Yesterday we
looked at the income tax as a tax. Is it
unconstitutional? Is it just? We decided that if you can believe the United
States Supreme Court, the income tax was constitutional prior to the Sixteenth
Amendment . . . but only if it was levied unjustly. If it were administered justly, then it would
be unconstitutional! The Sixteenth
Amendment fixed that little problem, making an income tax levied justly
constitutional.
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| Adam Smith: Four principles of taxation. |
Frankly, if you
stop to think about it, an income tax is probably the most just form of
taxation, aside from a use tax, given Adam Smith’s Four Maxims of Taxation from
The Wealth of Nations, i.e., a tax
should be 1) proportionate to benefits received, 2) predictable, 3) convenient,
and 4) efficient.
And what do these
mean?
1)
Proportionate to Benefit. The way
Smith put it, “The
subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities;
that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.” There you go —
Smith favored an income tax as the best way of meeting the first principle of
taxation: people pay in proportion to the value of the benefits they receive.
2)
Predictable. Anyone who has ever
tried to figure out the Internal Revenue Code to determine just how much tax is
due should love Smith’s second principle: “The tax which each individual is bound to pay ought to be
certain, and not arbitrary. The time of payment, the manner of payment, the
quantity to be paid, ought all to be clear and plain to the contributor, and to
every other person.”
3) Convenient. According to Smith, “every tax ought to be
levied at the time, or in the manner in which it is most likely convenient for
the contributor to pay it.” In other
words, don’t make paying taxes so difficult that people have to hire lawyers
and accountants to calculate their tax liability. (This isn’t exactly the same as #2, although
it’s related.)
4) Efficient. This one might need a bit of explanation, as
it is the justification for not taxing people on what they need to live . . .
so that you can give it back in the form of welfare and job subsidies: “Every
tax ought to be so contrived as both to take out and to keep out of the pockets
of the people as little as possible, over and above what it brings into the
publick treasury of the state.” Under
the principle of efficiency, you tax on people’s ability to pay. Why?
Because it is inefficient (and kind of stupid . . .) to tax people who
can’t pay! This also gives a poke in the
eye to people who want to eliminate the income tax in favor of a consumption
tax, and give a rebate or refund to those in the lower income brackets. It is inefficient to spend money to collect a
tax, only to spend more money giving it back.
(Plus it gives the State a lot of power through the ability to control a
portion of people’s income.)
As an aside, we
wonder if anyone has ever really run the numbers to show how much money would have
to be collected and repaid, and what the tax rate would have to be to collect
that much? This is pretty crude, but it
gives an idea of what we could expect if the income tax and all other taxes
were replaced with a consumption tax for all levels of government.
First, of course,
the poverty level would have to be raised to around $17,000 from $12,000 for an
individual. You have to allow for the
additional money required to be paid in and refunded, which raises the prices of
all goods. To be fair, every single
taxpayer must receive a refund of all consumption taxes paid on the first
$17,000 of purchases.
Total government
spending for the year ended June 30, 2016 was $6.7 trillion. To that must be added the amount to be
collected and refunded to calculate the consumption rate tax, or $1.8 trillion,
for a total of $8.5 trillion.
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| As of 12:40 pm EDST 08/29/2016 |
Total consumer
spending was $11.5 trillion, which includes borrowed money, so we’ll just
assume that consumer spending would stay the same, plus the amount collected as
all other taxes that is now included in consumer spending, $8.5 trillion, for a
total of $20 trillion.
Dividing total
government spending by total consumer income gives us a consumption tax rate of
42.5%. Rounding that up gives us a
probable increase in the consumer price level of 50%, as merchants would find
it much easier to do that than 42.5%.
Thus, everything people buy that cost $1.00 before the new tax would
cost $1.50 once it was instituted.
And it would be
applied to ALL consumer purchases, including medicine, housing,
whatever, or the tax rate would have to be even higher.
Of course, all
this is pretty crude, but it gives an idea what would happen if we changed from
an income tax to a consumption tax.
Looking at these figures, we do realize one thing, though. Ultimately, all taxes are “income taxes,” as
you can only pay them if you have income.