The Death of the Income Tax

Imagine April 15 was just another spring day.  The only things on your mind are the warming weather and the fact that the Pittsburgh Pirates are still in the pennant race.  Fantasy?  Perhaps.  But before the 1913 ratification of the 16th amendment, Congress’ ability to levy an income tax was limited.  It sold the concept to the states and people by claiming only the wealthiest citizens would pay.  That didn’t last long.

The next important step in America’s income tax experiment came during WWII.  To speed up tax receipts to finance the war effort, the government began requiring employers to withhold money for income tax from each paycheck.  Without withholding it’s unlikely the current tax system could exist.  Can you imagine middle class taxpayers cranking out checks for $5,000, $10,000, or $25,000 each April?  There would be a revolt.

To illustrate how important withholding is, think about the conversations most people have around tax time.  How much did you pay in taxes last year?  Nothing-I got back $1200!  This poor sap is ecstatic he gave the government an interest free loan for $1200.  If banks could find enough customers like this maybe we could knock a few hundred billion off the bailout package.

According to the Tax Foundation, in 2005 U.S. individuals and businesses spent about $265 billion complying with the federal income tax.  This equals 22% of the amount the IRS actually collected.  And it’s pure waste…unless of course your name is H&R Block.

Let’s put aside the philosophical debates for now.  We’ll accept that government is entitled to every dollar it gets (as much as it pains me).  Isn’t there a more efficient way to collect this money?

Fortunately, a group of business leaders financed a study on precisely that question.  Their conclusion led to the national phenomenon (including two best selling books) known as the FairTax.

The FairTax is based on consumption, not income.  It’s like a sales tax.  But unlike an ordinary sales tax, which is regressive (more painful for the poor), there is a “prebate” that completely removes poor people from the tax rolls.  Since it doesn’t tax income, the FairTax would encourage businesses to make decisions for purely rational reasons, as they no longer would factor in tax liabilities.

There are no loopholes under the FairTax.  It is revenue neutral, meaning it takes in as much money as the current system.  And best of all, it gets rid of the IRS.  There are many more benefits of switching to the FairTax.  I encourage everyone to read about it on the web site.

Campaigning to end the income tax may seem like tilting at windmills.  And maybe it is.  But if incumbents start losing elections to FairTax supporters, the landscape would change in a hurry.  After all, there’s nothing more important to politicians than keeping their own seats.

4 Responses to “The Death of the Income Tax”

  1. J Howe Says:

    The older I get, the less I like the FairTax. With each passing year I pay more and more in income tax. When I retire I’ll be able to stop paying income tax. However, if we switch to a consumption tax, I’ll have to pay taxes again with money that was already taxed once. I like the concept of the Fair Tax, although I would like it better if it brought in *less* revenue (although that wouldn’t fly politically) I think the government is already taking too much in taxes.

  2. admin Says:

    True, you paid income tax on the money you’ve been saving over the years…unless of course it was in certain IRA, 401K, or similar plans. But had the FairTax been in place you would (on average) have the same savings now–the plan was designed to be revenue neutral. You would have been paying the FairTax rather than income tax all these years.

    Of course this is big picture, and your individual behavior might have been different…perhaps you would have trimmed consumption and saved more. Even if you don’t completely buy into that, let’s not let the imperfections of the FairTax derail a drive for serious reform of a horrid system. It would be better to tweak the bill with a transition mechanism for those in and nearing retirement.

    I chose to avoid the philosophical arguments over smaller government (as the FairTax creators did) as that discussion would undoubtedly sidetrack the debate. The FairTax would be a massive power shift from government to individuals. I firmly believe that once that happens We The People will begin to flex our muscles.

  3. Timothy McCarville Says:

    The income tax as we know it is rapidly dieing. With the lower 50% of all households paying zero income tax and with an ever increasing amount of filers falling under the AMT (“Flat Tax”), this entire discussion is becoming increasingly moot.

  4. admin Says:

    I don’t think it’s dying–just fewer people pulling the cart. That certainly could hasten the decline of the income tax if too many of those footing the bill take their ball and go home. This has actually been going on for years. More and more wealthy Americans have been renouncing their citizenship for tax purposes.

    The official estimate of AMT households is 5%-10%. Of course that would mushroom without yearly congressional action. A dramatic expansion of the AMT would hammer high-tax states like CA, NY, and NJ. I can’t imagine the party in power will let that happen.

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