Though it is currently overshadowed by more acute economic concerns about the national debt and budget deficits of the federal government, the issue of taxation is nevertheless one of perennial interest and which will never fully be placed on the backburner. We’ve fought revolutions over it, overturned constitutions because of it, and it still remains one of the primary subjects about which we like to grouse and complain. How and to what extent should a free society fund its government? This is a question which has implications not only for the means of taxation itself, but for the reasons why we allow ourselves to be taxed, for the priorities which our nation sets for itself. In the article below, I would like to present some reasons why I prefer (to the extent that any taxation can be “preferred”) a model of federal taxation through consumption taxes over the now typical model of funding the federal government, in good part, through personal and corporate income taxes (according to these Concord Coalition numbers, personal and corporate income tax receipts made up 47.4% and 7.9% of total federal inlays for FY2011, respectively). I’m not intending to argue for any one particular scheme for consumption taxation (such as the Fair Tax or the third “9” in Herman Cain’s 9-9-9 plan), but to address it conceptually.
First, I would like to state that any government, no matter how limited in scope or faithful to its constitutional boundaries, will require some taxation to fund its operations. The Founders understood this, which is why not only our present Constitution, but even the previous (and much more decentralized) Articles of Confederation provided taxation powers to the government. Within a commonwealthian system such as envisioned by Locke and other early theorists, every individual who participates in the commonwealth agrees to give up something so as to gain something – in this case, yielding over some of their wealth so as to maintain the protections and conveniences of civil society. Every system, no matter how libertarian, will see some necessary economic inefficiency introduced through taxation (of whatever sort) as a result of the demands for funding the means of defense (externally – the military, internally – police and judicial systems) and those things that are determined to be useful for the advance and prosperity of the general welfare and the protection of property and its rights (e.g. roads, civil and contract courts, etc.) As a result, some taxation is inevitable. Anyone living in a civil society should expect that they will have to pay taxes as a part of living in that society. The argument comes into what type and to what extent the taxation will take.
It is my belief that the income tax – not just the mechanics, but the very concept itself – is unconstitutional, at least in the sense of not conforming to the foundational understanding of liberty embodied in the products of our Founding Fathers (the spirit of the law), even if it is not in the strict legal sense (the letter of the law). There is, after all, a reason why the income tax had to be “legalized” by the 16th amendment – prior to then, it was generally understood that a tax on a person’s income itself did not fall under the prescribed powers of Congress. Consumption taxes, of which excise taxes (as we employ the term today) are a subset, were among Congress’ taxation powers, per Article I, Section 8. Indeed, in arguing for the new Constitution, Hamilton in Federalist #12 advocated funding the federal government via consumption taxes and tariffs, because they were fairer, easier to collect, and not destructive to property and its development. He argued against income taxes, and it is clear that income taxes were not the original intention of the Founders for funding the federal government. So even though the income tax is technically legal because of an amendment in 1913, it nevertheless is against the general spirit of limited government and the protection of liberty that underlay the Constitution when it was written and ratified. While “legal,” the income tax is not really “legitimate.”
Further, income taxation is unjust and immoral because it is the direct assessment from an individual of their labor. A man or woman who labors does so for the purpose of benefitting themselves. They contract with an employer to trade their time, skills, and energy to the employer for a set wage in return. When the government takes, say, 25% of an individual’s income, the government is essentially making that person work for it, rather than for their own benefit, for 2 hours a day, 1 ¼ days a week, 3 months a year. Essentially, that is slavery. Unlike with a consumption tax, where to some extent the choice to pay is voluntary and depends on the choice to spend, an income tax is a tax on the person himself. The only way to avoid paying it is to avoid working for your own benefit and advancement. Otherwise, a portion of the benefit from your labor is being taken and given to someone else. This is destructive of liberty, initiative, and entrepreneurial aspirations, and hence to property, both tangible and intangible.
Most immoral and unjust of all, however, is the present system of “progressive” taxation, in which the rates are adjusted such that it falls disproportionately heavily on those who produce and contribute most to our society. As most readers are likely aware, the “progressive” income taxation system is a key facet of the Communist Manifesto, and forms the centerpiece of pretty much every modern effort to create socialistic economic systems in which productive, successful individuals are punished and “leveled” or “equalized” with those who are not. The purpose for its existence is to take from those who contribute to society and give to those who don’t, all in the name of “fairness.” In essence, and as we have seen by practical experience, the “progressive” income tax is a way to enslave an ever-shrinking minority of producers among the rich and the middle classes to an ever-increasing majority of tax-consumers who are dependent upon government for their sustenance. The entire concept is simply a giant, liberty-destroying scheme to destroy the economic (and, pursuant to that, political and social) independence of those who don’t need or want the government to steal from others and give to them.
As such, for the liberty-minded individual, the income tax does not have much to recommend it. Even flat tax schemes, while avoiding much or all of the more immoral aspects of taxation inequality, still ultimately rest on a system whereby the individual himself, rather than his voluntary economic choices, is what is assessed by the government. While superior to the present system, flat tax proposals are not really the best alternatives.
There are also three positive reasons why I would favor consumption taxes over our present income tax, beyond the negative reasons given above.
First, consumption taxes would be paid by everybody. In essence, they are more “fair” than systems in which higher incomes net disproportionately higher levels of taxation through a graduated “progressive” structure. Those on the Left constantly talk about making the rich “pay their fair share.” Under a consumption tax, everybody pays their “fair share.” Granted, the rich will still pay more in tax, because the rich generally tend to buy more and more expensive things. However, with a consumption tax, there are far fewer freeloaders, people who consume resources provided by the government (services, infrastructure, etc.) without effectively paying in (and having payroll tax taken out, but getting it all back, or more, in EITC, low income assistances, etc. doesn’t count as “paying in”). Indeed, even people who don’t pay income taxes because their “business” or their labor is illicit (drug dealers, illegal aliens, and so forth) still end up paying a consumption tax. If a drug dealer buys a blinged-out Caddie, he still has to pay the tax on it.
Second, a consumption tax would help to make people more aware of just how much money goes from them and to the government in the form of taxes. One of the great deceptions in our modern payroll deduction system (which, for its designers, was a feature, not a bug) is that the average person is insulated from an understanding of just how much the government takes from their paycheck each month. By engineering the deduction into the system before the worker ever actually sees any of their money when they cash or deposit their check, the government is able to mask and ameliorate the impact of the income tax on our earnings. As it is, most people simply budget for what they will have “after taxes” and never give it a second thought. However, if everybody was paying a certain percentage on their purchases, and could more easily see just how much was going to Washington in a month or a year, more people might realize the effects of things like “rate of taxation” on their own lives.
Third, and as a consequence of the first two, a consumption tax would help, perhaps, to bring more and more people over into the camp of those who seek government parsimony in taxation and spending, once they began to more fully realize just how much the government really takes (and spends). If people have money in hand, and see it going to Washington, they will begin to consider the whole matter in a different light than they do when tax is just a skim off the top that they never see, and therefore rarely miss. People might begin to weigh how much they are really willing to give for government superfluities once they realize they have skin in the game. I would expect that calls for less spending, and the streamlining of the spending that remains, would arise, which can only be beneficial to the nation as a whole.
Obviously, no system is perfect, and there would be drawbacks to a consumption taxation system as well. One argument that has been made is that we simply don’t need to add on another layer of taxes to what we already have. I would agree – which is why I would like to see a consumption taxation system replace, rather than augment, the current income tax scheme. Sure, the government could always implement both, just as it can (theoretically) implement just about any other combination of taxes it would like. The problem here is not with a consumption tax, per se, but with maintaining consistent and sufficient citizen vigilance over our own government and its officials to keep their revenue-generating proclivities in check.
Another problem that could attend to a consumption tax system is the level of rate that would be required to actually fund the government to what was needed. Of course, a sales tax would make the cost of all purchases rise (though this is generally offset by having more money available with which to make purchases to begin with). Some estimates for the Fair Tax suggested rates as high as 18% to make it “revenue neutral” with regard to current income tax receipts. But then again, the long-term goal ought to be for the government to not be “revenue neutral,” but to instead see the need for tax income drop as the spending of tax monies goes down. That should be our ultimate end, regardless of what type of taxation we employ. I suspect that were we to move to a consumption tax system, we would see initially high tax rates that would begin to drop as my third point above began to take effect.
One last problem for a consumption tax comes from a “theory of the firm” perspective, which is that sales taxes can help to reduce economic specialization, not just economic growth. They could do this because they would encourage companies, especially large ones, to try to cut costs and streamline their operations by amassing within themselves more and more of the stages of production for their products, rather than paying a tax on the purchase of needed materials. For example, a company that produces airplanes might buy or start up a subsidiary that makes electronics and avionics, and might buy or start its own bauxite mine and aluminum smelters, so that it can produce all the needed parts internally rather than purchasing these materials from other companies and paying a consumption tax. As a result, specialization in the economy would somewhat decrease and there would be a trend towards autarkic oligopolism.
Nevertheless, I believe that the benefits to a move towards a consumption taxation system would outweigh the drawbacks, and would help to make our country both freer and more prosperous. We would no longer punish the producers and the entrepreneurial, and eliminating personal and corporate income taxes would make this country a place where people want to do business, live and work, and park their money for investment. While a consumption tax might not be able to fully fund the government (unless some government reduction takes place!), this coupled with tariffs (which is a whole separate issue) would help to bring businesses back and encourage them to invest in the USA.