I couldn’t let April 15th go by without some mention of our wonderful federal income tax. One is tempted at this time of year to recall the adage that nothing in life is certain except death and taxes. Indeed, there are likely none left among us who can recall the time before the 16th amendment, allowing Congress to levy an income tax. On the other hand, that was only 100 years ago; death has been with us quite a bit longer. Just the same, neither death nor Constitutional amendments are often overturned.
The Obamas released their 2012 tax return this week; they made a bit less than last year, but they still have the free house, so I think they’ll be ok. Despite the hundreds of thousands they arguably earned, the effective tax rate they paid was just slightly over 18%, which isn’t too much higher than the much maligned rate Mitt Romney was vilified for, and approximately half of the top rate that the President fought for and won. Of course, the irony of these numbers is not lost on the President’s Republican critics. Never the less, all of the Presidents deductions are legal, and easily located somewhere in the thousands of pages of regulations in the current tax code. Actually, most of the reason for the low tax rate is attributable to the Obamas’ generous charitable giving to their preferred non-profits. The same could be said for Mitt Romney (though it wasn’t), and who also benefitted from capital gains regulations and other legal tax shelters. While one could label as loopholes deductions for charitable gifts and lower rates for capital gains than ordinary income, they are loopholes designed by the central planners for reasons. Such is the case with most “loopholes”, they are designed by those who consider themselves to be geniuses, and then used and abused by the scrupulous and the unscrupulous who actually are geniuses, or at least have enough money to hire geniuses.
The original idea of an income tax was sold to the public as a tax on the rich… sound familiar? I’m sure the middle class of the day was told that it wouldn’t cost them a “single dime”. The problem then, as now, is that there wasn’t enough rich people’s money; and the rich, like the rest of us, avoid taxes as much as possible. So the limits get pushed, the wealthy find loopholes, and the middle class inevitably feel the pain. You can talk all you want about justice and fairness, but the rich have the means to find ways to keep their money. In anything short of a fascist society confiscating a rich man’s wealth is about as likely as selling gun confiscation to a man with an AR-15 in his hands.
There was a time when leeches and bloodletting were considered good medicine. When sucking blood from a sick man did not cure him, which I imagine it seldom did, the answer was more leeches, more bloodletting. When hundreds of pages of tax code were not enough, more were added, and more, and more. The regulations intended by the planners to cage the elusive tiger of tax fairness, only provided an ever growing jungle for it to hide in. The rich with their lawyers and accountants easily navigate the regulations and use them to their advantage, while the rest of us are at the mercy of the jungle, and the IRS. The more people avoid taxes, the more regulations, intrusions, and IRS agents we need, to the point that the IRS now deems it appropriate to look at our personal e-mails without a warrant to try to track down cheaters.
It’s a complicated mess, but it doesn’t have to be. Consider the simplicity of the Thruway toll. You drive the road, you pay the toll. There aren’t special exits that rich people can use to avoid the toll… everyone pays. Cars pay one toll, big trucks pay more, but there are no exemptions. The problem isn’t in the tax, the problem is in trying to do too much with the tax system. If all we were trying to do is fund the government it would be easy, simple, and progressive. A simple national sales tax would make sense on many levels. Income is simply a precursor to consumption, and the wealthy do the most consuming by far. As in Florida, foreign tourists would end up paying much of the freight. Adjustments for the poor could easily be made in the form of rebates, prebates, or exemptions. Instead of looking into the private lives of 300 million citizens, the IRS would only need to keep an eye on a far smaller number of vendors. No tax forms, no record keeping, no audits. Simple. But funding the government isn’t all the tax system is for, so it can’t be that simple.
The tax system has become the proverbial carrot at the end of the stick by which the central planners can bribe people to do what the planners consider to be good. I won’t waste space with examples because emotionally we will often agree with the planners about what is good, and lose track of the question as to whether coercing the citizenry in a particular direction is a valid function of government in a “free” society. The concepts of central planning and a free society are mutually exclusive. A free people cannot tolerate some elected or appointed elite to “plan” their existence from Washington and continue to call themselves free. We know what is good and do not need that any should coerce us to do it. Likewise, planners will be frustrated by freedom, as the best laid plans of mice and men oft go awry. And so, having your life decisions decided for you is not consistent with freedom; and planning society is not feasible in the chaos of freedom, the two can not long coexist.
IMHO: Nothing speaks as clearly to the attempt of Washington to influence the legal decisions we make as the Tax Code. Freedom repeatedly frustrates that attempt as ordinary citizens prove themselves more intelligent than the elite planners. Like the leeches they are, the answer is always more bloodletting… more rules, more regulations, more IRS agents, more taxes. Funding the government need not be an overwhelmingly onerous procedure… but ordering the Universe is a little more complicated.
You’re calling for a tax system that is easy, simple, and progressive. A national sales tax would not be progressive at all and would be incredibly unfair as you are only making a distinction between the poor (who will get some sort of tax break) and everybody else (who will be paying the same rate). Even worse, as those on the lower end of the income scale are forced to spend a larger proportion of their income on consumption goods to cover their basic needs, they would, in fact, be taxed more heavily than those who are in a position to save a portion of their earnings. Besides, in our global marketplace such a tax could easily mean the end of the U.S. economy as we know it. A national income tax would would cripple domestic consumption and encourage imports, resulting in the necessity to impose significant import duties on practically every commodity, which, in turn, would make products manufactured and sold in the U.S. even less desirable.
Regarding the use of taxes as a corrective measure, what’s wrong with a tax system that rewards behavior that will benefit society as a whole, for example in the form of environmental incentives? We’re still free to do as we please as long as we don’t break the law.
@tsc444: My understanding of most consumption taxes is that provision is made for basic needs for everyone, to be sure that tax is not levied on that. A national sales tax would be progressive only in so far as the rich spend a greater portion of their budget on luxuries than middle class and the poor whose income goes almost entirely for needs. When the Obamas pay an effective rate of 18%, and the Romneys 14%, one needs to ask for all our efforts how progressive our present system actually is. Sales tax is a point of purchase tax, and despite a global economy purchases of most items and services continue to be purchased locally, as state sales tax coffers will attest. Transferring to a consumption tax would destroy at least one industry, the tax industry of IRS agents, accountants, Turbo-Tax, H&R Block… Beyond that, as you point out, there are always macro-economic consequences, sometimes unforeseen, and any transition would need to be gradual. My post was less to advocate for tax reform as to spotlight the coercive nature of the present code, and the complexity necessary to continually tweak and enforce it. There is the assumption that people won’t do things that benefit society as a whole unless they are rewarded on their taxes. Seems a little like having to pay your spouse to help with the housework! I’m sure that there are a few who would not do these things without the incentive, but in the end it is taking money from some to pay off others to do good things. Generally speaking, doing the right thing for greedy motives rather than a social conscience only invites abuse as regulation replaces morality.