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 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 reducing taxes, prioritize rate reduction over loophole closure and always reduce the top rate first.
Renewing the promise of American life requires changing the way we fund our federal government. This may seem like an odd thing to say, but I can find no way around it. The income tax has to go. Or more specifically, all taxes the directly burden production, including today’s income and payroll tax systems.
I do not think these kinds of taxes can be reformed. Their negative effects on our liberty and prosperity are too great. We must replace them.
Replace them with what? With the other kind of taxes, namely, taxes on consumption. In the next plank, we will look at those more closely. In this plank, I want to focus on production taxes and why they have to go.
They have to go because they are a source of numerous evils and are unnecessary. From 1776 to 1914, the federal government got along just fine without them. /1 /2
Taxing production taxes prosperity. It diminishes work, saving, and investment. It makes us poorer. Ending production taxes would make us richer. Indeed, the benefits would be stupendous.
Among other things, eliminating all income and payroll taxes would:
- Enable workers to keep every penny they earn.
- Increase everyone’s paycheck by up to half, overnight.
- Make American businesses the most competitive in the world.
- Lift the weight of a million-word tax code from the shoulders of job creators.
- Bring the tax-evading ‘underground economy’ above ground.
- Dramatically reduce wealth redistribution and social engineering.
- End the IRS’s political harassment of private citizen groups.
- End the IRS’s interference with the free speech rights of churches.
- Reduce the costs of housing, health care, education, and other necessities of life.
And those are just the benefits that spring immediately to mind. Doubtless there are more.
If any single reform can palpably improve the life of every American, it is this one. /3
More Reasons to Abolish
Income taxes facilitate the growth of government. Administering them requires large bureaucracies and intrusive collect information — information that can used for social engineering and political control. Why does anyone other than a welfare bureaucrat 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, it tends to make the rich richer and the poor poorer.
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. 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.
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 push back. They find ways to evade the tax. They secure loopholes and carveouts. Some just leave the jurisdiction.
A consumption tax is more compatible with individual liberty, because people can minimize the burden by changing what they consume. With a production tax, such freedom, if it exists, is more restricted. The only realistic way to minimize the burden is to shift it onto somebody else, or to cheat.
So to sum up, income taxation reduces freedom, privacy, and prosperity, while increasing poverty, inequality, and social discord. Other than that, Mrs. Lincoln.
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 wealth distribution, and the ‘free stuff,’ plus the promise of security offered by the regulatory state. What they don’t seem to realize is that all that extra government must be paid for, and if not paid for with high taxes it will be paid for with reduced purchasing power (inflation) and reduced freedom (ever-bigger and more centralized government). There is no free lunch. But Americans are sadly determined to believe there is — or rather, they are content to live with the fiction that there is. The problem is that eventually 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 all hit a saturation point, and inflation will kick in to burn up the excess demand, and with it the life savings of everyone but the wealthiest. Then, we will finally have a popular revolution. People’s minds will be open to fundamental reforms. But not come before we all have paid dearly. We will recover our wits, but only after we have collectively hit rock bottom. The hope of this plan is that maybe, just maybe, we can begin that recovery without having to hit rock bottom.
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 thereafter. We should not wait for a constitutional amendment before abolishing the taxes. And the amendment should do more than just repeal the Sixteenth Amendment. It should also take away Congress’s power to levy income taxes. And ideally, it would also take that power away from the states.
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. Tax receipts will grow, relative to the status quo. Or rather, they will fall less than they would in a static model (a model that fails to account for improved productivity). Second, we can minimize the deficit impact of the reform by reducing the size and scope of the federal establishment — something the other planks of this plan would do.
Wouldn’t it be safer fiscally to postpone this change until Congress is running routine surpluses? Sure. But I wouldn’t hold my breath waiting that. No, we should go ahead. 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 this plan.
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 taxing necessities more lightly than luxuries. For example, many states that impose a retail sales tax exempt food and medicine. We could levy excises more lightly on such necessities. /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 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 portable from job to job.
By the way, what exactly do we mean by ‘income’ in this context? There are varying definitions, but I am using the term ‘income’ to mean gifts and earnings (gains, profits, and receipts). Income is generated through activities like work, enterprise, and investment.
Which specific kinds of taxes are ‘income’ taxes and which are not? In my view, 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 of 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, and occupations, and other wealth-generating activities. Okay. So what does that exclude? In theory, it excludes everything else, but more specifically, I would say it excludes 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 of ‘income tax’ the proceeds of auctions and sales of government-owned land and property. As for head taxes and land taxes, while I think they can straddle the line, I think their effects make them more like income taxes than not — certainly, we should not rely on them. Happily, the Constitution regards them as so-called ‘direct’ taxes and thus makes them impractical to collect.
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 governments claim, a mere excise on the ‘privilege’ of work. (Only in an age of big government could work be viewed as a privilege.) If we have to choose whether to eliminate the income tax or the payroll tax first, we should eliminate the payroll tax first, because it is the biggest tax most Americans pay and, more importantly, because, if left in place, it will inevitably morph into a messy, complicated, graduated income tax like the one we have today.
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. Payroll taxes are not necessary to fund these programs — any tax can serve that purpose. And eliminating payroll taxes would have the benefit of making Social Security and Medicare permanently solvent.
1/ Historical trivia. Before the Sixteenth Amendment (1913), which gave Congress a power to lay and collect taxes on incomes ‘from whatever source derived,’ the federal government got most of its revenue from whiskey taxes. The temperance movement helped secure the income tax amendment in order to remove this obstacle to their desired alcohol prohibition amendment.
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.
3/ I am not proposing a national retain sales tax. I think we would be better off relying on duties and excises. It would just morph into a VAT, a kind of tax that is the opposite of simple and transparent. Tariffs and excise taxes, by contrast, are comparatively simple in that you never see a tax bill (the tax is embedded in the price of goods) and transparent in that the rates are published for all to see. And, as we have seen, the rates are naturally self-limiting.
Although this plank does not strictly require any constitutional amendment, it does recommend one, an amendment to repeal the Sixteenth Amendment and to go beyond that and explicitly prohibit Congress and ideally also the states from taxing incomes in the future.
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, 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.