A Plan to Renew the Promise of American Life, Plank 5
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Plank 5. Rely on duties and excises
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.
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, meaning taxes on imports and manufactures. As we saw in the previous plank, production taxes are levied on people, consumption taxes are levied on goods. Duties are taxes collected on goods that cross the border as they enter the country. Excises are taxes collected on goods that are produced within the country, either at the point of manufacture or the point of sale. (Personally, I prefer the point of manufacture.)
Why consumption taxes? Well, because they promote freedom and prosperity, compared to production taxes.
If you want less of something tax it. If you want less productivity, tax production. If you want more production, tax consumption. Taxing consumption encourages saving and investment, which are the seeds of future production, and thus of future economic health and prosperity.
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 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.
And while consumption taxes are normally regressive, falling more heavily on those whose incomes are lower and who must therefore spend a larger portion of their income on necessities, that is not a reason to tax production. It’s a reason to reduce taxes on necessities.
Reliance on consumption taxes is critical to achieving lower taxes, balanced budgets, and sound money, and to maximizing the benefits of free enterprise.
That is the system we had in the nineteenth century, and it worked very well. As I mentioned, from 1789 to 1914 our central government relied exclusively on consumption taxes and averaged about a tenth of its current size, as a share of the economy. Over that period, we rose from a fourth-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?
To be clear, I’m not saying consumption taxes are a positive good. Like all taxes, they’re a necessary evil. But consumption taxes are better than the alternative — far better.
Could excises be used to promote social engineering via sin taxes? They could. But social engineering is a potential risk with most kinds of taxes. Excises are taxes on particular goods, and politicians get to choose which goods get taxed. Personally, I dislike so-called ‘sin taxes’ on things we don’t like (alcohol, tobacco, gambling, pollution, carbon emissions, and so on). My view is taxes should be used to raise a revenue and be kept as economically neutral as possible. But at the end of the day, tax codes are always written by human beings, and inevitably reflect the community’s moral judgments.
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 gold standard and fixed exchange rates.’ (Not all who call themselves free traders would define it that way, but they should.) Without honest money, low or non-existent tariffs do not, by themselves, constitute free trade. And international trade deals in the absence of honest money turn ‘free trade’ into a joke, because trading partners can just use currency manipulation as a non-tariff barrier. Can tariffs be too high? Sure. But consumers help keep rates in check. Can a nation benefit by replacing income taxes with moderate tariffs? Yes! Indeed, it’s about the smartest policy upgrade a nation can make.
Won’t this just lead to more cronyism and corruption? No. Just the opposite. While a certain amount of cronyism and corruption is unavoidable — we’re talking about politicians — the overall amount of cronyism and corruption will always be less under consumption taxes. The schedule of current tariff rates is public information, much more transparent and easily interpreted than an income-tax code. With that information, any voter can get a pretty good idea about which special interests have the most effective lobbies in Washington, and can then factor that information into his or her voting and buying choices. No tax system can be perfect, but all things considered, a schedule of duties and excises is preferable to any income tax.
Wouldn’t it be smarter to adopt a flat tax? No. Admittedly, a flat tax, meaning an income tax with a single, low rate for everyone (and that 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, with all the inherent downsides. And more importantly, it would not remain flat. Politicians can’t help themselves. And it’s also a political nonstarter because the current tax code exempts nearly half the population. For those voters, a flat tax is a tax hike. Rule No. 1 of politics is ‘Never get involved in a land war in Asia, ‘ Only slightly less well-known is Rule No. 2: ‘Never raise taxes on half your constituents.’
Why not adopt a national retail sales tax? A national retail sales tax collected at the cash register is a popular idea. In its best form, promoted as ‘the FairTax,’ it would replace all other federal taxes. While it’s superficially tempting, the idea is flawed, for three reasons. 1) Although supporters tout it as a highly transparent way to fund our government, it would almost certainly morph into a highly non-transparent one. This happened in Europe. In the 1960s national retail sales taxes evolved fairly quickly into value-added taxes. A VAT is collected not just at the cash register but also at every other stage of the economic process. VATs are not self-limiting like duties and excises are, and they generate a ton of revenue for vote-buying politicians without transparency. And they invariably exist on top of, rather than in lieu of, income taxes. 2) Despite FairTax supporters’ rhetoric about ‘abolishing the IRS,’ the plan actually necessitates the retention of a nosey IRS in order to pay every citizen something called a ‘prebate’ intended to offset the burden of the sales tax on such essentials as food, clothing, and shelter. The prebate is adjusted to reflect families’ income and household size. That forces everyone to report to Washington their income and household size — just like an income tax. 4) ) We don’t need a new kind of federal tax. The federal government already collects duties and excises, and they have proved their worth. Just expand those.
Why not just impose a gross receipts tax on the states? This is a bold idea, and a bad one. Promoted under the label, ‘the NeutralTax,’ the reform, which would require a constitutional amendment, would replace all existing federal taxes with a gross receipts tax on state governments. The states could impose whatever kinds of taxes they wanted. In other words, it would devolve federal tax policy to the states. Presumably it would generate a tax policy equilibrium, with the tax rate set at the point that produces a maximum of revenue with a minimum of burden (assuming every state chooses a relatively efficient tax system). The scheme would certainly be very simple to administer (for the feds) and would depoliticize tax policy (for the feds). But it would also give Congress a weapon with which to swallow up the states, potentially leading to a consolidated nation like France or Russia. The power to tax is the power to destroy. Under current law, states may not tax the federal government (McCulloch v. Maryland, 1819), and likewise, for the most part, the feds may not tax the states (New York v. United States, 1946). Sovereigns may not tax other sovereigns. But under the NeutralTax, the feds would be able to tax the states and with a vengeance. Congress could easily use the threat of rate hikes, or the prospect of rate cuts, to influence states’ behavior — carrots and sticks. Overall, the balance of power would shift even further toward Washington. No, thanks!
Why not rely instead on head taxes and/or property taxes? Because they are not consumption taxes, and because head taxes are an abomination, and because property taxes, while also an abomination, have been the traditional mainstay of local governments forever, which lends them a certain venerable status. In my ideal system, localities would continue to rely primarily on property taxes, states would continue to rely primarily on sales taxes, and Congress would go back to relying primarily on duties and excises. And income taxes would be prohibited.
This plank does not require any constitutional amendments.
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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