How to Get Rid of the Income Tax

Are you frustrated by the time, cost and complexity of having to comply with thousands of pages of obscure rules in order to avoid obscene penalties for not filing your income tax return and paying the taxes that are due? Does it annoy you to have to pay top dollar to people like me to help you with that unpleasant chore? If so, I don't blame you a bit.

But how frustrated are you?

Are you ready to dismember the income tax -- or do you just want to adjust the system to make it simpler, fairer and less costly for you? If you are at a really high level of frustration and are ready to contemplate a radical change, then you might be ready for the "Fair Tax".

Yesterday, I received an email inviting me to sign a petition to advocate a change from the income tax to a national consumption based tax called the "Fair Tax." I hadn't really looked at this proposal for a long time so I followed the link to their web site at www.fairtax.org and read a number of the explanations on that site.

The first time I encountered this concept a few years ago, I summarily rejected it for three reasons. One was that it is designed to be revenue neutral. I couldn't think of a reason to support a tax that was going to give the government the same amount of money to waste. The second reason was that I was under the impression that the 16th Amendment to the Constitution would not be repealed. Today, I found that repealing the 16th Amendment is a major component of the "Fair Tax". The third reason is because I'm aware that the U.S. adopted an income tax system (in 1913) because a majority of taxpayers felt the prevaling system of tarriffs and excise taxes was unfair. The question is whether the "Fair Tax" overcomes the problems that led to the income tax.

In spite of the fact that I'm a CPA and have chosen to make a living by helping people to cope with the income tax, I truly hate this form of taxation and believe it has been a major cause of the economic problems we are experiencing. My primary objection is that income is such a vague and hard to measure base for any kind of tax. Accountants, lawyers, economists and politicians all have different ideas about what constitutes income. With the income tax, the politicians can simply define income to be whatever they want it to be. There simply is no way to have a simple or fair tax system based on the elusive concept of income.

The IRS has become a massive bureacracy that bully's taxpayers, engages in fear propoganda and considers your income and assets to be the property of the government. Privacy has been lost. When we tax income, we end up with less of it. The income tax contributes to the negative savings rate in the U.S. It fosters an industry that spends billions to influence legislation that favors one group of taxpayers at the expense of others. The cost of administering the system is huge and the cost to taxpayers in terms of their time and the fees they pay to tax professionals is much larger.

Because the tax system is so easy to manipulate, the Government creates serious distortions and uncertainty that discourages taxpayers from embarking on ventures that might result in more jobs. The FICA, Medicare and other employment related taxes (and the administrative burden) discourage people from hiring others and creating new jobs. Our multi-national corporations are at a disadvantage in competing with their counterparts from other countries because our corporate tax rates are significantly higher than those of most of our trading partners. The income tax subsidizes debt financing compared to equity financing and has contributed to the home mortgage debt bubble.

Without an individual or corporate income tax, payroll taxes and estate taxes, the U.S. would quickly become a Mecca for investors around the world. Much of our lost privacy could be restored. Personal savings rates would explode. Our big corporations would enjoy an advantage over those based in other countries and more of their world-wide earnings would be reinvested in the U.S. There would be less incentive to outsource jobs to other countries. We would not be subjected to the abuses of over-zealous tax collectors. We could hire someone to work for a few hours without worrying about employment taxes and the time consuming reporting duties that are now required.

After some reflection, I've changed my mind about opposing a consumption based tax that is revenue neutral. Even though there is no immediate tax savings because of a cut in government spending, it may be the only way to placate all of the people who are currently receiving compensation or benefits from the Federal Government. Without revenue neutrality, nothing will happen.

I still believe that if a federal consumption tax is passed without repealing the 16th Amendment, we will end with both an income tax and a sales type tax. But repeal of the 16th Amendment is a major component of the Fair Tax proposal. As for my argument that we would simply be going back to the situation that led to the passage of the 16th Amendment before 1913, the "Fair Tax" concept does provide for some significant relief for the lower income members of the country -- without which it would never have any chance of being passed. A monthly "prebate" would be provided through the Social Security Administration that would be based on offsetting the cost of the "Fair Tax" on expenditures equal to the poverty level for diferent family sizes. This would (or should) appeal to those who are advocates of a progressive tax system because it has the same effect as tax credits, low tax rates and exemptions that benefit the lower income taxpayers more than the higher income taxpayers.

As a tax accountant, passage of the "Fair Tax" and repeal of the 16th Amendment would obviously force me to find other ways to make a living. But in exchange for the many benefits that I perceive from a "Fair Tax", I welcome the challenge -- if I live long enough to see it happen. I expect that the vast majority of my colleagues in the tax business will consider me to have lost my mind and to be in need of serious therapy. But I challenge them to consider the drawbacks of the income tax system, the severe penalties that can be imposed on them for hundreds of potential mishaps, the litigation risk that they face and the destructive impact of the income tax on our economy and personal liberty.

In addition, many of my friends in the Libertarian community may be apalled at my support of the "Fair Tax" because most of them don't see any justification for a revenue neutral tax. They argue that the problem is the magnitude of government spending, not the method of collecting taxes. And, as pointed out in an article on the Ludwig von Mises web site, the actual details of the "Fair Tax" bill (HR 25) do not require repeal of the 16th Amendment prior to adoption of a national consumption tax -- so we could indeed end up with both.

But a consumption tax is far more visible than the income tax and should result in persistent pressure on the politicians to reduce the rate of tax and related spending. In addition, I see no way that we can scrap the income tax and cut government dramatically because of the many people who benefit from various forms of government spending. As for not repealing the 16th Amenment before adopting a consumption tax, there is nothing to prevent the government from adopting a consumption tax at any time.

This isn't to say that I don't see any problems or that I agree with every part of the "Fair Tax" proposal.

Among other things, everyone who sells any kind of goods or services could have to become a tax collector. In many states, there is no sales tax on services -- so small service businesses are not curently required to collect and pay over sales taxes. Also, in most states, someone who sells goods over the Internet to out-of-state buyers is not required to collect taxes on those sales. And not all 50 of the states collect sales taxes, so the Federal Government would have to establish tax collection administration in those states.

Another problem is that if money earned in the U.S. is sent to families in other countries, it would escape the U.S. tax. And I agree with the critics that there would be a huge incentive for an underground economy that could make the bootlegging era look tame by comparison. There would also be lobbying pressure from various groups to be exempt from having to pay the tax (such as charitable organizations) or from having to collect the tax. (Would home workers have to collect and pay over the "Fair Tax"?) Finally, would the "Fair Tax" be imposed on the shipment of goods to foreign buyers or on providing services to foreign companies or persons? If so, how would that affect the ability of U.S. workers to compete in world markets?

Although the Fair Tax does not reqire the elimination of the income tax as a pre-condition, if it were to pass, it would provide a politically practical way bridge the gap between elimination of the income tax and establishing an alternative tax system. I see no realistic possibility that the 16th Amendment would be repealed without some way to placate all of the diverse voter groups that would otherwise be unwilling to make such a drastic change.

For more food for thought, visit the "Fair Tax" web site at http://www.fairtax.org and http://www.fairtaxblog.com. And if you enter "Fair Tax" in Google, you will encounter a lot of interesting web sites with diverse points of view about this still controversial topic.

Vern Jacobs

Reprinted from the International Wealth Protection Monitor