[Update: Tyler Cowen on the VAT]
“Tax Reform” is UNlibertarian
Calls for tax reform of a distraction (no offense, my naive, youthful advocacy of a national sales tax). For good material on this see: Rockwell, The Tax Reform Racket; Rockwell, Diversions; Rothbard, The Consumption Tax: A Critique and The Myth of Neutral Taxation; and The Fair Tax Fraud and Flat Tax Folly by Laurence Vance. In Power and Market (ch. 4, Binary Intervention: Taxation), Rothbard lays out a taxonomy of the methods utilized by the state to confiscate private property and how each tax uniquely distorts the free market. And as Rockwell writes in The Tax Reform Racket:
“Is there a need to reform taxes? Most certainly. Always and everywhere. You can always make a strong case against all forms of taxation and all tax codes and all mechanisms by which a privileged elite attempts to extract wealth from the population. And this is always the first step in any tax reform: get the public seething about the tax code, and do it by way of preparation for step two, which is the proposed replacement system.
Of course, this is the stage at which you need to hold onto your wallet.
Bait and Switch
Hardly a day goes by when I don’t receive an email from someone who has a grand plan to reform the tax code, replacing the current system completely, with something else. That something is usually the Value Added Tax or the National Sales Tax. The people promoting this plan long for a world in which they are permitted to keep all the money they make and only the purchasers of goods and services pay.
Now, there are many grave problems with the VAT or the NST, not the least of which is that it would have to be more than 20% or perhaps as much as 40% in order to raise “enough” revenue. Then there are the problems of enforcement. The US would instantly become host to the world’s largest underground economy, which in turn would give a rationale to the central state to invade our businesses, homes, and bank accounts like never before. It would be essentially unenforceable and lead to even more a war of the government against all, complete with more spies, agents, and entrapments of all sorts.
But there is another danger to promoting a VAT or a NST. It might actually convince someone in Washington to give it a try. And instead of replacing the whole tax code, the politicians might try to introduce the new one at the seemingly low rate of 1 percent or 3 percent. If they ever get away with this, look out. It will inch up year by year as the political class discovers yet another way to loot us.
This points to a general danger of the idea of a replacement tax. I hear of these plans all the time. People say, let’s get rid of the tax I don’t like and replace it with one I do not pay. So people will propose getting rid of the capital gains tax and instead increase taxes on inheritance. Or they say, let’s get rid of inheritance taxes and put a higher tax on Americans working abroad. You can think of many of your own variations on this. The danger here is not in advocating the repeal of one tax. That is something we should all favor. The danger comes from advocating a new tax to take its place. If you know the way politics works, you know that the new tax will be enacted and the old one not repealed.
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Never Trust a Thief
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For my part, I’m a champion of loopholes, as was Ludwig von Mises. He was attending a conference in the 1950s, at which economists were all denouncing loopholes and he rose to their defense. “Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes,” he said. “Thanks to these loopholes this country is still a free country and its workers are not yet reduced to the status and the distress of their Russian colleagues.”
A loophole is nothing more or less than a chance to keep your own money. It is not a subsidy. It is not tax spending. It is not corporate welfare. It is not a special privilege. It is just a window of freedom. Loopholes should be expanded as much as possible. There should be ever more of them. A completely loopholed economy, where there were maximum opportunities for not paying tax, would finally arrive at the idea of freedom.
Thus do I suggest we never bite when someone dangles on a hook the idea of closing loopholes. And this raises the question of precisely what we should support.
The Lower Tax
The only tax plan anyone should trust is the most simple possible: the one that proposes to lower existing taxes. I really must say this again because it is the most important single point you can remember when evaluating whether to support a tax reform or not: the only trustworthy plan is that one that proposes a lowering or elimination of an existing tax, period. That is the bare minimum. An ideal reform would also propose equivalent spending cuts. In fact, in the most strict sense, there can be no tax cut without spending cuts since we must all pay, one way or another, for the burden of government as measured by spending. But we must leave that aside for now.
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The Red Flag of Reform
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What is the end result of tax reform? Well, we have had reformed taxes frequently in the last century, and you need only look at the rise in federal revenue to see where this has gotten us: ever more of our earnings going to Washington, ever fewer choices on how we use what remains.
Let me close with a proposal that we abolish the income tax. It took in $873 billion last year. If we cut the budget by that amount, we would end with a completely gutted federal budget, right? Actually, that is not true. We would end up with a federal budget of about $1.5 trillion, where it was in the last year of Clinton’s second term. If anyone thinks that the federal government was too small back then, I can only recommend a complete education in economics, politics, and the truth about human freedom.
Thus do I end this talk with a call, not for reform, but for an end to the income tax. It should be replaced with nothing at all. In any case, that would be a good first step.”
Update: See also Rothbard, “Big-Government Libertarians,” Rothbard-Rockwell Report (Nov. 1994):
Opposition to taxes in fact, is being weakened across the board. Cato has recently come out in favor of the well-financed campaign to eliminate the “personal income tax” and to replace the revenue completely by a national sales tax. The Old Right, or older paleo call that I remember fondly from the days of my youth, was to repeal the Sixteenth Amendment and to abolish the income tax, period. The current variant is a very different proposition. In the first place, it falls for the slogan first foisted on the conservative movement by the supply-siders and then adopted, left and right, by virtually all economists and alleged statesmen: that whatever happens, and whatever changes are made in the tax laws, that the changes must be “revenue neutral,” that is, that total federal revenue must never fall.
It is never explained how this axiom got smuggled into alleged conservative or free-market doctrine, or why in Heaven’s name total tax revenues must never be allowed to fall. Why in blazes not? To the common answer that we have to worry about the federal deficit, the proper reply, which no one seems to make any more, is to cut government spending by huge amounts; and that means, of course, the old-fashioned definition of “budget cut” as an actual cut in the budget, and not its current meaning of a cut in its “rate of growth” or a cut from some presidential or congressional projection, based on inevitably shaky assumptions, of future growth in spending. As pointed out recently in the Mises Institute’s Free Market newsletter there are several grave flaws in the idea of replacing the personal income tax by a national sales tax.
In the first place, contrary to the alleged “realism” or “pragmatism” of this proposal, it will not, in practice, result in repeal of the income tax, but rather in adding on of the sales tax to the current rotten tax structure. Secondly, if the “personal” income tax were eliminated, the corporate income tax would remain. In that way, the hated IRS Gestapo would remain intact, examining records and poking into lives. Moreover, a 30-percent sales tax would also require heavy enforcement tactics, so that a new division of the IRS would soon be poring over the records of every retailer in the country. It seems to me that to foresee these consequences does not take a Ph.D. or extensive theoretical acumen, which leads one to question the bona fides of outfits advocating this program.
Update: See Lowering Taxes Without Spending Cuts
“Suppose that you want to destroy a city. Should you bomb it, or would it be sufficient just to impose rent control?”
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