There is no excuse for today’s federal tax system. It obstructs wealth-creation and jobs. The only interests it serves well are those of the political class. When they debate among themselves about the proper level of taxation, it’s clear that they think the federal government can tax at any level they want.
Many people were enraged when it was revealed in May 2013 that the federal government’s taxing authority, the Internal Revenue Service, was playing favorites with tax-exempt organizations. Specifically, groups seen as hostile to big government (and therefore to its feeding mechanism, the IRS) were subjected to heightened scrutiny that amounted to harassment. In some cases, IRS officials leaked confidential information about disfavored groups to their political opponents. In response to this scandal, many have called for the reform of the IRS, but they miss the point. The IRS is politicized no matter which party is in power. No reform will change human nature. The real disgrace is that Americans—whose country was founded on individual freedom—cower before the political creation that is the IRS every April 15. The real disgrace is a tax code that is a monument to social engineering. The tax code rewards some groups for being “non-profit,” some for buying a house with debt, and others for having children.
The reasonable response to the monstrosity that is our tax code is the flat tax that Steve Forbes has so articulately proposed. A flat tax would make the IRS largely irrelevant and would take away the club that lets fallible politicians tell us how to live. A flat tax would abolish the myriad deductions that define the tax system. It would eliminate taxes on capital gains, corporations, dividends, and estates—all of which amount to quadruple taxation of individuals’ earnings.
The downside to a flat tax is that it might work too well. In a country filled with some of the most productive, entrepreneurial people on earth, the stimulation of growth could increase the federal government’s already abundant revenues. All that additional money in the treasury might fuel the government’s uncontrolled growth.
Now, the federal government has a necessary role in protecting citizens from foreign intruders, administering justice, and protecting property rights. It needs revenue, but not nearly as much as it receives. The best tax, therefore, might be a tax on consumption rather than income—what some call the Fair Tax. The first reason for such a tax is that in a free country, citizens should not have to prove their income to the federal government. Adopting a consumption tax and abolishing all other taxes and deductions would end the IRS altogether.
Second, even a flat income tax still puts a price on work. A sensible tax system would make work “free” while taxing consumption. Some will suggest that such a tax would penalize retailers, but people produce in order to consume. The wants of human beings are unlimited, so a light tax on consumption would have a negligible effect on consumption.
Third, even if a consumption tax did have a noticeable effect on spending, society would be better off. To return to my refrain, there are no companies, no start-ups, and no jobs without savings and investment first. If people avoid consumption, their savings will supply the credit to the innovators of tomorrow. All the products we enjoy today are the result of past savings, and a small national tax on consumption would free up enormous amounts of capital to fund the next Steve Jobs.
Fourth, a consumption tax would be blind. It would be hard for politicians to impose a graduated consumption tax with an eye on playing favorites. Instead, we’d all be equal before the tax law, as we should be.
Fifth, and perhaps most critical, a consumption tax is the only way citizens can starve the federal government. Theoretically, a consumption tax, unlike a flat income tax, would give citizens the power to pay the government less some years. This is particularly important when people are unhappy with the federal government, but it’s also important when we citizens are having a difficult year such that we’re consuming less. If we’re struggling, so should the government struggle through reduced revenue intake.
We don’t know for certain why Facebook co-founder Eduardo Saverin renounced his U.S. citizenship, and really it is none of our business. If he did it with taxes in mind, the problem is not with Saverin but with the tax code that drove such an entrepreneur from our shores. It is time to bulldoze this obnoxious affront to the free society that our Founding Fathers established at such great cost over two centuries ago.
Excerpted with permission from Popular Economics: What The Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics by John Tamny.