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 altogether.
After years of reflection, I’m convinced we cannot renew the promise of American life without abolishing the income tax in all its forms.
The income tax cannot be reformed. It simply has to go.
Income taxation is a source of numerous evils and isn’t necessary to raise a revenue or to fund entitlements. The United States can get along just fine without it. We did so before 1913. Back then, the federal government relied exclusively on consumption taxes. That was a better system.
An income tax is a tax on production. It diminishes work-effort, savings, investment, and prosperity. Taxing consumption, by comparison, promotes work-effort, savings, investment, and prosperity.
There are a number of ways to tax consumption, but I think the best way is to rely 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? Abolish income taxation.
- Want to keep every penny you earn? Abolish income taxation.
- Want to make American businesses instantly the most competitive in the world? Abolish income taxation.
- Want to lift the weight of a million-word tax code from the shoulders of job creators? Abolish income taxation.
- Want to bring the tax-evading ‘underground’ economy above ground? Abolish income taxation.
- Want to dramatically reduce federal manipulation of the economy? Abolish income taxation.
- Want to reduce wealth redistribution? Abolish income taxation.
- Want to end political harassment of private citizen groups by the IRS? Abolish income taxation.
- Want to end federal interference with the free speech rights of churches? Abolish income taxation.
- Want to reduce the costs of housing, health care, education, and other necessities? 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 panacea. I merely contend that the change would be a huge, huge trade up.
The ‘Root of All Evil’
It is not going too far, I think, to say that income taxation is the root of all evil, politically speaking. It is a principal, if not the primary, engine driving the growth of government in our time, a machine for wealth exaction that makes the rich richer and the powerful more powerful.
As Aristotle pointed out 2,500 years ago, a primary condition of social peace and happiness is what today we would call income equality. Happy communities have a large and stable middle class, which naturally tends to check the worst tendencies of the extremes: the rich and poor. But protecting the middle class is not easy. It requires vigilance. 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 few try to reduce the many poor to a state of servitude. The many poor try to expropriate the rich few—help themselves to their wealthy neighbors’ property. And of course the middle class gets squeezed. Justice and prudence alike require that we check both tendencies—that we firmly respect everyone’s freedom and everyone’s property. And that, of course, is precisely what our Constitution was designed to do.
Freedom by nature includes the freedom to acquire property in any honest, decent, lawful way that does not harm others. Forcible wealth redistribution, by contrast, threatens civil peace and social concord. To be free and happy, a people must shun forcible wealth redistribution.
Enter the Sixteenth Amendment, ratified in 1913, which authorizes Congress to tax incomes ‘from whatever source derived.’ With this revolutionary constitutional change, the balance is forever upset and wealth redistribution becomes the name of the game.
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 two distinct things. Direct wealth redistribution should be avoided at all costs.
A final thought. Government should be transparent and moderate. Income taxation makes it easy for government to become opaque and immoderate—and corrupt. Income tax abolition is good government.
Tax Consumption, Not Production
To tax production is to tax workers. And thus to tax work-effort. And thus to tax prosperity.
Taxing production burdens saving, risk-taking, and investment. It ensures we make less, get less, have less. It makes us poorer. /1
Income taxation also makes us less free, because it inevitably requires massive amounts of information and gigantic bureaucracies to administer. It hands to government the keys to invade our privacy, 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 and less prone to abuse.
Saving is the basis of investment, which is the basis of job creation, economic health, and rising living standards. Saving is the key to wealth and prosperity.
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 naturally encourage thrift and discourage waste and luxury.
Admittedly, the poor have less freedom to avoid taxes than the rich do. The poor have no choice but to spend more of their income on necessities. But that is not a reason to tax incomes. It is a reason to reduce taxes on necessities!
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.
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 wishes to shift the burden onto his neighbors, a kind of ‘war of all against all’ inevitably develops, with the rich inevitably made the targets of the majority, who use their votes to shift their tax burden onto those who are perceived as wealthier than themselves. But the rich always fight back. They find ways to evade unjust exactions. They leave the country, for example, or use their influence to secure loopholes and exceptions in the law, through which they can escape. In other words, they escape the tax physically or financially.
And thanks to the existence of the inevitable 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 tax than is strictly necessary. We all have that brother-in-law or cousin we just know is exploiting some credit or deduction we’ve missed.
The ultimate fruit of this system is a general atmosphere of suspicion and dissatisfaction. Toss in frustration, thanks to mind-boggling complexity and paperwork—which are inevitable, so long as politicians think they can use the tax code to buy votes—and, well, the little guy naturally comes to feel as if he is being 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 entirely out, at least not explicitly. Before the Civil War, it wasn’t entirely clear whether income taxes were direct or indirect taxes for federal constitutional purposes. This is an important distinction, though not one without some ambiguity and confusion.
By ‘direct’ taxes, the Founders seem to have meant those that really hit people where the live, such as head taxes and land taxes: taxes that fall on you just for existing. By ‘indirect’ taxes, they seem to have meant all other kinds of exaction. Because the Founders did not like direct taxes, they intentionally made them hard to levy, by requiring that all direct 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 impossible to impose.
But indirect taxes, the Founders limited only by requiring that they be ‘uniform throughout the United States.’ And income taxes, they seem to viewed as indirect, and therefore permissible, if unwelcome, provided they are uniform throughout the country.
During the Civil War, Congress levied our first, emergency income tax. Its authors and President Lincoln, who signed it, seem to have taken it for granted that it was an indirect tax that did not have to be apportioned by state. The tax existed from 1862 to 1872. People were thrilled to see it go.
Then, in the 1890s a populist-socialist coalition arose seeking to impose an income tax on ‘the rich.’ In 1895, the Supreme Court in a surprise decision impeded this movement, by ruling that income taxes, to the extent they are derived from income that are in turn derived from land rents, are direct taxes. That made such taxes virtually impossible to levy as a practical matter. Undeterred, the pro-income-tax coalition responded by resolving to amend the Constitution, and eventually succeeded. The Sixteenth Amendment, ratified in 1913, grants Congress explicit authority to levy income taxes ‘from whatever source derived’ and without any need for apportionment.
This Amendment has proved one of the great errors of American history. More than any other policy choice, it has cleared the path for big, corrupt, lawless government. It has, as we’ve seen, let in numerous evils.
Together with two other events of the fateful year, 1913—the ratification of the Seventeenth Amendment, which greatly diminished the ability of the states to keep the federal government within its constitutional bounds, and the creation of the Federal Reserve, which made it possible for Congress to impose taxes without a vote by means of unrestrained money-printing—the Sixteenth Amendment effectively exiled the Founders’ Constitution. /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. That seems reasonable, given that food and medicine represent a greater share of expenditures for the poor than they do for the rich. 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. Why insist on amending the Constitution (which requires supermajorities in Congress and the states), when we can achieve the same goal by passing a law (which only requires a simple majority in House and Senate)? Should we eventually pass an amendment depriving Congress of any power to tax incomes? Yes. But that step can wait. Income taxes are hated, after all. People would rejoice at their elimination. They would be in no hurry to reinstate the IRS and April 15th. I admit income taxation would probably make a comeback, eventually, if the rest of this plan were not implemented (especially the honest money plank). But it would not come back quickly. We would 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 I hold, and hold firmly, that the government should ordinarily run modest surpluses, and avoid debt like the plague, I do not think we can postpone this reform until conditions are ‘favorable.’ Conditions will never be favorable, to a political class dependent on debt. We need to prioritize freedom and long-term economic health over short-term deficit purity. Income taxation is so harmful, the amount of revenue it generates is so great, and the advantages of immediate elimination are so vastly greater than any downsides associated with higher deficits, that we should not wait. We can and should, of course, minimize the deficit hit. The very best way to do that is to restore general economic health, which, happily, this reform also promotes. Another way to do it is is to cut spending dramatically (see the spending freeze plank and devolution plank of this plan). A third way: increase duties and excises (see the consumption taxes plank). To be clear, I do not advocate raising duties to protectionist levels. I think taxes should be for raising a revenue, not for favoring certain industries or local interests.
Allow me o add that all of the aforementioned reforms, including tax reform, would be easier to achieve if we first restore honest money, which basically guarantees a return to fiscal common sense, and thus of balanced budgets. But here we are focusing on the best tax reform, separate and apart from monetary 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
It will be harder to get the votes in Congress to eliminate income taxation if we don’t at the same time get rid of payroll taxes. Ideally, both kinds of tax go away together, and at the same time. 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 eliminated income taxes but left payroll taxes in place, the latter would in all likelihood morph into the former. 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, meaning 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 kind of tax will do for that purpose. And eliminating payroll taxes would have a definite benefit. It would make Social Security and Medicare permanently solvent. That’s right. Abolishing the payroll tax would force Congress to fund Social Security and Medicare using other revenue sources, most likely out of the general fund, which is a fund that can never go bankrupt so long as Congress has its Article I, section 8, powers to tax and borrow. Y
Yes, dear reader, the solution has been hiding in plain sight all along: the simplest and easiest way to protect the Social Security and Medicare trust funds is to give them a permanent and unlimited tap on the general fund. We can abolish the payroll tax without endangering anyone’s retirement benefits. Why are we waiting?
Question: What’s the best way to keep the general fund adequately supplied with revenue? Rely on duties and excises. But that’s the next plank.
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 dramatically 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 rise as millions of people start shopping for the best values. Today, employment-based health benefits dominate our system entirely because the tax code (incorrectly and harmfully) excludes them from the definition of income. The tax code puts employers (and their chosen insurers) in the driver’s seat. As a result, people don’t really shop for value. Instead, they let their employer do it for them. By removing the bias in the tax code, most people will shift from workplace group health benefits to individually owned insurance. That will be a healthy shift. Today, individual-purchase insurance is unfortunately overpriced because of misguided state and federal regulations. But it is still the best form of health insurance, because, being based on the actual amount of medical risk each individual brings to the insurance pool, it can be priced affordably for the maximum number of people. And it has the important side-benefit of being fully portable: you don’t lose it when you change jobs. So by ending income taxation, we give millions of people access to individual coverage and in so doing cause health insurance to more closely resemble auto or homeowners’ insurance. It will become portable, personally owned, and cheap. The ultimate goal of health reform should not be ‘national health insurance’ or ‘universal coverage,’ whatever those pleasant-sounding terms may mean. (The reality of ‘universal coverage,’ as we are learning from the so-called Affordable Care Act, is not all that pleasant.) No, the goal should be universal availability of, and universal access to, needed health care services and thus to health insurance plans that are cheap in price and high in quality, for everyone who wants them, without coercion or mandates. That kind of widespread, salutary access can only come into being in a world of free markets and consumer sovereignty, supported by safety nets (personal charity and prudently targeted public welfare). What we need and should seek is a world in which the vast majority of health care consumers pay cash prices out of pocket for minor and routine care while relying on very cheap, rarely used, and preferably individually owned catastrophic indemnity insurance policies for the big bills. (An indemnity policy is one that pays you a lump sum in cash for a particular event. For example, if you’re diagnosed with lung cancer, you get X thousand dollars.) In a cash-pay-dominated world, needed health services will be more affordable to more patients than is the case today, and charity will go further, and safety nets will be smaller but stronger. The best health reform is to stop taxing incomes.
P.S. As a transition to income-tax abolition, I would support ‘HSAs-for-all.’
1/ Let’s define exactly what we mean by ‘income tax.’ By this term I mean any tax on income or on an 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 are 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 finally, head taxes and land taxes. Personally I classify them as income taxes when they are really income taxes by another name, but otherwise not. But however you classify them, head and land taxes are direct taxes for federal constitutional purposes and thus may not be levied by the federal government.
2/ P.S. A bit of free advice for anti-global-warming activists: A carbon tax is 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. Which is why I like to say: ‘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.