A Plan to Renew the Promise of American Life, Plank 4
Plank 4. Abolish income taxation
4.1. Tax consumption, not production—goods, not people.
4.2. Abolish all forms of income taxation, initially by statute and eventually 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. Where gradual phase-outs are required, prioritize rate reduction over loophole-closing.
4.4. Do not neglect to eliminate payroll taxes, lest they become a taproot for income taxes to reappear. When possible reduce income and payroll tax rates simultaneously. When forced to choose, eliminate payroll taxes first.
4.5. Fund Social Security and Medicare entirely from general revenues rather than payroll taxes. Grant to their trust funds a permanent tap on the general fund, to be used as needed to ensure timely payment of all scheduled benefits. In this way, make both programs permanently solvent without having to cut benefits.
In the next plank, we’ll talk about what to replace the income tax with. This plank focuses on why we need to get rid of income taxation. After years of reflection, I’m convinced we cannot renew the promise of American life without doing so. The income tax cannot be reformed. It must simply go.
Income taxes are a source of numerous evils and unnecessary to raise a revenue or fund entitlements. The United States can get along just fine without them. We did so before 1913. Back then, the federal government relied exclusively on consumption taxes. That was better.
An income tax is a tax on production. Taxing production diminishes work, savings, investment, and prosperity. Taxing consumption has the opposite effect. Comparatively speaking, it promotes those things.
There are a number of ways to tax consumption, but I think the best is to rely exclusively on excises and duties as we did before 1913.
The benefits of this fundamental change would be plentiful.
- Want to increase your paycheck by up to half, overnight?
- Want to keep every penny you earn?
- Want to make American businesses instantly the most competitive in the world?
- Want to lift the weight of a million-word tax code from the shoulders of job creators?
- Want to bring the tax-evading ‘underground’ economy above ground?
- Want to dramatically reduce federal manipulation of the economy?
- Want to reduce wealth redistribution?
- Want to end political harassment of private citizen groups by the IRS?
- Want to end federal interference with the free speech rights of churches?
- Want to reduce the costs of housing, health care, education, and the other necessities of life?
Abolish income taxation!
If any reform can dramatically improve the life of every American, it is this one. /2
To be sure, I don’t pretend consumption taxes are free of all problems, or that the switch would be a cure-all. I merely contend that the change would be a huge trade up, and a necessary one, if we want to renew the promise of American life.
The ‘Root of All Evil’
It is not going too far, I think, to say that income taxation is the root of all evil, at least politically speaking. It is a principal engine driving the growth of government, a machine for wealth exaction that makes the rich richer and the powerful more powerful. It is the number one source of income inequality.
As Aristotle observed 2,500 years ago, happy communities invariably have a large and stable middle class. The wealthiest and poorest classes are comparatively small. This distribution of wealth naturally tends to check the worst tendencies of the rich and poor extremes, each of which has its own characteristic vices. In every political community the tendency of both the rich and the poor is to use the power of government to advance their own interests. The wealthy, who are invariably few in number, try to reduce the poor to servitude, while the poor, especially when they form the majority, try to help themselves to the property of the rich. And typically the middle class gets squeezed. A healthy and just community checks both tendencies, firmly respecting everyone’s freedom and everyone’s property. And that, of course, is precisely what our Constitution was designed to do.
Freedom, properly defined, includes the freedom to acquire property in any honest, decent, lawful way that does not harm others. Forcible wealth redistribution, by contrast, threatens the peace and concord of the community. To be free and happy, a people must shun forcible wealth redistribution.
The Sixteenth Amendment, ratified in 1913, authorizes Congress to tax incomes ‘from whatever source derived.’ Through this door, wealth redistribution has entered our affairs, bringing in its wake a train of evils.
To be clear, I am not rejecting the idea of taxation per se. Nor the idea of providing social safety nets. We need both. But I am rejecting the idea of taking the fruits of some people’s labor and savings and transferring it to other people under the guise of raising a revenue. We need a tax system, and we need a welfare system, but they should be kept separate and distinct. Direct wealth redistribution should be shunned.
Income taxes make it easy for government to become opaque, immoderate, and corrupt. Abolishing them is good government.
Tax Consumption, Not Production
As I mentioned, taxing production is a tax on work and thus on prosperity. It burdens saving, risk-taking, and investment. It ensures we make less, get less, have less. It makes us poorer. /1
Income taxes also make us less free, because they inevitably require massive amounts of information and gigantic bureaucracies to administer. They hand to government the keys to our private financial information, and a powerful tool by which to shape and influence our private choices (social engineering).
By comparison, taxing consumption encourages saving and prosperity, and is inherently less intrusive.
Saving is the basis of investment. Investment is the basis of job creation, economic health, and rising living standards. Saving is the key to wealth and prosperity.
Consumption taxes naturally encourage thrift and discourage waste and luxury.
With consumption taxes, we are, comparatively speaking, free to choose how much tax we’ll pay. We can minimize our tax burden by saving.
Consumption taxes are naturally self-limiting. They leave us free to vote with our dollars. We can give the politicians constant feedback, by substituting one form of consumption for another. For example, suppose good A is over-taxed. We substitute good B. Revenues derived from good A fall. The politicians receive a signal that it’s time to lower the rate on good A.
Admittedly, the poor have less freedom to avoid taxes than the rich do. The poor have to spend a greater share of their income on necessities. But that is not a reason to tax incomes. It is a reason to reduce taxes on necessities!
With an income tax, there is no in-built feedback mechanism, other than complaints and cheating. The only real limit is ‘How much are voters willing to put up with?’
Because every voter consciously or unconsciously seeks to shift the tax burden onto his neighbors, a kind of ‘war of all against all’ inevitably develops, with the rich made the targets of the majority. But the rich fight back. They find ways to evade unjust exactions. They use their influence to secure loopholes and exceptions. Or they simply move to another country.
And thanks to those loopholes and exceptions, nobody can ever be absolutely sure that the rich are in fact paying ‘their fair share,’ whatever that means, or that they themselves are not paying more than is strictly necessary. We all have that brother-in-law we suspect is exploiting some obscure tax credit or deduction that we’ve somehow missed.
The ultimate fruit of this system is a general atmosphere of suspicion and dissatisfaction. Toss in frustration with mind-boggling complexity, and the little guy begins to feel intentionally persecuted.
The Constitution’s Tax Policy
What did the Founders think about income taxes? They disliked them. But unfortunately, they did not rule them out, at least not explicitly. Before the Civil War, it wasn’t entirely clear whether income taxes were ‘direct’ or ‘indirect,’ which is the distinction made in the federal Constitution.
What these terms meant has never been precisely clear, but we have a pretty good idea. By ‘direct’ taxes, the Founders seem to have meant those that really hit people where they live, such as head taxes and land taxes: taxes that fall on you just for existing.
By ‘indirect’ taxes, they seem to have meant everything else. Because the Founders disliked direct taxes, they made them hard to levy by requiring that such taxes be apportioned according to population, by state (basically, ‘one man, one buck,’ regardless of all other considerations). This ‘apportionment rule’ makes direct taxes practically very difficult to impose.
As for indirect taxes, the Founders limited them only in this: they be ‘uniform throughout the United States.’ And they seem to have regarded income taxes as indirect. So Congress can levy them, provide they’re nationally uniform.
During the Civil War, Congress levied our first, emergency income tax, which was not apportioned by state. Its authors (and President Lincoln, who signed it), seem to have taken it for granted that it was an indirect tax and did not require apportionment by population. It existed from 1862 to 1872. People were thrilled to see it go.
Then, in the 1890s a populist-socialist coalition arose seeking to impose a redistributive income tax on ‘the rich.’ In 1895, the Supreme Court blocked this movement, by ruling, in a surprise decision, that income taxes, to the extent they are derived from income derived from land rents, are direct taxes, not indirect.
Undeterred, the pro-income-tax coalition resolved to overturn the decision by amending the Constitution. And eventually they succeeded. The Sixteenth Amendment, ratified in 1913, grants Congress explicit authority to levy income taxes ‘from whatever source derived,’ without any need for apportionment.
This Amendment has proved one of the great errors of American history. Perhaps more than any other single policy choice, it has cleared the path for big, corrupt, lawless government. Together with two other ‘achievements’ of that fateful year of 1913 — the Federal Reserve and the Seventeenth Amendment establishing direct popular election of U.S. Senators — the Sixteenth Amendment effectively deformed American government into something barely recognizable. /3
Question: Don’t consumption taxes fall more heavily on the poor than on the rich? Answer: Not if we tax necessities less heavily than luxuries. Many states, for example, exempt food and medicine from sales tax. The same distinctions can be made with federal duties and excises.
Question: If income taxation really is the root of all evil, why not repeal or reverse the Sixteenth Amendment? Answer: Because it’s not necessary to do so, at least at the outset. We can abolish income taxation by ordinary statute any time we want. Amending the Constitution requires supermajorities in Congress and the states, but passing a law only requires a simple majority in House and Senate. A federal constitutional amendment closing the barn door, while important, can wait. People would be in no hurry to reinstate the IRS and April 15th. I admit income taxes would probably make a comeback, if the rest of this plan is not implemented. But it would not come back quickly. We’d have time to gather the supermajorities needed to secure the amendment.
Question: Should income tax abolition be postponed until we are consistently running surpluses? No. Abolishing income taxation is more important, more urgent, more economically helpful, and more politically attractive than avoiding near-term deficits. While governments should ordinarily run modest surpluses, I do not think we can postpone this reform until conditions are ‘favorable.’ Conditions will never be favorable to a political class addicted to debt. We should minimize the deficit hit, of course, but not at the expense of postponing this vital reform.
Payroll taxes are income taxes levied on the wage portion of income. /4
No serious tax reform can avoid dealing with payroll taxes, because those taxes (there are three of them, technically) affect more voters than any other and together constitute the largest tax most voters pay. /5
Both kinds of tax should go away together, if only for vote-getting reasons. But I think it’s acceptable to eliminate payroll taxes alone, as a first step to total income-tax abolition, since payroll taxes, which affect most voters, are less likely to reappear than is a traditional graduated income tax.
But the reverse is not true. Leaving payroll taxes in place after eliminating other forms of income tax would be like pulling a poisonous weed without removing the taproot. If Congress left payroll taxes in place, the latter would in all likelihood morph into another income tax like today’s. So long as any kind of income taxation is on the books, there will be pressure to make it ‘graduated,’ meaning heavier on higher-income earners (redistributionist). This has already begun to happen. The 2010 health care law modified existing payroll taxes, which had traditionally been ‘flat,’ to include a ‘surcharge’ on high-income earners.
Social Security and Medicare
Question: If we eliminate the payroll tax, won’t that mean the end of Social Security and Medicare? Answer: No. Social Security and Medicare would continue to exist. The only thing that would change is their funding source. Payroll taxes are not necessary to fund them. Any tax will do for that purpose. And eliminating payroll taxes would have the benefit of making Social Security and Medicare permanently solvent. The general fund can never go bankrupt.
Question: What’s the best way to keep the general fund adequately supplied with revenue? Answer: Rely on duties and excises.
What about Health Care?
Question: If we eliminate the income tax, and with it the American system of employment-based health benefits (which rests on a tax policy preference for such benefits), won’t the number of uninsured Americans skyrocket? Answer: No. While ending the income tax would certainly reduce the number of employers offering workplace health benefits, the number of insured people will, if anything, go up, not down. The price of direct-purchase (‘individual market’) health insurance will fall, as millions of people start shopping for the best values. Today’s employment-based health system, with its soaring costs, perpetual uninsured population, and job-lock problem is an artifact of the tax code. The best health reform is to stop taxing incomes. P.S. As a transition to income-tax abolition, I would cheerfully support establishing ‘Health Savings Accounts for all.’
1/ Perhaps I should define more precisely what we mean by the term ‘income tax.’ For me, it broadly means any tax on income or income-producing property or activity. If a tax scheme requires a definition of, and a reporting of, income, gains, profits, or receipts, it’s an income tax. Admittedly, drawing a precise line between income taxes and other kinds can be a bit of a challenge. There is a seemingly endless array of labels and descriptions, and not everyone classifies each exaction in exactly the same way. But the main boundary lines seem clear enough for our purposes. Income taxes include all of the following: 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. And income taxes exclude all of the following: 1) duties, imposts, and excises, 2) sales taxes, value-added taxes, and personal property taxes, and 3) user fees, filing fees, document fees, licensing fees, and postage. I would also exclude from the definition the proceeds of auctions and sales of government-owned land and property, and of course head taxes and land taxes. Personally I classify the latter two as income taxes when they are really income taxes by another name, but otherwise not. However classified, head and land taxes are direct taxes for federal constitutional purposes and thus realistically cannot be levied by the federal government.
2/ P.S. A bit of free advice for anti-global-warming activists: You’ll find a carbon tax a lot easier to enact in place of the income tax than on top of it.
3/The Seventeenth Amendment provided for the direct popular election of U.S. Senators. The Federal Reserve System has evolved into a powerful tool for currency manipulation by debt-addicted politicians. Together with the income tax, these changes make 1913, constitutionally speaking, the worst year on record, although 1937 is a close second — the year the Supreme Court gave up on enforcing the principle of enumerated powers and thus paved the way to today’s unlimited federal government. The constitutional revolution of 1937 was a direct result of the constitutional revolution of 1913. To repeal 1937, repeal 1913!
4/ Is the payroll tax an income tax or an excise? It is an income tax. When the Roosevelt administration created the payroll tax in the mid-1930s, it split it into two equal shares, one to be paid by the employee, the other by the employer. Both shares are withheld from the employee’s wages. Federal law classifies the employee’s share as an income tax and the employer’s as an excise, specifically an excise on the privilege of producing income. But this distinction is problematic on two levels. First, the earning of income is not a matter of privilege, that is, of government permission, except in rare cases. It is rather a matter of common right, founded in nature. To call the right to earn one’s daily bread a ‘privilege’ is an abuse of language. Second, as an economic matter, the distinction between the two ‘kinds’ of tax is insupportable. All income is ultimately produced by employees. (The employer too is an employee, to the extent he contributes his labor to the enterprise.) Both shares of this tax fall on the wages, that is, on the income, of the employee. Therefore, the payroll tax is an income tax.
5/ There are three main federal payroll taxes, which go by the acronyms FICA, SECA, and FUTA. FICA funds Social Security, Medicare, and Disability Insurance from employees’ wage income (with the employer nominally paying half). SECA funds the same programs from self-employed workers’ income. FUTA funds Unemployment Insurance from employees’ wage income, with the employer nominally paying the entire tax.
This plank does not require any constitutional amendments, although the legislation abolishing income taxation should be followed up with an amendment denying Congress any power to tax incomes. We should not make the legislation dependent on first securing a constitutional amendment.
Will provide substantial financial relief to all Americans, especially the poor.
Will increase the nation’s economic health and unleash permanently higher rates of innovation and job creation.
Will provide significantly greater freedom to work, save, and invest.
Will measurably increase living standards and personal financial security.
Will end tax-code-based social engineering, wealth redistribution, privacy invasions, speech suppression, and political harassment.
Will dramatically reduce tax-code-based injustice and dramatically increase civil peace and social concord.
Will reduce the costs of housing, health care, and much else.
Will make the payroll-tax-funded entitlements permanently solvent.
Revised: October 23, 2018.
Published: June 21, 2013.