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.