Tax reform being on the agenda this last election, this guest post by Laurence Vance suggests there is only one decent tax reform that should be considered:
The best tax is always the lightest.
— Jean-Baptiste Say
There cannot be a good tax nor a just one;
every tax rests its case on compulsion.
— Frank Chodorov
There can be no such thing as “fairness in taxation.” Taxation is
nothing but organised theft, and the concept of a “fair tax” is
therefore every bit as absurd as that of “fair theft.“
— Murray Rothbard
Since the very fact of taxation is an interference with the free
market, it is particularly incongruous and incorrect for
advocates of a free market to advocate uniformity of taxation.
— Murray Rothbard
The real issue is total spending by government, not tax reform.
— Ron Paul
When it comes to the subject of taxes, many conservatives, some libertarians [and supporters of virtually all political parties] just don’t get it.
The Tax Foundation, a “non-partisan research think tank, based in Washington, DC,” has six “principles of sound tax policy” that guides all of its research and “which should serve as touchstones for good tax policy everywhere”: simplicity, transparency, neutrality, stability, no retroactivity, broad bases and low rates. Good tax policy “promotes economic growth by focusing on raising revenue in the least distortive manner possible.”
The Tax Foundation recently charged education tax credits with violating “the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code.” They should be eliminated, they said, “within a comprehensive reform package” for a number of reasons, among which is that “trading the elimination of education tax credits for lower marginal tax rates is good for economic growth.”
The Tax Foundation does a good job of answering the question of whether “the tax code is the proper tool to increase access to higher education and make college more affordable” (it isn’t), but the organisation’s proposal that the government should eliminate all education tax credits and use “the revenues to cut marginal tax rates across the board” is naïve.
The government simply can’t be trusted to not turn around and raise marginal tax rates the next time it “reforms” the tax code. And the fact that “trading education credits for lower tax rates” would “benefit the Treasury as well” means that the government would collect more money — which is always a bad thing.
How about proposing keeping the education credits and cutting marginal tax rates?
The Tax Foundation also recently weighed in on the subject of sales tax holidays. It is against them. Sales tax holidays “are periods of time when selected goods are exempted from state (and sometimes local) sales taxes.” Although “at first glance, sales tax holidays seem like great policy,” they “are based [says the Tax Foundation] on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform,” “introduce unjustifiable government distortions into the economy without providing any significant boost to the economy,” “represent a real cost for businesses without providing substantial benefits,” are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers,” and “impose serious costs on consumers and businesses without providing offsetting benefits.” Although sales tax holidays may eliminate taxes for some period of time, they “are not real tax cuts.”
But even if, from an economic and political perspective, everything the Tax Foundation says about sales tax holidays is true, there is one thing they have dead wrong: Sales tax holidays are not just real tax cuts; because they eliminate sales taxes completely, they are the ultimate and ideal tax cut.
And then there is Dan Mitchell, formerly of the Heritage Foundation, now of the Cato Institute, who blogs at International Liberty. He is “a long-time proponent of the flat tax.” One reason Mitchell supports the flat tax is “other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.” But because “a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point,” and “the two plans are different sides of the same coin” with no “loopholes,” even though he is “mostly known for being an advocate of the flat tax,” Mitchell has “no objection to speaking in favour of a national sales tax, testifying in favour of a national sales tax, or debating in favour of a national sales tax.”
But as I have said before, the flat tax is not flat and the Fair Tax is not fair.
Surprisingly, although Mitchell despises Obamacare, he believes “that there’s one small part of Obamacare that will have a positive impact”: the so-called Cadillac tax on expensive employer-provided health plans. The Cadillac tax:
- Will slightly reduce the distortion in the tax code that encourages over-insurance and exacerbates the healthcare system’s pervasive third-party payer problem.
- Is merely making workers more aware of costs that already exist.
- Discourages over-insurance, and this is already leading to some positive changes in the marketplace.
Although I admire and recommend the work of the Tax Foundation and Dan Mitchell, and regularly visit their websites, for a more libertarian view of sound tax policy, I suggest that we turn to Frank Chodorov and Murray Rothbard.
From his essay “Taxation Is Robbery,” here is Chodorov on the morality of taxation:
The Encyclopaedia Britannica defines taxation as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects.” That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is. In that statement of fact the word “compulsory” looms large, simply because of its ethical content. The quick reaction is to question the “right” of the State to this use of power. What sanction, in morals, does the State adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?
On this question of morality there are two positions, and never the twain will meet. Those who hold that political institutions stem from “the nature of man,” thus enjoying vicarious divinity, or those who pronounce the State the keystone of social integrations, can find no quarrel with taxation per se; the State’s taking of property is justified by its being or its beneficial office. On the other hand, those who hold to the primacy of the individual, whose very existence is his claim to inalienable rights, lean to the position that in the compulsory collection of dues and charges the State is merely exercising power, without regard to morals.
Taxation for social services hints at an equitable trade. It suggests a quid pro quo, a relationship of justice. But, the essential condition of trade, that it be carried on willingly, is absent from taxation; its very use of compulsion removes taxation from the field of commerce and puts it squarely into the field of politics. Taxes cannot be compared to dues paid to a voluntary organisation for such services as one expects from membership, because the choice of withdrawal does not exist. In refusing to trade one may deny oneself a profit, but the only alternative to paying taxes is jail. The suggestion of equity in taxation is spurious. If we get anything for the taxes we pay it is not because we want it; it is forced on us.
And as Chodorov explains in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens:
Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognise your need, not your right; but whatever we grant you for yourself is for us to decide.
The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.
All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects….
Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.
The libertarian approach to tax deductions and credits differs strikingly from those on the left and the right who want to simplify the tax code by eliminating these things to ensure that every individual and corporation pays some uniform and arbitrary fair share. Since the federal government is unlikely to ever eliminate the income tax, proponents of a free society should work toward expanding tax deductions, tax credits, tax breaks, tax exemptions, tax exclusions, tax incentives, tax loopholes, tax preferences, tax avoidance schemes, and tax shelters and applying them to as many Americans as possible. These things are not subsidies that have to be “paid for.” They should only be eliminated because the income tax itself has been eliminated.
A deduction or exemption is only a “loophole” if you assume that the government owns 100% of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy. Lowering the overall tax by abolishing deductions for medical care, for interest payments, or for uninsured losses, is simply lowering the taxes of one set of people (those that have little interest to pay, or medical expenses, or uninsured losses) at the expense of raising them for those who have incurred such expenses.
There is furthermore neither any guarantee nor even likelihood that, once the exemptions and deductions are safely out of the way, the government would keep its tax rate at the lower level. Looking at the record of governments, past and present, there is every reason to assume that more of our money would be taken by the government as it raised the tax rate back up (at least) to the old level, with a consequently greater overall drain from the producers to the bureaucracy.
Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, noton the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just.
In the literature on taxation there is much angry discussion about “loopholes,” the inference being that any income or area exempt from taxation must be brought quickly under its sway. Any failure to “plug loopholes” is treated as immoral.
From a libertarian perspective, the goal should be no coercive taxes whatsoever. To that end, any decrease in taxes or tax rates is a good thing and any increase is a bad thing; and any increase in tax deductions or credits is a good thing and any decrease is a bad thing.
No matter whom it benefits, no matter why the government does it, no matter who lobbied for it, no matter who supports or doesn’t support it, no matter how temporary it might be, and no matter how much complexity it adds to the tax code, any reduction in taxation, with a concomitant reduction in spending, is a very good thing indeed.
Laurence M. Vance is a columnist and policy adviser for the Future of Freedom Foundation, an Associated Scholar of the Mises Institute, and the author of Social Insecurity, The War on Drugs is a War on Freedom. Author, publisher, lecturer, freelance writer, the editor of the Classic Reprints series, and the director of the Francis Wayland Institute, he holds degrees in history, theology, accounting, and economics.
This post has been republished from the Mises Daily.