End the Income Tax

Today is tax day.  Despite President Trump’s signature tax reform, I ended up owing money to the feds for the first time in my adult life (although I’ll be getting a bit back from the State of South Carolina).

The income tax used to be unconstitutional in our Republic.  Indeed, the primary way that federal government gained revenue was from tariffs on imported goods and excise taxes on certain products, like whiskey.  Alexander Hamilton advocated for high protective tariffs to protect young domestic industries from British manufacturers, who were “dumping” cheap British goods into the infant nation (a practice China has taken up today).  Only during times of war, such as the American Civil War, did Americans have to endure a tax on incomes.

Like most odious, liberty-killing measures, the income tax was a Progressive Era project, ratified in the 16th Amendment (followed shortly thereafter by the 17th Amendment, which made US Senators directed elected, and the 18th Amendment, which prohibited the manufacture, sale, and distribution of alcohol).  Progressive reformers assured Americans that only a very small proportion of Americans would ever pay the income tax, which was graduated from the beginning.

That claim was true… for the first year.  Immediately, Congress began ratcheting up tax rates and requiring more Americans to pay it.  Governments are hard-pressed not to exploit a newfangled method of raising revenue.

The income tax is not all bad:  it’s a more stable source of revenue that tariffs, which depend upon foreign imports.  No imports, no taxation.  Advocates for the graduated income tax, like Tennessee Congressman and future Secretary of State Cordell Hull, argued that, in the event of a major war in Europe (which broke out a year after the 16th Amendment was ratified), international trade would fall, bringing collected duties down with it.  That was a prescient observation, and a strong argument in favor of some kind of domestic tax.

That said, the income tax is incredibly invasive.  Every year, I lament that the federal government has to collect so much information about me:  where I worked during the fiscal year, how I saved my money, etc.

According to Scott Rasmussen, 52% of Americans favor repealing the 16th Amendment.  Count me among them.  The income tax gives the government far too much influence over our lives, and the federal tax code is so byzantine and full of carve-outs and exemptions, it’s become the purview of the well-connected.  It’s become a corporatist monstrosity.

What would replace the income tax?  Given that it’s likely never to be repealed—governments don’t typically diminish their power (or access to other people’s money)—the question is largely academic.  Still, it’s worth considering.

While I think tariffs can serve a useful purpose (see also: bringing China to heel), and that there’s an argument for some mild protectionism, high protective tariffs like Republicans championed after the Civil War would be ruinous to trade.  The deadweight loss (destroyed economic activity) associated with tariffs—especially from the inevitable retaliatory tariffs other nations would pass in response—would do more harm than good, and could result in a Smoot-Hawley Tariff of 1930 situation (i.e., the Great Depression).

The only realistic alternative that I see currently (from my admittedly myopic position) is a national sales tax.  There are some serious drawbacks to this approach, to be sure, but it would be the cleanest, most efficient way to generate revenue.

A national sales tax would encourage saving and work, both of which are currently disincentivized under our current tax regime.  Instead, purchases would be disincentivized, which would hurt sales, but encourage people to hold onto more of their money.  Further, it would not require the government to keep elaborate tabs on every worker; the Internal Revenue Service could be greatly reduced, or even eliminated.

Of course, any tax is a necessary evil, and a national sales tax would make it more difficult for high sales tax States to raise revenue (as it would limit those States’ ability to increase their taxes if necessary).  It would also slow purchasing, and necessarily raise prices (by definition, especially if you’re tacking 15-25% on top of a good).  There’s also the question of whether a sales tax should just apply to consumer goods, or if it should be an uber-expensive value-added tax, with each economic transaction along the chain of production getting taxed.

Those are sticky questions for wonkier types than I to sort out.  But wouldn’t it be nice to build an economy on the production of real value—of stuff—rather than one built on ever-expanding sales, purchasing on credit, and debt financing?

Regardless, the federal income tax is a major imposition, an invasive intruder that enters our lives every April, borrowing from us (without interest!) throughout the year, and intimidating us with the looming threat of disruptive audits.  It seems everyone would be happier—even, in a way, the feds!—if it were eliminated.

3 thoughts on “End the Income Tax

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