Happy Tax Day!!

This year, thanks to a generous donation by the IRS to give us tax slaves two extra days to pony up our protection money, today is Tax Day. Have you gotten your forms filed?

It’s funny how this one time of year is when most people are inclined to reflect on exactly how much they pay in taxes, and what they get in return. Of course, few people actually resolve to do anything about it, but many people will reflect for a few moments before resigning themselves to bending over and taking it from our Masters in Washington.

It’s also the time when the Americans for Fair Taxation try to make a push for their proposal to end income taxation and replacing it with a national sales tax. They call it the “Fair Tax” (as if there could ever be such a thing.) I even got a note in my inbox late last week, indicating that activists from this group will be at the post office handing out material to late filers. Good luck to them!

People ask me all the time what I think about the Fair Tax. Some are liberals who really like to pretend that the current progressive income tax system is the proper tool to soak the rich (the fact that it doesn’t just goes to show how corrupt those nasty Republicans are). Others are conservatives who think (correctly) that the current system is a horrible mess, and think (incorrectly) that if we could just wave a magic wand, implement the Fair Tax, all our big government problems would go away. So they ask me, what is my take on the fair tax?

Like most “reform” proposals, I’m ambivalent, bordering on skeptical, about it.

Radio talk-show host and self-professed “libertarian” Neal Boortz has gotten quite a lot of attention in the past year regarding his support of this proposal. He even authored a book with the bill’s principle sponsor, Representative John Linder (R-GA), which has raced up the New York Times Best-Sellers list. The book goes into the nuts and bolts of the proposal as well as explaining the ideological rationale behind moving away from an income tax system. I won’t attempt to debunk the arguments of the book itself, beyond pointing out that Lawrence Vance did a marvelous job skewering Boortz and Co , by exposing the various lies and problems the “Fair Tax” proponents ignore and/or overlook. (Another Vance article on the subject appears here )

To these eloquent arguments, I add the following:

1. A Sales Tax IS An Income Tax

One man’s purchase is another man’s “income”. When you pay an “income” tax, which is deducted from your paycheck, you are in effect paying a tax on the sale of your labor. Economically speaking, a sales tax is no different from an income tax, as it just boils down to which perspective are we looking at a given transaction. Plus, the fact that the tax would be on retail purchases, rather than at various steps of production in the supply chain, means we will have to create various classes of taxpayers, who will have to keep all the appropriate records on what sorts of purchases they make, and for what uses, and will be monitored by a special tax collection agency. (Sounds like the IRS to me.) To boot, even the bill itself sets up such an agency, so any fantasy you might have that getting rid of the income tax will eliminate the IRS is simply pie-in-the-sky.

2. The Numbers Don’t Add Up.

Boortz and Co. like to throw around a bunch of numbers, insisting that, under the Fair Tax, while you would get to take home every dollar that you earn (ie. no more withholding), this “revenue neutral” tax will not result in any corresponding increase in any form of consumer prices. It’s patently naïve to believe that such shifting around the sources of tax revenue would result in such a scenario. If the Feds need to collect two-point-whatever trillion dollars, and they decide to relocate the source of that revenue from your paycheck over to a cash-out counter, no amount of fiscal alchemy is going to alter that. If that actually were the case, then why not simply abolish the personal income tax altogether? The end result is the same. I get to take home 100% of my paycheck, and the prices of goods that I buy are exactly the same. So why not? Intuition tells you, that you can’t shift a tax burden from one column and not expect it to appear in another column.

3. The Income Tax Isn’t The Root Problem

Government spending is. On this point, I happen to agree with Congressman Ron Paul (R-Tx)(perhaps the most principled…or rather, the ONLY principled…person in Congress). I saw Dr. Paul give a speech once, and he mentioned the Fair Tax, and whether or not he would vote for it if it hit the floor. His take was that, in the short run, it might offer some temporary relief from our problems, but as long as we ask our government to raise and spend $2.7 trillion dollars (and climbing) then the exact method of financing is irrelevant. A government with a budget that size has to redivert resources from the private sector, and the more resources rediverted, the bigger the drag on the economy, and the bigger the threat to our liberties.

Ask yourself a simple question… if the Federal Government’s budget was half of what it is now, would you really care how we financed it? If the FedGov, instead of the $2.7 trillion they want now, only demanded $1 trillion from the private sector, wouldn’t that mean there are more resources left in the hands of productive enterprise?

It is this last point that I think provides the most crucial objection to the Fair Tax. The Fair Tax is a red herring issue which blinds it supporters to the real problem. Instead of fighting to make real and effective change, supporters of the Fair Tax are implicitly saying that they don’t have any objection to Big, Expensive, Intrusive Government, they would just like to finance it differently. If all these “Fair Tax” supporters put their energy into eliminating as much wasteful government spending (but I repeat myself) as possible, we could really begin to reestablish liberty in America.

Or, to go one step further…if we insisted the Federal Government do ONLY what it was authorized to do by the U.S. Constitution, we wouldn’t need an income tax to begin with, as we could finance the FedGov through the tariffs and excise taxes already in place. Of course, this means giving up our favorite government programs in exchange for tax freedom. In fact, this was the “Great Libertarian Offer” proposed by the late Harry Browne when he ran for President as a candidate from the Libertarian Party. The theme of his 2000 campaign was to ask the voters a simple question: “Would you give up your favorite federal programs if it meant you'd never have to pay income tax again?”

So, for those of you out there chaffing from your tax load, I hope you take the time to rethink your view of government. Instead of trying to rearrange the deck chairs, why not focus on keeping the ship from taking on water? The problem isn’t how you pay your taxes, it’s what you pay for with your taxes. Demand change for that, and you’ll solve more problems than how much time you waste filling out silly forms.