The presidential primary season is in full swing. Current and former Democratic and Republican candidates alike have put forward various tax-reform proposals. Some of their proposals were officially unveiled at a press conference; others were unofficially presented in campaign speeches or during one of the debates. Some rehash old proposals, others recommend something entirely new. But whether Democratic, Republican, official, unofficial, old, or new — all suffer from the same fatal flaw.
The tax code
The income-tax system in America began in 1913 after the adoption of the Sixteenth Amendment. It was initially quite modest, with a 1 percent tax on income greater than $3,000 ($4,000 for married couples). A series of surcharges up to 6 percent were applied to higher incomes, with the maximum rate being 7 percent on taxable income more than $500,000. Thanks to U.S. involvement in World War I, the tax rate in the highest bracket increased to 77 percent by 1918. The highest rate reached a whopping 94 percent in 1944. After dropping briefly, the highest rate stayed near or above 90 percent between 1950 and 1963. Although all tax rates eventually came down, and dramatically so in the 1980s, the size and complexity of the tax code has steadily increased. The tax code is now a maze of arcane rules and computations concerning income, brackets, deductions, credits, exclusions, and phase-outs that Americans spend more than six billion hours a year complying with at a cost to the economy of more than $150 billion. The tax code and tax regulations in Title 26 of the Federal Code of Regulations together amount to more than 10 million words.
For individuals, there are currently seven tax brackets for ordinary income with tax rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. The brackets are narrower for married persons filing separate returns, wider for heads of households, and wider still for married persons filing jointly. Income from capital gains and dividends is taxed at lower rates, with a top rate of 23.8 percent. However, there is also a net investment income surtax of 3.8 percent for taxpayers who earn more than $100,000 ($250,000 for married filing jointly). Many tax exemptions and deductions are available to lower one’s taxable income. The personal exemption for tax year 2015 is $4,000. The standard deduction is $6,300 for singles and $12,600 for married filing jointly. There are deductions available for home mortgage interest, charitable contributions, student-loan interest, and medical expenses. Tax credits are dollar-for-dollar reductions of the amount of income tax owed. They include the Earned Income Tax Credit, the Child and Dependent Care Credit, the Additional Child Tax Credit, the American Opportunity Tax Credit, and the Hope Scholarship Credit. Some tax credits — most notably the Earned Income Tax Credit — are refundable; that is, you can still take the credit even if you don’t have any tax liability. That means that some Americans not only get back all of the money that was withheld from their paychecks, but also receive additional funds from the government that are taken from other Americans who do have tax liabilities. The Alternative Minimum Tax ensures that those who earn more than $53,600 ($83,400 for married filing jointly) and take a lot of deductions and credits still pay their “fair share.”
For corporations, the top rate is 35 percent. Although the maze of deductions, credits, and exemptions ensures that many companies don’t pay the maximum rate, the U.S. corporate tax rates are still the highest in the industrial world. The United States is one of the few countries where businesses have to pay taxes on income earned overseas (a “worldwide” verses a “territorial” tax system). However, taxes are deferred on international income until the income is returned to the United States. The profits of “pass-through” businesses such as partnerships, sole proprietorships, and S corporations — which now employ more than half of the private sector workforce — are passed directly to the businesses’ owners to be taxed on their individual income-tax returns. All corporations and businesses must also pay 6 percent unemployment tax on the first $7,000 of each employee’s income.
In addition to income taxes, there are two payroll taxes. The Social Security tax rate is 12.4 percent (split between employers and employees) on the first $118,500 of wages. The Medicare tax rate is 2.9 percent (split between employers and employees) on wages of any amount. The employee share increases to 2.35 percent on that portion of income that is more than $200,000 ($250,000 for married filing jointly).
Even death will not spare Americans from taxes. An estate tax is levied on the net value of property owned by deceased persons on the date of their death. Currently, estates are taxed at a rate of 40 percent on assets greater than $5.430 million.
The proposals
Many Republican candidates have said that they want to eliminate the estate tax. Jeb Bush specifically mentioned eliminating the estate tax and ending the step-up basis in capital gains for estates. On the other side of the aisle, Democrat Bernie Sanders wants to increase the top estate tax rate to 65 percent and lower the estate tax exclusion to $3.5 million.
Some Republican candidates have said that they want to eliminate the corporate income tax. Most have talked about lowering the maximum rate from 35 percent to 25, 24, 20, or 15 percent. Two Republican candidates want to lower the top rate on manufacturers even further. Two others suggested replacing the corporate income tax with a 14.5 or 16 percent business transfer tax, which applies to all capital income and labor payments. Several Republican candidates have proposed a special tax on “pass-through” business income of 10, 14.5, 15, or 25 percent. Several others have called for shifting to a territorial tax system and enacting a deemed repatriation of foreign income at a 6, 8, 8.75, or 10 percent rate.
Sanders wants to raise payroll taxes by applying the Social Security tax to earnings greater than $250,000 and creating a new tax of 0.2 percent to fund paid family leave. Two Republican candidates want to eliminate payroll taxes for workers older than 62 or 67. Two others just want to eliminate the additional .09 percent Medicare tax on incomes greater than $200,000. Ted Cruz has said that he wants to eliminate the payroll tax altogether.
Although many Republicans have called for the elimination of the Alternative Minimum Tax, Clinton has said that she wants to create a new minimum 30 percent tax rate on individuals earning more than $1 million.
Instead of the current seven tax brackets, some Republican candidates want a system of three brackets with the lowest rate ranging from 2 to 15 percent and the highest rate ranging from 20 to 35 percent. Others prefer a flat tax of 10, 14.5, or 15 percent.
Many Republican candidates have proposed eliminating all itemized deductions except for the charitable deduction and the mortgage-interest deduction. Some want a cap on the amount of the mortgage-interest deduction and other deductions. A few have called for increasing the standard deduction or personal exemption. Clinton wants to cap the tax benefit of itemized deductions at 28 percent of the deduction.
Republican candidates are creative when it comes to tax credits. Many would like to expand the Earned Income Tax Credit. Some want to eliminate all credits except for the Earned Income Tax Credit and the Child and Dependent Care Credit. One wants to establish a family tax credit of $4,300 for all households living in poverty. Another wants to replace the personal exemption with a nonrefundable credit for dependents and transfer the Earned Income Tax Credit to the payroll tax. One wants to replace the standard deduction, personal exemption, and Earned Income Tax Credit with a refundable personal credit of $2,750. Another wants to establish an additional child credit of $2,500 and replace the standard deduction, personal exemption, and 10 percent tax bracket with a refundable personal credit.
Clinton wants to make the American Opportunity Tax Credit permanent.
Some Republican candidates have proposed lowering the tax rate on capital gains and dividends. Others are content to tax capital gains and dividends as ordinary income. Clinton wants to raise the rate on medium-term capital gains. And although many Republicans have expressed their desire to eliminate the net investment-income surtax, Sanders aims to increase it to 10 percent.
Republican candidate Mike Huckabee has called for the elimination of all taxes (personal income, corporate income, capital gains, estate, and payroll) and replacing them with a national sales tax rate of 23 percent on all goods and services (the FairTax) with monthly rebates (cash payments from the government) for low-income households.
The fatal flaw
It is safe for Republicans to call for the elimination of the estate tax or the lowering of the corporate income tax. Corporate taxes are a relatively small share of federal revenue, about $328 billion in 2015. The estate tax provides the government with even less revenue than the corporate income tax. No candidate would ever call for abolishing in its entirety the personal income tax, replacing it with nothing. Not when they support just minuscule cuts in federal programs, saving Social Security and Medicare for future generations, and increasing the defense budget. That is why they always talk about tax reform rather than complete tax elimination.
And herein lies the candidates’ fatal flaw. Their tax-reform proposals all presuppose that the government has a claim to a certain percentage of every American’s income. They may disagree on what percentage that is, whether higher-income Americans should give the government an even higher percent, and how the government should collect the money, but they all agree that the state says to its subjects, as Frank Chodorov made clear in his book The Income Tax: Root of All Evil (1954), “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide…. The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.” That means that there can be no such thing as a fair tax.
Republicans are always patting themselves on the back for inaugurating and extending for several years the so-called Bush tax cuts — until the new top rate of 39.6 percent was instituted in the “American Tax Relief Act of 2012” passed by the lame-duck Congress to avert the “fiscal cliff.” But what was the top rate before their bipartisan tax increase? It was 35 percent! That some Americans had to turn over 35 percent of their income to the government is something that Republicans should be ashamed of, not proud of.
Acquiring someone’s property by force is morally wrong — even when it is done by government. This means that all taxation is theft, and theft on a grand scale, as the late Austrian economist Murray Rothbard explained:
All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.
It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.
So, if taxation is theft, then why do libertarians pay taxes? Libertarians pay taxes for the same reason that they hand over their wallet to someone who points a gun in their face and says, “Give me your money or I will shoot you.”
The libertarian alternative
The libertarian alternative is a simple one. Instead of debating how the tax code should be reformed — whether the focus should be on simplifying it or making it fairer, whether the number of tax brackets should be expanded or reduced, whether there should be a flat tax rate, whether tax rates should be made more or less progressive, whether certain tax credits and deductions should be eliminated, whether tax credits and deductions should be phased out for those with high incomes, whether tax credits and deductions should be indexed to inflation, whether tax loopholes should be closed, whether families making below a certain amount should be exempt from paying income tax, whether “the rich” are paying their “fair share,” whether the tax burden should be shifted to businesses, or whether the income tax should be replaced with or supplemented by a sales tax or VAT — libertarians say that the whole tax code should be eliminated.
Not reformed, not rewritten, not simplified, not shortened, not revised, not amended, not rephrased, not reworded, not altered, not reworked, not made more efficient, not modified, not changed, not improved, not enhanced, not made more equitable, not adjusted, and not replaced, but eliminated. Completely eliminated — every title, section, paragraph, and word.
No tax code, no IRS, no tax courts, no tax rates, no tax brackets, no deductions, no credits, no exemptions, no loopholes, no shelters, no personal income tax, no corporate income tax, no payroll taxes, no capital gains tax, no estate tax, no Alternative Minimum Tax, no depreciation schedules, no tax burden, no tax base, no filing requirements, and no tax forms — not even one that fits on a postcard.
Although it may seem unnecessary and redundant that the elimination of the tax code has to be spelled out in such terms, such is certainly not the case. Not when conservative tax-reform proponents are so disingenuous. Not when conservative tax-reform proponents talk about repealing the Sixteenth Amendment and eliminating the IRS at the same time as they propose to institute a national sales tax or give the specifics of some income-tax plan. Do they really expect us to believe that the government would have a tax code of some kind, to collect taxes on consumption or income (or both), and just expect businesses and individuals to voluntarily collect and pay taxes?
But, it is objected, without a tax code and an IRS, the federal government wouldn’t have any way to fund Social Security, Head Start, food stamps, scientific and medical research, farm subsidies, space exploration, school breakfast and lunch programs, SSI, arts and culture, education, student loans, Medicare and Medicaid, TANF, foreign wars, overseas military bases, WIC, airport security, the drug war, foreign aid, disaster relief, Planned Parenthood, housing subsidies, home heating assistance, and the Corporation for Public Broadcasting.
Exactly. That is the point. The government shouldn’t be funding any of those things.
All constitutional functions of the government could be funded by donations, bequests, user fees, land sales, and lotteries. In a free society, the government wouldn’t levy taxes on individuals or businesses. In a free society, the government would know neither the incomes of individual Americans nor the profits of American businesses. In a free society, all Americans would keep the fruits of their labor. In a free society, there would be no such thing as public assistance. In a free society, all charity, assistance, aid, relief, benevolence, philanthropy, and welfare for food, medical care, housing, mental health, the handicapped, and foreign countries would be private. In a free society, funding for scientific and medical studies, arts and culture, and exploration and research — from the depths of the sea, to the lab, to outer space — would be voluntary. In a free society, the government wouldn’t forcibly take money out of the paychecks and pockets of Americans and redistribute it after funneling it through layers and layers of federal bureaucracy.
But, it is then objected, with all the statists in Congress, the tax code and the IRS don’t look like they are going away any time soon. What should be done in the meantime? The answer is to work toward keeping as much money as possible in the hands of Americans and as much money as possible out of the hands of Uncle Sam. Therefore, any decrease in taxes or tax rates or increase in tax credits or deductions is always a good thing. From the libertarian point of view, the “goal” of tax policy should not be reform, simplicity, fairness, efficiency, economic growth, revenue maximization, revenue neutrality, tax base broadening, tax shifting, or tax replacement, but freedom. Freedom to keep as much of the fruits of one’s labor as possible.
The tax plans of all of the presidential candidates — Democratic and Republican — are flawed, fatally flawed. As Chodorov reminds us, “There cannot be a good tax nor a just one; every tax rests its case on compulsion.”
This article was originally published in the February 2016 edition of Future of Freedom.