-Caveat Lector-
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http://www.mises.org/fullstory.asp?control=1095
The Tax Shift Racket
By Llewellyn H. Rockwell, Jr.
[Posted November 25, 2002]
Every new president in memory has plotted a grand "tax reform," and theImage
outlines of George W.'s are becoming every clearer. The Washington Post
reports that the administration—particular treasury secretary Paul O'Neill—
is seriously considering a move away from the income tax toward a national
consumption tax.
The purpose is not to yield lower taxes. On the contrary. One Treasury
official quoted in the story complains that it is "inherently difficult to
measure income…there are just too many ways to minimize it." Neither is
anyone talking about eliminating the income tax altogether. The idea would
be to gradually shift from one method to the other as the predominant means
of scarfing up the people's property.
In other words, we may watch a repeat of an old Washington trick, called the
tax shift. The tax shift is one of the great games of government. In the
game, the government uses the prospect of lowering one tax in order to buy
support for raising another. The proposal to move from an income tax to a
consumption tax is a good example of the game.
The essential key to understanding the trick is to realize that the
government wants money and is going to get it one way or another. Zig
zagging from one method to another does not change the reality. But it can
fool the gullible. And it can raise a lot of money from affected groups
during the transition period.
One helpful way to understand this is to think of a robber who promises to
stop coming through your front door if you promise to leave open the back
door. So it is with the state that promises to stop taxing your income if
you let it tax your consumption. The issue is not the method; it is the
amount.
The case for the consumption over the income tax rests on these essential
claims:
1. The consumption tax is at least voluntary. Actually, it is just as
coercive as any tax. Under the income tax, if I earn income and don't pay
the tax, I can be fined and jailed. Under the consumption tax , if I want to
consume a tax item and don't pay the tax, I get fined and jailed.
It's true that I can choose not to consume that item. Similarly, under the
income tax, I can choose not to earn income. Nothing is voluntary if I am
not permitted to exempt myself. There is no such thing as a voluntary tax.
If there were, it would be called something else. (The lottery isn't a tax;
it is a government-run enterprise.)
2. The consumption tax doesn't tax production. Yes it does. Businesses don't
set their own prices, which is why they cannot simply pass on the
consumption tax to the consumer. If they could raise their prices without
its affecting their profits, they would have already done so. Imposing a new
tax on a business, ceteris paribus, the business will have to absorb the
cost of that consumer tax into its own operations. In this way, the
consumption tax is a tax on production, wages, research, investment, and
every other aspect of economic life.
3. Consumption tax is easier to collect. Assuming this to be true, why is
this necessarily a good thing? A tax that is hard to collect suggests that
it less tempting to increase. What's more, a consumption tax might be easy
to collect at 1%. But to replace the federal tax with a national consumption
tax would require a tax of some 25%, while some estimates even put the
replacement rate above 50%. Any tax on this level would throw markets into
chaos, create an overnight black market in everything, and give a great
excuse for massive despotism and mandatory record keeping.
4. The consumption tax doesn't tax savings. Generally this is true. But the
government should not be in the business of prodding us into a particular
pattern of saving and consumption. It should leave that up to us. Saving is
great to the extent it reflects individual preferences. Consumption is great
in the same way. But there is no way to know a priori what the right mix
should be. And think of this: the degree to which the consumption tax
discourages consumption is the same degree to which it does not raise
revenue. How does the tax-hungry state deal with that paradox?
As an aside, note that income saved today will be taxed twice, once when
income was taxed and once when consumption is taxed. This is grossly unfair.
Also, the consumption tax diminishes the value of savings. The only point to
saving is eventual consumption. The reduced purchasing power of the dollar
after the tax is imposed is imputed to the value of money available for
consumption, i.e. savings.
5. The consumption tax, whatever its problem, is at least not progressive.
Far too much is made of the flat versus progressivity issue. Think of it
this way. Would you rather pay a flat 40% tax, or finagle your way through a
system with 20 different rates ranging from 1% to 39% (all else being
equal)? If you knew that you would pay less under a progressive system, that
is the one you would favor. This why the flat tax has never gone anywhere
politically: it necessarily means raising some taxes while reducing others.
The champions of the consumption tax, particularly those who claim to
support free markets, need to redirect their energies, away from the method
of taxation to its level. They need to adopt the general principle that
whatever the existing tax, it should be lower and lower. Going back to the
robber analogy, the ideal system would be to have every door and window
bolted down solidly.
Let's not reform taxes. Let's eliminate them, starting with the income tax.
That is not unrealistic. The income tax this year will yield $1 trillion for
the federal government. Cutting that amount gives us a budget equal to the
federal budget of 1987. Was the government intolerably small back then?
Llewellyn H. Rockwell, Jr., is president of the Mises Institute in Auburn,
Alabama and editor of Lewrockwell.com. Send him MAIL. For more on all these
issues discussed here, see the Frederick L. Maier Taxation Archive.
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