Mission Statement

Mission Statement: This blog is dedicated to both political philosophy and application to current issues based on the ideas of limited government, free markets, and individual liberty. Additionally, this blog strives to create an atmosphere where intelligent discussions based on the principles of logic, no matter the viewpoints expressed in their conclusions, are not only welcome, but also thrive.

To learn more, feel free to read the introduction and subsequent posts which explain the aforementioned philosophy and purpose of this blog in more detail.

Tuesday, February 8, 2011

Issues 8: Budget III--Solutions from the Income Side

     In his State of the Union speech, the President made clear his desire to simplify the tax code. While this is certainly a good step, it wouldn’t hurt to also bring the Federal notion of taxation back into line with the Constitution while we are at it.
     Let me start with a brief history of one of our most contentious taxes, our income tax. The Constitution says that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” In 1894, Congress passed a graduated income tax on various sources of income. The next year, in Pollock v. Farmers’ Loan & Trust Co., the Supreme Court held various parts of the income tax Unconstitutional. Rather than removing the individual clauses that violated the Constitution, the US Government instead decided to amend the Constitution with the 16th Amendment, saying “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
     When the Constitution is not keeping up with changing times, it should be amended. Our Founding Fathers were intelligent enough to build in a mechanism of change, but that change should be applied to broad principles, not to creating loopholes to push an agenda. Making an amendment to say that in a certain instance the government need not abide by the Constitution is certainly an abuse of the amending power. Repealing the 16th Amendment and striking down any portion of the tax code that would then violate the Constitution would be a good start to simplifying the tax code and respecting the Constitution and its intent for governance.
     As I mentioned before, cutting the four programs of Social Security, Welfare/Unemployment, Medicare, and Medicaid would cut 56% of Federal expenditures. As they disappear, so would the need for much of the income the government currently takes. As the graph shows, 45% of Federal revenue comes from personal income tax, which could eventually be done away with. This income tax should be kept until the commitments to those programs are met, but be amended to be a flat percentage tax on all incomes, without credits, exemptions, or graduations; 10% would be an admirable middle goal. When the obligations for the dying programs are met, the income tax would expire altogether.
     In addition to personal income tax, payroll tax on business, corporate income tax, inheritance tax, and any other tax associated with Americans becoming more prosperous should also be done away with. An interesting academic publication, “On the folly of rewarding A, while hoping for B,” highlights the potential for unintended consequences in taxing prosperity. All of these various taxes should instead be replaced by a national sales tax. This tax would tax everything that a person or business buys in proportion to the price. I would graduate this tax, with essentials such as the sale of food, shelter, and clothing not being taxed, while basic items (toys for children, books, etc.) are taxed at perhaps a 10% rate, luxury items (jewelry, cars, yachts, etc.) are taxed at perhaps a 25% rate, and finally, harmful items (alcohol, tobacco, etc.) are taxed at perhaps a 50% rate.
     This national sales tax in place of income tax has several benefits. First, it gives every individual more control over how much of their money they keep and how much they pay in taxes. In an income tax, you are taxed a certain rate as you try to prosper, without recourse. In a sales tax, especially one where necessities for life are not taxed, a person has complete control over how much of their money they keep (useful if you are saving for a certain goal) and how much is surrendered through taxation.
     It has the added benefit of indirectly having those who can afford to do so pay more taxes. The more you can afford to buy, the larger share of the tax burden you will shoulder. Additionally, businesses will still pay taxes as they purchase items to keep their business running.
     There are also ways to generate income outside of taxing honest citizens. Some ideas include using the Justice system to generate revenue through more fines and less jail time, creating the dual benefit of more income and less expense. Other Justice adjustments may make it possible to generate government revenue. I will expand on these ideas in a later posting discussing the criminal justice system and how it also may be improved to be more of a benefit to society.
     Even without the Justice system modifications, the tax changes that I mention in this entry serve multiple purposes. First, they are fairer to all citizens. Second, they give every individual more control over how much of their money is kept and put toward ends they deem beneficial compared to how much is taken by the government. Third, it does all of this while ensuring that those who can afford to pay a larger share of taxes do so. Finally, it simplifies the tax code to be straightforward without the loopholes that many people use to pay less in taxes or to not pay taxes at all. The best part is that we can accomplish all of this while still maintaining the libertarian principle of limiting government’s involvement to bare minimums, allowing each individual the most freedom, and still supporting the necessary government functions through some taxation. Let’s be honest; no matter how taxes are distributed or collected, they suck. This way just sucks the least.


Mark Saxon II said...

In regards to the sales tax plan, I agree with some form of graduated tax. The basic premise is to not tax the necessities of life while ensuring that those who choose to live a life of luxury and therefore should be capable of bearing a heavier tax burden are held to the higher standard that they wish to display.

The hardest issue when somebody else decides what the necessities in life are, the situations they are familiar with are not the same as another's situation. For example, while a person living in a metropolitan area with multiple choices of reliable public transportation has no need for a personal vehicle, the family of the farmer who lives 40 miles from the nearest town sees it as a necessity.

At first, I was going to recommend a certain amount of "free" tax on an item, much like some local areas have homestead exemptions for property taxes where the first $10,000 of assessed value is not a part of the tax calculation. However, we are going for simplicity here, and somebody would have to make an assessment of how much to exempt from each range of products.

The solution to this is a single exemption based on the age of the product. You can say you have a need for a lot of things in order to maintain the quality of life expected in this country: clothes, shelter, furniture, appliances, and a vehicle. What is not necessary, though, is purchasing these items new. Simply because durable goods are no longer desired by the original owner does not mean that they are beyond their useful life, and nobody knows this more than the less financially well-off. We now run into another problem with simply not taxing a used item--that durable goods drop in value, however, after dropping to their lowest point, they begin to increase in value again as seen most easily with antiques and vehicles which begin to be desired again by the wealthy.

I think that the fairest solution is related not to the original cost of the item, but to the age of it. By taxing items which are less than 5 years old, you ensure that you are not taxing necessities for our desired quality of life. Once an item ages to 20 years, however, I believe it is agreeable to a reasonable person that it has reached the end of its life. Therefore, there is no sales tax on durable goods 6 - 20 years old.

The majority of manufacturers already put a date of manufacture on their products. It is already required of vehicles, and Dewalt Tools uses it to verify the validity of their unconditional warranties. Making it a requirement of the new tax code shouldn't be an extreme burden upon the manufacturers. This ensures that retailers of used items are able to verify the tax requirement of the items to be sold.

This plan also comes with an unintended bonus to the lowest classes as well. By living within their means, their tax burden to income would truly be minimal. It would also benefit them in giving them a way to more easily afford to keep their durable goods in the range of 6 - 20 years old as these should be more affordable without a tax burden.

I think that would be the simplest while also ensuring that our desired quality of life for everybody is maintained. Feel free to adjust the time frame within reason, or suggest a progression from regular tax, to none, to increasing.

Live Free said...

Mark, I have been wrestling with this and I am not sure what I think yet. I don't think the time stamp necessarily helps. What about consumables that are bought new and used quickly (food, clothes)? What about a guy who sells his 10-year-old Rolex?

I am starting to wonder if the best bet is to just make a straight sales tax percentage, without graduation? This accomplishes the same goal of "those who can pay more, do so," but keeps everyone paying some taxes.

I am not sure how to make it work specifically, but I am convinced the sales tax is the best form currently under discussion. Straight percentages seem to the best way to start, with adjustment from there. Thank you for commenting. Since I want this blog to be a discussion and not just me ranting, your input is vital, and I appreciate it.

The Heathen Republican said...

Wow, I didn't expect you to support sin taxes, especially at 50%. It sounds like you're basically advocating the FairTax. This is another time where I agree with you ideologically on a consumption tax, but I don't think it's realistic. At a minimum, we'd have to repeal the 16th amendment or we'll wind up with a sales and an income tax.

Live Free said...

I certainly agree with repealing the 16th amendment. After further inspection, I do think a flat sales tax would be better. I would only support the sin tax if the money was still be used to pay for healthcare--you know, you put yourself at risk to use more of the tax dollars, you put a little more into it.

The Heathen Republican said...

Forgive me for saying so, but supporting sin taxes doesn't sound very libertarian of you. What happens when we leave the left in charge of defining sinfulness? Bans on trans fats, peanuts, and soft drinks. No thank you.