A Plan to Renew the Promise of American Life, Plank 5
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Plank 5. Rely on duties and excises
Specific Recommendations
5.1. In lieu of income taxation, fund the federal government exclusively with duties and excises, with a little help from user fees and land sales. Prefer this approach over such attractive but flawed proposals as a flat tax, value-added tax, or national retail sales tax.
Comments
In the previous plank, we saw why it’s essential to permanently eliminate federal income and payroll taxes. Now we turn to the replacement system. The best replacement is what we did from 1789 to 1914: duties and excises — taxes on imports and manufactures.
More specifically, in this plank I define ‘duties’ as taxes on goods that cross the border as they enter the country and ‘excises’ as taxes on goods produced within the country, Excises can be collected at the point of manufacture or the point of sale. Personally, I prefer the point of manufacture.
As we saw in the previous plank, production taxes are levied on people while consumption taxes are levied on goods.
Why prefer consumption taxes? Because, compared to production taxes, they promote freedom and prosperity. If you tax something, you get less of it. If you tax productivity, you get less productivity. If you tax consumption, you get less consumption. Taxing production discourages saving and investment, the seeds of future production, and thus diminishes future economic health and prosperity. Taxing consumption encourages saving and investment and thus expands future prosperity.
To be clear, I’m not saying consumption taxes are good. I’m saying they’re better than the alternative — the worst form of taxation, except for all the others.
Consumption taxes leave us comparatively free to choose how much tax we’ll pay. We can minimize our personal tax burden by saving.
Consumption taxes are also naturally self-limiting. They leave us free to vote with our dollars. If consumers feel a tax is too high on a particular good, they can consume less of it or switch to a substitute, or in a pinch they can resort to black markets. These behaviors give policymakers helpful feedback.
(I’m not endorsing black markets, by the way. Just noting their useful function as a signaling device.)
And while a consumption tax is normally regressive, falling more heavily on people with limited means, forcing them to spend a larger share of their income on necessities, that is not a reason to tax production. It’s a reason to exempt necessities.
Reliance on consumption taxes is critical if we want to achieve lower taxes, balanced budgets, and sound money, and if we want to maximize the benefits of free enterprise (through light regulation).
That is the system we had more more than a century, and it worked. Indeed, it worked well. Before 1914, our central government relied exclusively on consumption taxes. During that time, it averaged about a tenth of its current size, as a share of the economy, and yet the country rose from a third-rate to a first-rate power. And in many ways, we were the freest, most prosperous, and happiest people on earth.
Why not go back to that successful formula?
Questions
Aren’t duties just a tool of protectionism? Not necessarily. Protectionism (meaning tariffs and other trade barriers designed to protect domestic producers from competition) is, generally speaking, a bad thing. That’s why I favor free trade, so long as it is defined as ‘zero-percent tariffs with a metallic standard (and fixed exchange rates).’ Not all who call themselves free traders would define it that way, but I think they should — if they really want trade to be free. Without honest money, low or non-existent tariffs do not, by themselves, constitute free trade. So long as your trading partner can just use currency manipulation as a non-tariff trade barrier, any ‘free trade’ deal you have with him is a joke — on you. Can tariffs be too high? Of course. But as we’ve seen, consumers help keep rates in check through their purchasing choices. Can a nation benefit by replacing income taxes with moderate tariffs? Yes! Yes, indeed. It’s about the smartest policy upgrade a nation could make.
Couldn’t excises be used for social engineering? They could. But social engineering is a potential risk with most kinds of taxes. Policymakers get to decide what gets taxed and what doesn’t. ‘Sin taxes’ are taxes on things we currently don’t like for some reason. My own view is taxing ‘sin’ is a waste of time (remember those black markets) and can spawn crime (think Al Capone). The prudent policy is to use taxes simply to raise a revenue and do it in a way that is economically neutral. Tax codes are written by human beings. Inevitably, they’ll tend to reflect the community’s moral sense. Some sins will get taxed. I can live with that, if it means having my freedom and privacy and prosperity back.
Won’t this just lead to more cronyism and corruption? No. Just the opposite, in fact. While a certain amount of cronyism and corruption is unavoidable — we’re talking about politicians — the overall amount of it will be less under a system that taxes consumption only. Tariff rate schedules and lists of excise tax exemptions are public information, much more transparent and easily interpreted than an income-tax code. And with that information, any voter can get a pretty good idea about which special interests have the most effective lobbies in Washington — which politicians are bought and paid for. And he can then factor that information into his voting and buying decisions. No tax system can be perfect. But all things considered, duties and excises are preferable to any income tax.
Wouldn’t it be smarter to adopt a flat tax? No. I say this with a heavy heart. Admittedly, a flat tax, meaning an income tax with a single, low rate for everyone, and which taxes all income once and only once, would be better than today’s graduated, loophole-ridden mess. But it would still be an income tax. It would still require tax collectors to know how much money you make, and how you make it. And it would constantly be criticized for being regressive and, absent a strong, enforceable constitutional amendment, it would not remain flat. Politicians can’t help themselves. Congress enacted something approaching a flat tax in 1986. It lasted four years. The fact is, it’s a tough sell, politically. The U.S. tax code currently exempts nearly half the population. For those voters, a flat tax is a tax hike. The reader may say: Yeah, and ending income taxation is a tax cut for the rich! Sure (assuming we disregard payroll taxes), but it’s also true that imposing duties and excises is a tax hike on the rich. (Rich people consume, too.) Stepping back for a moment, it’s easy to see that, as a practical matter, we have to do the two things simultaneously: impose duties and excises, on the one hand, and reduce income taxes (and especially payroll taxes) on the other. If we keep the changes roughly comparable and synchronized, we can keep the overall burden the same or lighter for the vast majority of voters. Take things by the smooth handle.
Why not adopt a national retail sales tax? A national retail sales tax is a popular idea. Perhaps the most appealing variant of it is marketed as ‘The FairTax.’ The idea is to replace all federal taxes with a single, national sales tax collected at the cash register. This idea is at first very tempting, but on closer examination, it turns out to be flawed, for at least three reasons. 1) It would not remain transparent. Why? Because it would morph into a value-added tax (VAT). Supporters tout it as highly transparent: the amount you pay is printed right there on each receipt. But that’s not the end of the story. Cash-register taxes are easy to evade, which leads inevitably to a game of tax enforcement whack-a-mole. This happened in Europe. Retail sales taxes there evolved into VATs, which are collected not just at the cash register but also at every other stage of the economic process. That, of course, makes the tax complicated and confusing, and thus non-transparent, and thus non-self-limiting, or at least less self-limiting than duties and excises, which, as we’ve seen, are straightforward. Now, if you force me to choose between an income tax and a VAT, I’ll take the VAT. But look around. Wherever there’s a VAT, it exists on top of income taxes, not in place of them. A VAT plus income taxes is, I daresay, the worst of all possible worlds. 2) Despite FairTax supporters’ rhetoric about ‘abolishing the IRS,’ the plan actually necessitates the retention of a quite nosey government agency in order to pay every citizen something called a ‘prebate.’ The prebate is included to make the system less regressive — to offset the burden of taxing essentials like food, clothing, and shelter. Since rich people don’t need such protection, the prebate would inevitably be targeted to the poor and thus adjusted for income. Which means everyone would need to report their income — just like an income tax. 3) The federal government already collects duties and excises. They work. They’ve proved their worth. Why get fancy.
What about a gross receipts tax on the states? This is a bold idea, and at first glance an appealing one. But it’s unwise. I’ve seen it marketed under the label, ‘the NeutralTax.’ The idea is to replace all existing federal taxes with a single, gross receipts tax on state governments. Uncle Sam would tax the states rather than persons. The states would in turn tax their residents in whatever way they think best. In other words, it would devolve federal tax policy to the states. This, of course, would require a constitutional amendment. Now, presumably, in practice it would generate an equilibrium and an optimal one. The tax rate would be set at the point that produces a maximum of revenue with a minimum of burden. I’m assuming every state would in time come to adopt for itself a relatively efficient tax system. The scheme would certainly be very simple to administer — I mean, for the feds. And it would also depoliticize tax policy — for the feds. But the trouble is it would also give Congress a weapon with which to manipulate the states. And well, to put this starkly, if you want to live under a consolidated, highly centralized government like France or Russia, this is a pretty good way to get there. It could kill federalism. Under the Constitution, state governments may not tax the federal government (McCulloch v. Maryland, 1819), and vice versa (for the most part) (New York v. United States, 1946). The basic rule is sovereigns may not tax other sovereigns. That is a good rule, and a logical one. But under the NeutralTax, the feds would not only be able to tax the states, they could influence their behavior in ways not so readily available to them now. They could use the threat of rate hikes, or the lure of rate cuts, to secure changes in local policy — sticks and carrots. At least with federal spending programs (grants-in-aid), a state is free in theory to decline the money. But here, there wouldn’t be an option. The tax must be paid, and Uncle Sam can set the tax rate wherever he wants. In short, he is the real sovereign. The balance of power would shift even further toward the city on the Potomac. No, thanks.
Why not rely instead on head taxes? Because head taxes are not consumption taxes. And because they are an abomination.
Why not rely instead on property taxes? Because property taxes are not consumption taxes.
That said, I wouldn’t abolish property taxes. They’re a mainstay of local governments for a reason. As taxes go, they’re relatively easy to administer and transparent. You can get a pretty good idea of whether you’re getting a good value for money, in terms of government services, based on your annual property tax bill. And if the answer is no, you can vote with your ballot or your feet.
To sum up, in my ideal system, localities would continue to rely primarily on property taxes, states would continue to rely primarily on sales taxes (but not VATs), and Congress would go back to relying primarily on duties and excises. And income taxes would be banned.
Constitutional Amendments
This plank does not require any constitutional amendments.
Benefits
Contributes to robust economic growth.
Permanently shrinks the central government, thanks to the self-limiting nature of duties and excises.
Reduces tax-driven social engineering and wealth redistribution.
Revised: May 6, 2016.
Published: June 21, 2013.
Author: Dean Clancy.
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