A Plan to Renew the Promise of American Life, Plank 4
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Plank 4. Abolish income taxation
Specific Recommendations
4.1. Tax consumption, not production — goods, not people.
4.2. Abolish all forms of income taxation, initially by statute and as soon as practicable thereafter by constitutional amendment. Specifically, abolish all taxes on personal and corporate income, wages, salaries, gifts, estates, pensions, annuities, profits, receipts, rents, royalties, interest, dividends, and capital gains, and all taxes on trades, professions, and occupations.
4.3. Do not keep a payroll tax in place, lest it become a taproot for an income tax to reappear. If possible, eliminate income and payroll tax rates simultaneously. If forced to choose, eliminate payroll taxes first.
4.4. Fund spending programs, including Social Security and Medicare, entirely from general revenues rather than payroll taxes.
4.5. When reforming taxes: (1) eliminate taxation of saving and investment, (2) reduce rates, (3) close loopholes, and (4) simplify filing and reporting, in that order of priority. In a graduated or multi-rate scheme, reduce the highest rate first. Do not exempt people from a tax because they are poor. Design the tax so everyone has an equal chance to get rich.
Comments
Renewing the promise of American life requires changing the tax code. That may seem like an odd thing to say, but it’s true. Federal income taxes must go. Or more specifically, all taxes must go that burden producing, saving, and investing. Today’s income and payroll tax schemes must go. I do not think these kinds of taxes can be reformed. Their negative effects are too great. We must replace them altogether.
With what? With consumption taxes. In the next plank, we’ll look more closely at those, and why they’re so vastly superior. In this plank, we’ll focus on why taxes on production need to go.
Production taxes are a source of numerous evils. They are also unnecessary. From 1776 to 1914, the federal government got along just fine without them. /1 /2
The benefits that would flow from ending them would be little short of miraculous. Among other things, ending income taxation would:
- Enable workers to keep every penny they earn
- Increase everyone’s paycheck by up to half, overnight
- Lift the weight of a million-word tax code from the shoulders of job creators
- Make American businesses the most competitive in the world
- End the taxation, and double taxation, of saving and investment
- End the taxation, and double taxation, of overseas earnings
- Decriminalize the tax-evading ‘underground economy’
- Reduce the costs of housing, health care, education, and other necessities of life
- End the IRS’s political harassment of private citizens and interference with the free speech rights of churches
- End presidents’ weaponization of IRS tax data against their perceived opponents
- Dramatically reduce wealth redistribution and social engineering
- Restore citizens’ financial privacy
- Reduce income inequality (yes!)
And those are just the benefits that spring to mind. Doubtless there are more.
If any single reform can palpably improve the life of every American, it is this one.
More Reasons to Abolish
Income taxes facilitate the growth of government. Administering them requires large bureaucracies and intrusive information gathering. Why does anyone other than a welfare dispenser need to know how much money I make?
Income taxes are a tool for wealth distribution, and paradoxically the number one source of income inequality. Contrary to popular wisdom, taxing incomes makes the rich richer and the poor poorer. If you want more poor people, tax incomes.
It is also a tool for social engineering and political control. It makes us less free.
In every political community, the rich and the non-rich tend to vie for control of the coercive power of government, to advance their own interests. The rich try to reduce the non-rich to servitude. The non-rich try to expropriate the rich. I’m speaking in general terms, of course. A healthy community checks both tendencies. It respects every man’s freedom and every man’s property.
Freedom is impossible without property, including the right to acquire property through honest effort. Indeed, protecting property is the main reason government exists. To quote Madison: ‘Government is instituted to protect property of every sort. . . That alone is a just government, which impartially secures to every man, whatever is his own.’
By the word ‘property’ here, Madison means not just land, money, and possessions, but also our natural rights. As he puts it, we have ‘a property in our rights,’ and he explicitly includes within the term ‘rights’ things like speech, conscience, and opinion. Protecting our property in that broader sense protects our freedom to pursue not just wealth but happiness.
Admittedly, money can’t buy happiness. But try living without it.
An income tax generates a kind of class warfare. Politicians vow to make the wealthy ‘pay their fair share’ by imposing higher rates on them. But of course the wealthy don’t just sit still. They find ways to evade the tax. They secure loopholes and carveouts. Some flee the jurisdiction.
So to sum up, income taxation reduces freedom, privacy, and prosperity, while increasing poverty, inequality, and social discord. But other than that, it’s great.
Questions
If income taxes are so bad, why do we have them? Because they make it possible to fund big government. I hate to admit it, but the American people like and want big government. And they need income taxes to have it. Or rather, they think they do. What they like is all the big spending programs, and the (nonconsensual) wealth redistribution, and the ‘free stuff,’ plus the promise of cradle to grave security. What they don’t seem to realize is that all that extra government must be paid for, and if it is not paid for with high taxes, it will be paid for with reduced purchasing power (inflation, currency devaluation) and reduced freedom (ever-bigger and more centralized government). There is no free lunch. But Americans seem determined, sadly, to believe there is — or perhaps it’s fairer to say, they are content to live with the fiction that there is. But sooner or later the fiction will become unbearable. The government will run out of other people’s money. Tax rates and deficit spending and the national debt will hit a saturation point, and inflation or economic recession will kick in to burn up the excess demand, and with it our material property. When that happens, I expect we will have a kind of popular revolution. People’s minds will be open to fundamental reforms. But sadly, it won’t happen before before most of us have paid dearly. The optimistic hope of this plan is that we can come to our senses and avoid that path.
Do we need to repeal the Sixteenth Amendment before we abolish income taxes? No. We can abolish income taxation by ordinary statute now and amend the Constitution as soon as possible, later. We should not wait for a constitutional amendment before abolishing the taxes. Amendments are hard to secure. The process takes years. We need an amendment, but it can come after, rather than before, the legislation. I should add here that the constitutional amendment should do more than just repeal the Sixteenth Amendment. It should completely take away Congress’s power to lay and collect taxes on incomes. I would not make an exception for wartime or national emergencies. There are plenty of other things government can do to raise money in a crisis. Should the amendment also apply to the states? While that’s tempting, I would say no. I’d leave the states free to determine their own policies and let them compete with each other for our affections.
Wouldn’t this reform massively increase deficits and the national debt? It could. Eighty percent of today’s federal revenues come from income and payroll taxes, with about forty percentage points of revenue coming from each. Consumption taxes probably would not raise as much revenue, because they have a built-in limit: people can avoid or minimize them by changing the way they consume. But this should not prevent us from implementing this reform, for two important reasons. First, by moving away from the current system we will increase economic productivity in real terms. The tide will rise, lifting all boats. Tax receipts will grow, relative to the status quo. Or rather, receipts will fall less than they would in a static model, meaning a model that fails to account for greater productivity. Second, we can minimize the deficit impact of the reform by reducing the size and scope of the federal establishment.
Wouldn’t it be safer fiscally to postpone this change until Congress is running routine surpluses? Absolutely. But I would not hold my breath. No, we should go ahead. The sooner, the better. If the deficit rises during the transition, we should view that as a ‘freedom fee,’ a small price to pay for the numerous benefits of the reform.
Don’t consumption taxes fall more heavily on the poor than on the rich? Yes, they do, all other things being equal. But we can minimize that disparity by exempting necessities or at least taxing them more lightly than luxuries. For example, all states that impose a retail sales tax exempt food and medicine to some extent. That’s not ideal, in terms of economic neutrality, but its universality suggests it is unavoidable. The feds could do the same. /3
What will happen to health care? Won’t this proposal end workplace health benefits and cause the number of uninsured to skyrocket? Actually, the reverse would happen. Ending income and payroll taxes would end the massive subsidies being pumped through the tax code into employment-based health benefits — subsidies that distort people’s preferences, reduce their price sensitivity, and drive up the overall cost of health care for everyone. The cost of health care would fall along with the cost of health insurance and the number of uninsured. Health coverage would be more efficient and affordable — and, by the way, you would no longer lose your workplace health benefits every time you change jobs. Health insurance would be like auto insurance. Cheap and portable.
What exactly do we mean by ‘income’ in this context? There are varying definitions, but I am using the term ‘income’ to mean the money that arises from our labor and the things we sell. It excludes, and should exclude, money we spend, save, or invest. While it includes the money we receive as a result of our saving and investing, that kind of income should not be taxed. Taxing the fruits of saving and investing is self-destructive, the economic equivalent of drinking poison or sawing off the limb on which you’re sitting. This definition of income excludes consumption, which is the only thing that should be taxed.
Which specific kinds of taxes are ‘income’ taxes and which are not? If a tax scheme requires a reporting of income, in whatever form, it is an income tax. There are borderline cases, and drawing a precise line can be a challenge, but I would say income taxes should be regarded as including all the following kinds of exactions: 1) all taxes on personal, corporate, and payroll income, 2) all taxes on gifts, estates, rents, royalties, wages, interest, dividends, and capital gains, 3) all taxes on profits and receipts, 4) all taxes on pensions, annuities, and salaries, and 5) all taxes on trades, professions, occupations, and other wealth-generating activities. Okay. So what does that exclude? It excludes at least the following: 1) duties, imposts, and excises, as the Constitution uses those terms, 2) sales taxes, value-added taxes, and personal property taxes, and 3) user fees, filing fees, document fees, licensing fees, country exit fees, citizenship relinquishment fees, and postage. I would also exclude from the definition of ‘income tax’ the proceeds of auctions and sales of government-owned land and property. As for head taxes and land taxes, while they can straddle the line, their effects make them more like income taxes than not — certainly, we should not rely on them, as a policy matter. But since they are traditionally hated, and since the Constitution seems to classify them as so-called ‘direct’ taxes and thus makes them impractical to collect, we can safely, for purposes of this plank, exclude head taxes and land taxes from the definition of ‘income tax.’
Why do we have to eliminate the payroll tax? Because the payroll tax is an income tax. It is a tax levied on the wage portion of income. It is not, as some claim, an ‘excise tax on the privilege of work.’ Only in an age of unlimited government could the right to work for one’s daily bread be viewed as a privilege.
Should we eliminate the income tax first, or the payroll tax first? That’s easy. The payroll tax. It is the biggest tax most Americans pay, and unlike the income tax it doesn’t exempt half the population. That makes it easier to reduce. More importantly, it is a taproot for a revived income tax in the future. If we eliminate the income tax and leave the payroll tax in place, the latter will just evolve into an income tax like the one we have today. A step in that direction has already occurred, with the imposition of an additional payroll tax rate on certain higher-income earners. When you’re adding tax brackets to a payroll tax, and making it graduated, you’re creating a graduated income tax.
If we eliminate the payroll tax, won’t that mean the end of Social Security and Medicare? No. Social Security and Medicare would continue to exist. All that would change is their funding source. A payroll tax is not necessary to fund such programs. Any tax can serve. And eliminating payroll taxes would have the benefit of making Social Security and Medicare permanently solvent because they would be paid for out of the general fund like other spending. Their trust funds would be revealed for what they are: fictions.
NOTES
1/ Historical trivia. Before the Sixteenth Amendment (1913), which gives Congress a power to lay and collect taxes on incomes ‘from whatever source derived,’ the federal government got most of its revenue from beer and whiskey taxes. The temperance movement joined the income tax movement as a way to achieve Prohibition. And they got their wish. And a century later, we’re still stuck with their infernal income tax.
2/ Free advice for anti-global-warming activists: You’ll find it a lot easier to enact a carbon tax in place of today’s income tax rather than on top of it.
Constitutional Amendments
Although this plank does not strictly require any constitutional amendment, it does recommend one, an amendment to repeal the Sixteenth Amendment and explicitly prohibit Congress from laying and collecting income taxes of any kind in the future.
Benefits
Provides substantial financial relief to all Americans, especially the poor.
Increases the nation’s economic health and unleash permanently higher rates of innovation and job creation.
Reduces the cost of housing, health care, and education.
Provides significantly greater freedom to work, save, and invest.
Measurably increases living standards and personal financial security.
Ends income-tax-based social engineering, nonconsensual wealth redistribution, privacy invasions, speech suppression, and political harassment.
Dramatically reduces tax-code-based injustice.
Dramatically increases civil peace and social concord.
Makes the big federal entitlements permanently solvent.
Revised: October 23, 2018.
Published: June 21, 2013.
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