Roger Buchholtz has written a series of articles we will be publishing over the next few days, explaining the advantages of a consumption based tax system.
The income tax destroys our freedom, punishes productive behavior (work, savings, investment, etc.), corrupts our representative form of government (by allowing the buying and selling of tax favors) and places American labor and business at a 20% competitive disadvantage to foreign competition (by embedding “business” taxes in the prices of American produced goods and services). A 2007 IRS study found that it collects only 67.9% of the tax due, with the result that the tax rate must be higher on those that do pay so as to fund the government. It cost Americans between $500 – $700 billion per year to comply with the current tax code, that’s ~$2,000 annually for every man, woman and child in the country.
What are the alternatives?
- A flat income tax would provide some partial and temporary relief. It would eliminate or reduce the graduated steps in tax rates, and would simplify tax returns, at least temporarily. This is what the Reagan tax reform accomplished in 1986, but all it did was to create a situation where the lobbyists and politicians could buy and sell the tax favors all over again. The flat income tax continues to embed taxes in prices so the 20% competitive disadvantage would not be solved.
- A value added tax (VAT) would (if the personal and corporate income tax were eliminated) eliminate tax returns for individuals and taxes paid could be returned to businesses when they export American made products so as to eliminate the 20% competitive disadvantage to foreign made products. Like foreign countries do to our products today, the U.S. could add the VAT tax to imported products so the 20% competitive disadvantage could be eliminated here in our domestic market as well. VAT taxes are paid to the government by businesses at every step of production at great administrative cost. The VAT and the associated high compliance cost are passed on to consumers in the form of higher prices. VAT taxes are generally not visible to the public (as they are embedded in prices) and this has typically resulted in higher taxes and bigger and more intrusive government (as in Europe).
- Excise and import taxes, duties, etc. are limited considerably by international treaty, WTO and other restrictive institutions and market factors. If we increase our import tariffs and duties, other countries would retaliate and our ability to trade internationally would be severely restricted. If our government budget was reduced to something near 10% of what it is today, these taxes could be considered as the primary source of revenue. While this may be a worthy goal, it will not happen overnight. To make no reforms until such a goal is attained is self defeating as we must be as competitive as possible before we have lost all of our productive capacity… and our ability to defend ourselves as a nation.
- The FairTax eliminates the 20% competitive disadvantage placed upon American labor and business by removing the taxes that are today embedded (hidden) in the prices of all American produced goods and services (including food, medicine, etc.). This is accomplished by having the only point of taxation at the retail counter, when a good or service is purchased by the consumer for personal benefit. It eliminates the $2,000 per year per citizen cost of complying with the current tax code. It eliminates the ruse that businesses pay taxes and makes our taxes 100% visible on every sales receipt, and this brings into play the natural limit on the level of taxation our founders intended. If we are aware of our taxation we can control it. It stops the practice of buying and selling tax favors between special interests and our elected officials and thus enhances our representative form of government. It allows citizens to keep the rewards (income) they have earned from their productive behavior and stops today’s practice of punishing such behavior by taxing income. It collects 96% of the taxes due, thus assuring that everyone pays their fair share. It returns to us our freedoms lost due to the income tax. For example, no longer will citizens be prohibited form discussing political matters in places of worship; no longer will we have to apply to the IRS for exempt status, then be restricted as to what we can say or do; no longer will citizens be guilty until they can prove themselves innocent; etc.
Looking at the political and economic impact of how we are taxed is vital. There is a reason why our Founding Fathers prohibited income and other head taxes and encouraged indirect taxes; and a reason why Karl Marx advocated a graduated income tax. One is to promote economic freedom and a free society, and the other is to destroy an economy and a free society.
A sales tax is an indirect tax similar to tariffs, duties, excise taxes, etc. Indirect taxes are, in essence, voluntary taxes. You can choose whether to buy something and if you so choose you pay the tax. The income tax is a direct tax that you must pay whether you choose to make a purchase or not… if you earn you pay. Property taxes are direct taxes, if you own (or rent)… you pay.
Our Founding Fathers had it right.
Economists generally agree that consumption taxes, like sales taxes/MI FairTax, are the least damaging to the economy and that income taxes are the most harmful to the economy. In essence, sales taxes do not punish productive behavior (work, saving, investing, etc.) whereas, income taxes punish this behavior by reducing the reward for the desired behavior. In addition, sales taxes are very visible, and if citizens are to be able to control the size and reach of government, they need to be aware of their true tax burden. Today’s “business taxes” are passed on to citizens in the form of a 22% hidden tax embedded in prices. Citizens can’t control that which is hidden from them. The MI FairTax eliminates these hidden taxes and citizens will be able to see their true tax burden for the first time in generations.
Roger Buchholtz is the president of the MI FairTax organization. (volunteer)
