees, etc., that are pouring into First World Western countries, part of the invading army consists of immigrating women, children and complete immigrating families. These members of the invading 'army' intend to win the war of conquest by out reproducing the native population, and incredibly the invaded countries are supporting their attempt to do so. Once the resident 'army' is sufficiently large, the male combatants will attempt to kill or enslave the native population.

The moral of all this is that, unlike in previous wars, women and children cannot be spared. If possible, they, along with the invading male battalions, must be removed as soon as and as completely as possible. Territorial borders must be defended from any and all encroachment. Any residue of the resident 'army' must be required to obey all laws and must NOT be supported to breed (welfare) here or abroad. If this is not successfully implemented immediately, Western Civilization is over, we will lose the 'war', and will be the subjects/slaves of the occupying invaders. The only alternative will be a no-holds-barred ethnic/race/religious conflagration where all men, women and children will be fair game. Humanity has achieved a 'critical mass', and avoiding a runaway detonation may not even be possible. As an aside, Google 'too many mice in a cage' and read the report entitled 'Behavioral Sink' by John B. Calhoun on the experiments he ran from 1947 to 1973. It's a little scary.

(1) Musings and Rants, p. 173, Marcus Everett, CKCPC3 publishing, March 2016, RR1 Box 510. Nowata, Oklahoma 74048

(c) Copyright 2016 by Marcus Everett, Wallback, WV

marcus.everett@citlink.net