JacobsReport
on International Financial Planning
The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.   


Should You Support the Liberty Amendment?

Rep. Ron Paul (Rep., Texas) and others in the Congress introduced a bill to require a two thirds majority on any legislation that would require any kind of tax increase. The bill was defeated. Now, he is sponsoring a resolution to repeal the income tax. H.J. Res. 45 -- The Liberty Amendment would repeal the 16th Amendment, which enabled the government to impose an income tax. A brief summary of the reasons for the Liberty Amendment is available online at http://libertyamendment.org/ 

But if you are in favor of repealing he 16th Amendment, don't be surprised if a lot of your friends, neighbors and even family think you are nuts.

Supporters of the Income Tax

There are a lot of people who are strongly opposed to any restrictions on the power of Congress to tax as they deem necessary. These are the folks who believe that the government should micro-manage the affairs of its citizens in every conceivable way. Nearly every federal politician benefits from the income tax because it provides the money with which to fund an assortment of programs that appeal to the voters. It also provides an incentive for substantial political contributions from supporters who want legislation to reduce their taxes or to subsidize some activity that the supporters favor. You can expect them to be vocal and strident in their opposition to the repeal of the 16th Amendment to the constitution. You can also expect them to spend huge amounts of money to sustain the status quo. 

For reasons that I don't fully comprehend, the mass media also seems to be highly supportive of the kind of government that taxes some citizens more than others and the kind of government that provides funding for a wide range of "benefits" for the "poor" and other special interest groups. You can expect them to rail harshly against any effort to repeal the income tax.  
 
A majority of people probably feel that any effort to radically alter the tax system in the U.S. is seriously unrealistic and is a waste of time and/or money. I also suspect there are even a lot of people who would not put their name on a petition to repeal the income tax because of a fear that the government or IRS might retaliate. 

Harry Browne, an author and former Libertarian Party Candidate for President, has identified the major source of resistance to elimination of the income tax. Most people are reluctant to give up some benefits they are getting (directly or indirectly) from the government that are supported by the income tax and the Social Security or Medicare tax. For some, that benefit is Social Security for themselves or their parents or Medicare or even Medicaid, which pays for the nursing home care of those who are not able to afford the high cost of such care. In case it's not obvious, the Social Security tax and the Medicare tax are both based on income and would be prohibited if the 16th Amendment were repealed. 

Others have jobs with the government or with companies that get a major part of their income from the government. Millions are dependent to varying degrees on the money spent for military purposes. Almost everyone in the health care system in the U.S. is dependent on Medicare. Employees of non-profit organizations are likely to resist the repeal of the income tax for fear that people would no longer have an incentive to make contributions to their organizations. Companies that offer products that enjoy tax benefits would worry about the impact on their industry. Real estate, farming, education and the tax preparation industry are just a few that come to mind. The entire "military-industrial complex" and most of their employees can be expected to resist repeal of the federal income tax.  A large part of the construction industry produces buildings and roads under government contract. 

If you understand that taxes of every kind (at all levels of government) represent close to 40% of our national income, it should be obvious that a large part of those tax dollars represent income or benefits to someone. Nearly every family has someone who is substantially dependent on some government project or program. 

Then there are the many millions of people who are committed to some special cause which is being supported by government - whether it's the environment, the space program, medical research or any of hundreds (perhaps thousands) of others. 

Growing Opposition to the Income Tax 

But a growing number of people are ready to "storm the barricades" to get rid of the evils caused by the income tax. 

Many of them believe they will save more in taxes than they will lose in some kind of government benefits. This is the essence of the "Great Libertarian Challenge" posed by Harry Browne. He argues that you can't get rid of government programs on a piece mail basis because the support for individual programs will be more vocal and concentrated than the opposition to any specific program. It can only be done by getting a majority of people to agree to give up whatever government programs or benefits they like in exchange for a total elimination of the income tax. For more on this argument see http://www.harrybrowne.org or get a copy of his book, "The Great Libertarian Offer" from http://www.harrybrownestore.com/books.html 

But many of the people who resent the income tax object to it on non-financial grounds. High on the list is a near hatred for the IRS by many citizens. Closely related is the desire to restore some privacy by getting rid of the ability of the government to intrude into every nook and cranny of our private lives because of the income tax. Some object to the income tax because it does what it was intended to do. It imposes a tax on select groups and imposes different levels of tax on different taxpayers or groups of taxpayers. It is truly the most discriminatory tax in recent history. Some opponents of the income tax argue that it punishes those who are productive and rewards those who are not. A few people who have to cope with the complexity and the cost of the income tax system want to get rid of it because of the hidden costs (loss of productivity) it imposes in the form of the time or the expense of compliance. 

A hidden but growing cause of resistance to the income tax is that it is being used to control an assortment of activities in various ways. One example is the punitive taxation on investments in foreign mutual funds. Another is the insane maze of rules for employers who provide employee benefits and the potential penalties for failure to comply with the rules. Absurd penalties for failure to file an information return even when no tax is due is an abomination. Another is the assortment of tax incentives to invest in government approved projects. The income tax is an enormous source of political graft. Jobs are created for those who help successful candidates. Generous cost plus contracts are awarded to companies who support the politicians in power. 

Some of those who advocate the elimination of the income tax argue that its elimination will result in an immediate increase in productivity and investment. Those in the lower brackets who are mostly paying social security taxes may be likely to spend much of their tax savings at first. Those in the higher brackets will be more likely to invest their tax windfall. Those in the middle will do a little of both. Some of the tax savings will result in greater contributions to charitable activities, notwithstanding the loss of the income tax deduction. New spending will lead to some business expansion. New investment will lead to more productivity. The elimination of many government functions will cause those employees to seek work in some activity that is more likely to be productive in terms of producing goods and services that other people really want. There would be a huge increase in productivity by the elimination of the costs of compliance with the many thousands of pages of tax laws and regulations. Accountants would have to focus on accounting instead of on taxes. The cost of most basic goods and services would drop as the supply increases due to increased productivity. 

How Would Government Adjust?

A repeal of the 16th Amendment won't happen overnight. It will be a constant news story for years as various state legislators grapple with the implications and various lobbying groups argue about its merits. If it did pass, those who would be most harshly affected would have time to make plans to adjust to less government funding. 

It's almost a certainty that the Congress would resort to a national sales tax if it became clear that the income tax would be repealed. A national sales tax could be implemented fairly quickly and would provide for transitional funding of existing programs. However, the added cost of the goods that are subject to a national sales tax would result in some decrease in the use of those goods. Certain basic goods (like food and lodging) would most likely be exempted. Higher rates would be applied to goods and services that are perceived as being non-essentials or as luxuries. 

If the federal income tax were repealed, the U.S. would become a "tax haven" for the rest of the world. There would be an instant and dramatic increase in the number of people from other countries who would migrate to the U.S. Huge amounts of investment funds would pour into the U.S. from around the world. Other countries would have to respond to prevent a huge loss of funds. In varying degrees, most of the other major countries of the world would be forced to reduce the tax burdens on their residents.

The repeal of the Federal Income tax would not prohibit the various states from continuing to use income taxes to fund their programs. Substantial amounts of the programs now funded by the Federal government could and would be shifted to the states. The states would begin to rely more on income taxes and less on sales taxes. Some states would resist the continuation of various welfare programs and would adopt a low rate of income tax or would not have an income tax at all. Citizens would be free to move to low tax states if they wish to do so. Competition among the states for industry and for residents would result in tax competition between them.

What are the Realistic Prospects for Repeal of the Income Tax?

Nearly half the income in the U.S. is funneled through some level of government. The U.S. Congress is virtually split 50/50 between Democrats and Republicans. (That also implies a similar split among the voters.) An amendment to the Constitution requires a two-thirds vote in each house of Congress and must be approved by three fourths of the states. People don't tend to support radical changes unless they are hurting and as long as the economy is in fairly good shape, drastic change is not likely to be supported. 

On the other hand, when the 16th Amendment was submitted for approval by the states, few of the politicians expected it to pass. But it did - and in nearly record time. (There are some who dispute that it was passed in full compliance with the law, but the courts have held otherwise and have refused to consider any further cases that claim the income tax is not legal -- for various reasons.)

The big question is the extent to which the frustration and dis-satisfaction with the consequences of the income tax have affected the voters. I suspect that most of the folks who are self employed and who believe they can adjust their business to doing without any revenues that are derived (directly or indirectly) from the income tax will vote to repeal the income tax. If everyone in the U.S. had to pay taxes the way the self employed pay taxes, repeal would be a near certainty. Most of those who are self employed have to write quarterly checks to the government for their taxes. For those who are over the 15% tax bracket, their marginal federal tax rate is about 40% of their self employment earnings after expenses. With state income taxes, the total tax bite is close to 50% in many states. 

If we could somehow get rid of the withholding tax for a few years, it would be a lot easier to garner support to repeal the income tax. 

Have I Voted For Liberty? 

After having explored some of the implications and consequences of a repeal of the income tax amendment, am I prepared to take a stand on the issue? Because I'm a tax accountant, most observers might expect me to argue against a repeal of the income tax. 

Obviously, if the income tax is repealed, I would have to focus on non tax related issues as an accountant, author or entrepreneur. If the Social Security tax were repealed, my wife and I would have to continue working -- which we are doing anyway. If the Medicare tax were repealed, we would have to find a way to provide for our own medical expenses. 

On the other hand, we would have a substantial increase in our disposable income if the income tax were repealed.  I also believe that the cost of a lot of goods and services would decrease substantially when the hidden costs of income taxes are removed. It would take a few years, but I believe the cost of medical care and drugs would fall sharply as government money is no longer available to support the high prices that have been caused by an infusion of government funds. 

Harry Browne doesn't believe it would be necessary to cut off Social Security benefits to those who have contributed to the program for many years. He argues that the Government has enough assets that can be sold to private buyers to pay for lifetime annuities (through insurance companies) for current Social Security recipients. But that would not be an integral part of the Liberty Amendment. Repeal of the 16th Amendment would simply prohibit the Federal Government from imposing a tax on income. It would then be up to the politicians to decide how to cut the various projects or programs that are being funded with the income tax. It would be up to them to decide how to deal with existing Social Security and Medicare recipients and with those are within a few years of retirement age.

My primary personal objection to the federal income tax is that it's very much like a cancer. It started small and wasn't very painful and didn't cause much economic damage at first. But it's grown to the point where it's almost beyond any cure. If we don't face up to this problem now, it will soon be too late -- if it isn't too late already. 

The income tax provides the money with which the U.S. can engage in imperialist policies toward the rest of the world. As the most powerful military force in the world, we are continuing to use our military and economic power to bully and intimidate many other countries. The citizens and leaders of those other countries may one day decide to retaliate. With the disintegration of the USSR, there are a growing number of smaller countries that have the ability to deploy nuclear weapons. Even if they don't resort to that form of retaliation, there is a growing potential for biological warfare. 

A long time ago, I discovered the basic principle that most people don't like to change unless they are hurting. When people are making enough money to get by and to enjoy a few luxuries, they will put up with an enormous amount of restraint and taxes. Right now, I doubt that enough people are in enough pain to be willing to accept the radical change that would result from the elimination of the income tax. But if no one begins to stand up and support a cure for the cancer that is continuing to eat away at our liberties and economic vitality, it may be too late for a cure. 

Each of us, one at a time, must decide if this is an issue that is important enough to ourselves and to our children or grandchildren to devote some time and money to try to cure the disease.

I have already "voted" for the Liberty Amendment by sending an email to my Congressman in support of the bill. I'm also taking a public stand through this issue of The Jacobs Report. If I'm given an opportunity to vote on it in my state, I will do so.

Of course, most of my colleagues in the accounting and tax professions think I'm crazy.

For More Information

I don't expect any of you to support this idea just on my say so. Rather than present you with a one-side perspective, I've tried to present both the arguments for and against the repeal of the federal income tax. I don't happen to agree with those who are advocates of the income tax. 

But if you are on the fence, I do hope you will be willing to study the issues further until you can arrive at a conclusion. Here are some further Internet information resources you can study to learn more about the subject. 
 


Obviously, these are all groups that are in favor of elimination of the income tax. As far as I know, there aren't any organized groups in favor of keeping the income tax -- but there will be if the Liberty Amendment becomes a significant issue. 


Vernon K. Jacobs

Note:  If you wish, you may forward copies of this article to friends or family. I only ask that you forward the entire document and that my copyright and information about The Jacobs Report be retained in the copy. 

(C) Vernon K. Jacobs, 2001, All rights reserved.

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Copyright 2007, Vernon K. Jacobs
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Information in the Jacobs Report is educational in nature and deals with various tax or asset protection laws but not how those laws apply to any specific person or company. Readers should seek advice from a qualified professional for tax, legal or investment advice.
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