I & I Editorial BoardThe federal income tax is abusive. It is inconsistent with liberty. It has, as Chief Justice John Marshall noted, the power to destroy. There is nothing positive to be said about it. It cannot even raise government revenues efficiently. As we said a year ago, of all the good Donald Trump could do in his second term, eliminating the federal income tax would be one of his greatest achievements.
It’s clearly one of his goals.
“As time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replace the modern-day system of income tax,” Trump said during his State of the Union address.
It’s unlikely, though, that there will be a one-for-one swap between the two.
“To put it simply, the math just doesn’t work,” said Alex Durante, Tax Foundation senior economist.
Just as Trump pointed out, tariffs were at one time the primary source of federal revenues. But the government was smaller then (and should be far smaller now), not only in nominal terms but in relative terms, as well.
In 1900, federal revenues as a portion of the gross domestic product were a mere 3%. The portion shot sky high to almost 20% in 1945 to fund the war effort. The peace dividend that followed was both meager and brief. From 1952 to the present, it has bounced around in tight neighborhood bounded by a low of 14.4% in 2010 and a high of 19.8% in 2000. Last year, it was roughly 17%.
Feeding the rapacious federal Leviathan today would require either a significant bump in tariff receipts (not a good idea) or a sharp shrinking of the size and scope of Washington (a beautiful idea).
Neither, of course, is likely.
But our friends at the Committee to Unleash Prosperity point out that a national sales tax of 18% “could replace the federal personal income tax, the capital gains tax, the corporate tax and the dividend tax.”
“Imagine that America had no income tax. This would be the greatest wealth and job generator in world history. The only problem would be that everyone in the world would want to come here. We’d need a bigger wall.”
Without income taxes, capital gains taxes, corporate taxes and dividend taxes, Americans would not only enter into a new era of economic freedom, they would have many more hours to spend as they please — working, relaxing, traveling, the list is endless — because the burden that requires them to burn more than 7.9 billion of their hours complying with IRS filing and reporting requirements would be lifted.
To understand how this translates into more approachable numbers, we go to Scott Hodge and Claire Rock of the Tax Foundation, who have calculated that the time and labor Americans waste on tax preparation “is equal to 3.8 million full-time workers doing nothing but tax return paperwork — roughly equal to the population of Los Angeles — and nearly 46 times the workforce at the IRS.”
“If we assume a reasonable hourly wage, the 7.9 billion hours Americans spend complying with the tax code costs the economy roughly $413 billion in lost productivity,” they say. “In addition, the IRS estimates that Americans spend roughly $133 billion annually in out-of-pocket costs to comply with the tax code. This brings the total compliance costs to $546 billion, or nearly 2% of GDP.”
The IRS is also a booted agency, by which we mean it has the administrative leverage and inclination to wreck people’s lives. We again bring up the story of Dan Pilla, who has spent decades helping Americans with IRS problems avoid the cruel treatment he experienced as a teenager. As an 18-year-old, he sued the federal tax collectors because he had “literally stumbled onto an area of the law that deals with taxpayers’ rights and limits the IRS’ power” after he figured out “the IRS was proceeding illegally to seize” his family’s home.
That would not happen if Washington were to replace its revenue-collecting system from one that has the power to destroy to one that is more civilized.
— Written by the I&I Editorial Board
So if income tax is replaced by a national sales tax, will my Roth money buy things tax free, e.g., with a debit card connected to my Roth? Millions of Americans have billions if not trillions in their Roth accounts where 1) they have already paid taxes and 2) they have been promised tax free growth in perpetuity.
It’s simple, if we still have huge trade deficits, it means tariffs are too low. Who cares if Mercedes, Toyota and Hyundai can make a profit in this country? If their factories are running to make cars for the American market, it means our factories aren’t.
Until the local taxing authorities realize that the population has suddenly come inoperable all this “free money” and decide to tax it. Right back where we started.
In possession of all this “free money”. Not sure what happened there.
Typical government solutions follow a similar pattern…
Want more of something? “Incentivize” it…
Want less of something? Tax it…
Even if we solve or abolish the income tax, yes we would be “free-er” than before… We’d still be pretty much “Slaves to the State” as most all States have the archaic “Property Tax” systems. Do we ever really truly own something if we have to pay taxes into perpetuity?
Agree the “Leviathan” needs to be cut to size.
We need to use this moment to do something truly different; not just a rehash of an Olde System. We don’t need a sales tax or a wealth tax, we need a transaction tax. A simple x% tax on money transferred out of a bank account. When your boss pays you, he pays the tax to transfer the money to you. When you pay your phone bill, you pay the tax. Money is only taxed when it moves, and taxed uniformly. This accomplishes many things:
Your employer will pay 1% to transfer money to you – either through check, electronic transfer, or conversion to cash. You will pay no tax to deposit this money. When you pay your cellphone bill, buy groceries, pay the babysitter – either through check, electronic transfer, or conversion to cash – you will pay 1%.
The tax is assessed at the bank level, exactly like ATM fees. The banks already have the accounting software to handle this. It would be completely transparent, predictable, and stable. Auditing several thousand banks will be far easier than 300 million people
Several things will then occur:
1) Everyone will always be 100% in compliance. You will never, ever, ever have to worry about whether or not you are following the tax code ever again. In fact, it will become impossible for an individual to *not* be in compliance. The banks will handle all the auditing and payments. Disputes over taxes will occur between the IRS and bank representatives in boring meetings that we never need to hear about.
2) No one will ever have to file anything again. Ever. You will never have to reveal any personal details about your life or business to a bureaucrat again. No more ridiculous forms. No more audits. No more deadlines. Ever.
3) The entire IRS could be reduced to handful of employees and a few servers in some basement in DC that no one ever needs to see or hear from.
4) It will capture alot of black market transactions, as well – so when you take cash out of an ATM to pay your heroin dealer, we’ll get x% of that, too.
5) Companies like Google will have no incentive to take jobs or money out of the country.
6) It provides a slight bias to encourage savings… money is not taxed, unless it is spent. So, in reality, the tax is “optional”… you only pay it, if you spend.