Archive | September, 2014

Walt, here’s why you’re wrong about the Fair Tax.

2 Sep

Walt,

I have a great deal of respect for you as a noted Libertarian activist and the founder of Nolanchart.com. However, you were completely wrong about cyber-currencies, as I explained in my blog posts here and here. And although I heartily agree that taxation is theft, I believe that your objections to the Fair Tax are also somewhat misguided.

I am no gradualist. If you brought me a magical button, and said “Push this, and no tax will ever again be collected, and no monopoly of coercive force will ever again exist.”, I would push it in a heartbeat. But try getting that bill passed in Congress. I support the Fair Tax because I believe clear distinctions can be made between the effects on the economy of one tax policy over another. Specifically, I disagree with your assertions that the Fair Tax merely enforces the status quo, and that it shifts the tax burdens onto the poor and away from the rich. I continue to insist that reducing state expenditures to zero, which I don’t know how to do, and reducing the harm to the economy imposed by the tax regime, which I believe can feasibly be done by enacting the Fair Tax and repealing the 16th amendment, are separate issues. I believe that one can advocate for the achievable mitigation of an evil, while simultaneously desiring the much less achievable total elimination of that evil.

So first, let us consider whether the Fair Tax merely perpetuates the status quo. I will assume that your justification for this argument is the well established fact that the Fair Tax is designed as a revenue-neutral proposal, that is, its enactment will not (in theory) increase or decrease federal revenue. However, the amount of federal revenue is not the only factor in the status quo.

1. In addition to the drain on the private economy represented by revenue extracted, there are tens or maybe hundreds of billions of dollars in compliance costs associated with the existing tax regime. These costs do not benefit anyone other than accountants who sell tax compliance services to taxpayers. But these costs are not simply waste, they actually enable the most intrusive and anti-liberal bureaucracy of the American Imperial State. No other institution in our society has a greater on-going impact on otherwise peaceful and honest citizens than the annual tax return imposed by the IRS under the existing tax regime.

Under the Fair Tax, these costs would almost entirely disappear and be returned for productive investment in the private economy, and the tax compliance bureaucracy would entirely devolve from the federal to the state level, and cease to intrude into the private affairs of citizens in any way. This is a real change in the status quo that I can support even though it falls short of reducing state expenditures to zero.

2. The existing tax regime exists primarily to serve the interests of politically connected parties. Practically every word in the countless thousands of pages of the federal tax code can be traced to a specific objective of some lobby.

Under the Fair Tax, the unfair advantages in the tax code obtained by lobbying disappear. Future lobbying efforts will be restricted to obtaining federal contracts for the provision of goods and services, and obtaining regulatory advantages, but not tax advantages, over competitors. This represents a significant reduction in lobbying activity and the attendant potential for political corruption. Perhaps not an earthshaking change in the status quo, but still one that I can support.

3. Under the existing tax regime, U.S. businesses are harshly disadvantaged in global commerce. Putting aside tariffs, foreign producers have no embedded costs imposed by the U.S. tax code in the prices of their goods sold here, while domestic producers are burdened by onerous tax costs on goods sold abroad, including not only corporate income taxes, but also innumerable other taxes that may or may not add to a producer’s costs under the tax code, depending on that producer’s success in currying political favor, as noted in the previous point.

Under the Fair Tax, all producers, foreign or domestic, will have exactly the same embedded cost imposed by the tax code, 21% included in the price of new goods and services sold to end users in the domestic market. Domestic producers will have no embedded costs due to U.S. taxes on goods and services sold in foreign markets. This is a total reversal of the injurious policies affecting domestic business competitiveness in the current tax structure, and a huge change in the status quo which I support, even though it does not amount to total strangulation of the state.

4. Under the current tax regime, the state asserts the right to extract taxes on the income of American citizens earned anywhere in the world, and uses the implied threat of (either using or withholding) its coercive military power to impose its intrusive financial reporting requirements on foreign financial institutions. This is one of the clearest indications of the essential nature of the American Imperial State. Not surprisingly, this has made it increasingly difficult for American citizens living or investing abroad to obtain necessary financial services.

Under the Fair Tax, the issues of U.S. tax compliance will be restricted to the borders of each of the individual States, and American citizens will be free to pursue global financial opportunities with no interference from federal tax farmers. Another significant change in the status quo which I support.

I could go on, but now I would like to turn to your second objection, that the Fair Tax is unfairly burdensome to the “lower classes” and more advantageous to the “higher classes” than the existing tax code. I am assuming that you are using the term “class” to denote income level, not net worth or social status predetermined by the circumstances of birth. My refutation of this assertion is somewhat involved, and I hope it does not prove too tedious.

Rather than try to analyze the impacts of various tax schemes at differing income and spending levels, I will approach the question from a somewhat deeper level. One way of classifying tax schemes is by establishing two major categories, which I will call transactional taxes and recurring taxes. In the first category, a tax liability is triggered (i.e. a theft occurs) when a specific change in status, such as ownership or location, occurs. Examples are income taxes, where a change in ownership of wages or capital goods occurs; sales taxes, where a change in the ownership of a consumer good, or compensation for the provision of a service, occurs; and tariffs, where the status of a good changes as it crosses a border. A recurring tax is a liability imposed periodically. Examples are property taxes, licensing fees, and mandatory insurance premiums. For this discussion, I will ignore the second category, since virtual all of the federal tax regime that would be eliminated and replaced by the Fair Tax falls into the first category.

The Fair Tax is typically characterized as a sales tax or consumption tax, as opposed to an income tax, implying that it is the buyer, and not the seller who pays the tax. But in reality, both are simply transactional taxes imposed on the seller, when a sale occurs. In the case of the income tax, the seller is the wage earner who sells his or her labor to an employer, or a self-employed producer who sells goods or services. In the case of the capital gains tax, the seller sells an appreciated capital asset. In each of these examples, it is clear that it is the seller who is compelled to surrender a portion of the funds received in the transaction to the tax authority.

In the case of the Fair Tax, as any sales tax, it is commonly asserted that the buyer pays the tax. This is incorrect. The buyer pays the price set by the seller (even though the full, tax inclusive price is typically not on the price tag), the seller receives the money and remits a portion of that money to the taxing authority. The buyer does not remit a portion of the shirt or the hamburger that he bought to the tax man. It is always the receiver of money, i.e. the seller, who ultimately pays the tax.

Viewed in this light, the shift from income tax to the Fair Tax represents a shift from taxing the income of wage earners to taxing the income of producers of goods and services. Since the “lower classes” earn the bulk of their income from wages, while the “higher classes” typically earn the bulk of their income from the production of goods and services, it is difficult to see how this shift could be considered disadvantageous to the poor vis a vis the rich.

While this may seem counter-intuitive, it should be obvious that production is the only real source of value available for extraction by taxes. And given that the Fair Tax is designed to be revenue-neutral, the total cost imposed by taxation of goods offered by producers under the Fair Tax must be less than or equal to the total cost under the current tax system (actually less than, because of the tremendous reduction in compliance costs). This, in turn, implies that the general price level of consumer goods will remain the same, although there will surely be some price variations across different classes of goods depending on whether these goods are relatively subsidized or penalized by provisions in the existing tax system. In other words, the cost of all revenue generated under the current system, plus all of the cost of compliance, is already embedded in the prices of market goods, albeit in a bewildering variety of guises. Under the Fair Tax, the same cost of extracted revenue, but almost none of the compliance cost, is applied to all consumer goods in a perfectly uniform fashion. So although the relatively poorer wage earner will find the prices of subsistence goods equally affordable under either regime, his income in the form of wages will no longer be taxed at all. Meanwhile, relatively richer producers will continue to surrender taxes on same level of production as before. Nothing in this strikes me as a shift of tax burden from the rich to the poor.

So yes, Walt, everything I have written here simply refers to two different methods of conducting a criminal enterprise. Yet I still contend that one method injures the crime victims less than the other, and should therefore be implemented if possible. I look forward to your response.

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