The Value-Added Tax: A New
Tax System for the United States
by
Joseph George Caldwell, PhD
Originally published as
How to Stop the IRS…and Solve the Deficit Problem
November 16, 1987
Printed in the United States of America
ISBN 0-944848-00-1
This e-book edition November 8, 2000
Copyright © 1987, 2000 by Joseph George Caldwell. All rights reserved.
Dedication
To the memories of George Orwell and Dr. E. Fritz Schumacher
To Mom and Dad, in Spartanburg
To Timigale
To Jay, Chris and Steve
Contents
Meaningful
Reform Is Sorely Needed
Why Would
the US Government Keep a Bad Tax?
The Income
Tax Can Be Replaced by a Good Tax -- The Value-Added Tax
The Tax
System Proposals of This Book Were Developed Through Systems Engineering
A Personal
Word from the Author
The US Tax
System Has Its Roots in the US Constitution
The
Original Constitution Outlawed the Income Tax
The US Tax
System Changed as Conditions Changed
The Income
Tax Began as a Low Tax on the Rich
For Many
Years, Inflation-Caused Bracket Creep Increased the Effective Rate of Taxation
The
Current Situation: Tax Revenues Are Derived from a Narrow, Volatile Base
Having a
Large Variety of Taxes Helps Hide Taxes by Keeping Tax Rates Low
The
Current Tax System Promotes Budget Deficits
The
Current Tax System Is Not Well Suited for International Trade
The
Framers of the US Constitution Had a Good Idea when They Outlawed the Income
Tax
The
Serious Inadequacies of the Income Tax Were Not Initially Apparent
The
Inadequate Revenue-Producing Ability of the Income Tax Has Turned the US into a
Debtor Nation
The Income
Tax Has Severe Sociopolitical and Economic Drawbacks
Problem
1. The Income Tax Has Destroyed the
Privacy of the American Citizen.
Problem
2. The Income Tax Has Spawned an
American Gestapo.
Problem
3. The Income Tax Has Weakened the
Constitution.
Problem
4. The Income Tax Is Unfair.
Problem 5.
The Income Tax Is Corrupting the Country.
Problem
6. The Income Tax Is Too Complicated.
Problem
7. The Income Tax Has Serious Economic
Deficiencies.
Problem
8. The Cost of Administering and
Complying with the Income Tax Is Very High.
Problem
9. The Income Tax Base Is Contributing
to Economic Collapse.
Tax Reform
Perpetuates Economic Distortions
Under Tax
Reform, the Income Tax Is Even More Complicated Than Before
Meaningful
Tax Reform Will Not Come Easily
The Income
Tax System Has Spawned a Big-Brother Watchdog Agency
The Income
Tax System Has Been Converted from a Tax on the Rich to a Tax on the General
Population
Many
People Regard the IRS as an American Gestapo
Through
the IRS, the US Has Established a Police State
The
Efficiency and Dedication of the IRS Are Misdirected
The
Personal Income Tax Forces Businesses to Act as Tax Collectors
The US
Income Tax System Is in Reality a Payroll Tax System
6. The Constitution Has Failed
The
Personal Income Tax System Has Weakened the Constitution
Tax Terms:
Marginal Rate, Average Rate, Graduated, Progressive
All People
Do Not Have the Same Utility Functions.
The
Progressive Income Tax Discriminates against Hard Work, Long Hours, and
Self-Improvement
The
Progressive Income Tax Weighs Heavily on Working Wives and Mothers
Tax Reform
Imposes a Heavy "Marriage Tax" on Many Families
The
Verdict: The Progressive Income Tax Is Unfair
The
Personal Income Tax Is Not Well Suited to Tax Capital Gains
Capital
Gains May Be More Apparent Than Real
"Tax
Reform Adjusts for Inflation" -- a Myth
The Real
Tax on Your Home's Appreciation May Exceed 100 Percent!
8. The Income Tax Is Corrupting America
The Income
Tax System Contains Strong Incentives for Tax Avoidance and Tax Evasion
The Overall Tax Burden in the US Is High,
But No Higher Than in Many Other Countries
High
Income Tax Rates Have Given Rise to an Underground Economy
Tax Reform
Will Not Dismantle the Underground Economy
The
Complexity and Vagueness of the Tax Code Contribute to Tax Evasion
The
Irrational, Inequitable, Heavy-Burden Income Tax Creates a Lack of Respect for
the Law
The Income
Tax Generates Citizen Resentment of the Government
"I
Bought It Through My Business"
Cars Are
Not the Only Thing a Businessman Can Buy Through His Business
The Income
Tax System Creates Crimes That Waste Law Enforcement Resources
The Income
Tax System Encourages Surrogate Punishment
The Income
Tax System Is an Unnecessary Incentive for Crime
9. The Income Tax Is Too Complicated
The Income
Tax Is Out of Control
A Rash of
Books on the New Tax Law Attests to Its Complexity
Under
Current Law, the Tax Assessment Is Not Known for a Year
Why Is the
Income Tax So Complicated?
It Is Not
Possible to Measure Income
Complexity
Destroyed the Turnover Tax, and Will Destroy the Income Tax
10. The Income Tax Is Economically Deficient
The Income
Tax Discourages Saving and Investment
The Income
Tax Discourages Productivity
The Income
Tax Encourages Debt Financing
The
Business Profit Tax Subsidizes Inefficient Firms
Use of the
Income Tax Places the US at a Disadvantage in International Trade
The US
Income Tax Distorts the Economy
The
Personal Income Tax and the Corporation Income Tax Are Not Well Integrated
11. The Income Tax Is Too Costly
The
Administrative Cost of Collecting the Personal Income Tax is High
The Cost
of Compliance With the Personal Income Tax Is Very High
The Income
Tax System Causes the Waste of Much Productive Effort in Tax Avoidance
The Income
Tax System Causes the Waste of Productive Skills
12. The Income Tax Is Contributing to
Economic Collapse
The Income
Tax Causes Government Budget Deficits.
The Income
Tax Base Is Too Narrow
Both the
Personal Income Tax and the Business Profit Tax Have Small Tax Bases
The
Volatility of the Business Profit Tax Base Contributes to Government Budget
Deficits
The Income
Tax Contributes to Extreme Concentrations of Wealth
13. How to Design a New Tax System
The
Current System Rates Poorly in Accomplishing Tax Policy Goals
The Tax
Legislative Process Is Inadequate
The
Current Legislative Process Does Not Take Advantage of America's Talent
The Income
Tax System Is an Unstable System
The
Current Tax Legislative Process Is Unsystematic
Systems
Engineering Is the Discipline for Developing Systems
Systems Engineering
Has Achieved Success in Developing Modern Social and Economic Systems
Systems
Engineering Can Accommodate Social Institutions and Cultural Values
The
Government Uses the Systems Approach with Demonstrated Success
Examination
of Existing Alternatives
Criteria
Associated With Tax Policy Goals
What Rates
Are Correct?; What Tax "Mix" Is Appropriate?
Economists
Generally Prefer Taxes That Do Not Distort the Economy
How to
Allocate Taxes Is a Value Judgment
The
Government Must Set the Overall Tax Rate and Decide on Progressivity
Public
Opinion Can Be a Major Factor in Tax Policy
The
Acceptability of a Tax Burden Depends on Political Philosophy
The US Tax
System Allows for Collections at Several Levels of Government
Descriptions
of Alternative Taxes
Criteria,
or Principles, for Choosing a Tax
How Tax
Level and Distribution Are Measured
The US
Constitution Distinguishes Between Direct and Indirect Taxes
Indirect
Taxes Raise Prices; Direct Taxes Reduce Income
Indirect
Taxes Receive Preferential Treatment Under the GATT
The
Personal Income Tax Attempts to Address Ability to Pay and to Moderate
Recessions
The
Personal Income Tax Has Many Undesirable Properties
The
Corporate Income Tax Is a Tax on Profit
The
Corporate Income Tax Has Many Economic Disadvantages
The
Corporate Income Tax Produces Unstable Revenues
Consumption
Taxes (Taxes on Goods and Services)
Consumption
Taxes Encourage Saving
Two Ways
to Administer the VAT: the Tax-Credit Method and the Calculation Method
Synonyms:
Additive VAT = Income-Type VAT; Subtractive VAT = Consumption-Type VAT
Single-Rate
Versus Multiple-Rate VATs
Two Final
VAT Terms: Tax Inclusive Versus Tax Exclusive
The "Personal-Exemption-Type
VAT" Is Not a VAT
The VAT Is
Economically Neutral
Inheritance,
Estate, and Gift Taxes
Classification
of Taxes; Income and Consumption Taxes Versus Wealth Taxes
Classification
of Income and Consumption Taxes
Comparison
of Consumption Taxes to Income Taxes
Advantages
of Business Taxes over Taxes on Individuals
The
Problem of Determining the Tax Mix
Systems
Engineering Can Help Develop a Good Tax System
15. The Value-Added Tax, or VAT
What About
Income Taxes for Business?
The
Free-Enterprise System Has Accomplished Impressive Economic Growth
A Low-Rate
VAT Reduces the Incentives for Tax Evasion
The VAT Is
a Good Tax on Which to Base Spending Policy
Taxable
Items Are More Simply Defined Under the VAT Than Under the Income Tax
Under a
VAT, the Incentive to Make Purchases Through One's Firm Can Be Dramatically
Reduced
Use of a
Low-Rate VAT Would Dramatically Reduce the Incentive to Shelter Income in One's
Firm
The VAT
Includes a Tax on Labor
Alternative
Ways of Administering a VAT: The Tax Credit Method Versus the Calculation
Method
The
Calculation-Type VAT, Like the Income Tax, Is Hidden From Consumers
The
Subtractive VAT Has Advantages Over the Additive VAT
The
Temptation to Allow Exemptions to the VAT Seems Irresistible
Tax
Preferences Under the VAT: Exemption Versus Zero Rating
Packaging
of the VAT Is an Important Consideration
The VAT Is
Criticized as a Regressive Tax, but the Evidence for This Is Slim
The VAT Can Address Ability to Pay
The VAT
Has Been Called a "Money Machine"
The
Consensus: The VAT Is Not
Inflationary
A VAT Is Not an "Administrative
Nightmare"
Implementation
of the VAT Causes No Constitutional Problems
Worldwide,
the VAT Is a Very Popular Tax
16. Undesirable Alternatives to the VAT
What About
a Payer-Collected Earnings Tax?
Taxation
of Earnings From the Sale of Property (Capital Gains)
The
Payer-Collected Earnings Tax Is Less Costly to Administer Than the Personal
Income Tax
What's
Wrong With a Flat-Rate Income Tax?
Why Not a
National Retail Sales Tax?
What's
Wrong with a Net Wealth Tax?
How the
Net Wealth Tax Differs from an Ordinary Property Tax
The NWT Is
Justified on the Basis of Ability to Pay
The
Property Tax Is Less Privacy Intrusive Than the NWT
The NWT
Promotes Risky Investments
The NWT
Would Require a Constitutional Amendment, and Would Face Opposition from States
Other
Undesirable Alternatives to the VAT
17. Payroll Taxes: Good or Bad?
Payroll
Taxes Do Not Have to Be Intrusive
The Burden
of the Payroll Tax Is Considered to Fall on the Individual
Social
Insurance Is a Responsibility of a Civilized Society
The
Payroll Tax Reminds Citizens of the Cost of Social Insurance
A
Flat-Rate Payroll Tax Is Easier to Administer
The
Payroll Tax Is Not Intrusive of Personal Privacy
Proposal:
Tie Social Insurance Benefits to Need, Not Contributions
Levy the
Payroll Tax Solely on Business
Some
Additional Recommendations
Universal
Trust Plan (UTP) Proposed for Retirement
Supplemental
Retirement Coverage and Welfare
The
100-percent Pay-as-you-go Structure of the Current Social Security System Must
Be Abandoned
A Proposal
for a New National Tax System
The
Proposed Change Keeps State and Local Revenues at Their Current Levels (as
Percentages of GNP)
How to
Manage Social Insurance Without SSNs
Why Not
Use the VAT as a Means of Reducing Income Tax Rates?
Performance
of Proposed VAT-Based System
What About
a National Wealth Tax?
Modifications
to Estate, Inheritance, and Gift Taxes.
The Next
Step: The Detailed Design of a New Tax System
How to
Eliminate the Personal Income Tax and Business Profit Tax
Impact of
Elimination of the Income Tax on Tax Lawyers, Accountants, Tax Preparers, and
IRS Agents
Transition
to a VAT Will Cause a Temporary Economic Dislocation
20. What if Letter Writing Doesn't Work?
How Can
Meaningful Tax Reform Be Accomplished if Pressure on Congress Doesn't Work?
Does
Congress Not Realize How Much the Income Tax Is Despised?
Decades of
Neglect of Individual Rights Has Caused the Loss of Much Personal Liberty in
the US
The US
Population Has a High Tolerance for Bad Laws
A
Constitutional Amendment Is Needed to Protect Privacy
Changing
the Tax System May Require Changing Our Form of Government
The
Difficulty in Changing the US System of Government
The US Is
a Democratic Republic
Our System
Accommodates the Majority Very Well
A
Parliamentarian Form of Government Provides Greater Flexibility
The
Parliamentary Form of Government Would Eliminate Lame Duck Presidencies
Some
Americans Favor a Parliamentary Form of Government for the US
The US
System Worked Well, As Long as the "Pie" Was Growing
The Likelihood
of a Constitutional Convention Is Increasing
Fundamental
Tax Change May Require Fundamental Change in Our System of Government
The US
Government Exists at the Pleasure of the People
The Tax
System Will Be Significantly Changed Only If People Fight for Change
The
Supreme Court: Major Threat to Constitutional Democracy
American
Illiteracy and the Destruction of the American Republic
Tables and Figures
Table 1.
Relationship of Gross National Product, National Income, and Personal
Income, 1983
Table 2. Distribution of Tax Revenues by Source, Selected
Countries, 1983
Table 3.
Administration of a Subtractive VAT Using the Calculation Method (VAT
Rate = 20 Percent)
Figure 1. Sample
Letter to Congressman
The Value-Added Tax: A New Tax System for the United States proposes elimination of the personal and corporate income tax system in the United States. The central theme of the book is that the income tax system is not only a bad tax system from an economic viewpoint, but that it has severe political and sociological drawbacks as well. The book describes how the invasion of privacy and authoritarian tactics on which the current system is based have seriously damaged the relationship of the US citizen to his government.
The book describes the inadequacies of the current US tax system; its incredible complexity; its undesirable economic incentives which discourage saving, investment, and economic growth; the high administrative cost; the instability in government revenues caused by a narrow, volatile tax base; the incentive for wasting productivity in tax avoidance; the problem it causes in international trade; the invasion of privacy; and the tyranny of the IRS. The book shows how the Tax Reform Act of 1986 has not solved the fundamental problems of the income tax system, and explores why the US Government has perpetuated such a bad tax system for so long.
A major problem with the current US tax system is its inability to produce a sufficient level of revenue to cover desired government programs. The current system has resulted in massive government deficits and extreme wealth concentrations that threaten US and world economic collapse. The new tax system proposed in this book addresses these problems; it can help avoid economic collapse and reduce the severity of depressions.
The historical development and inadequacies of the US tax system are summarized. The archaic legislative process by which the current system was developed is described, and a modern approach to "tax engineering," based on the concepts of systems analysis and systems engineering, is presented. Alternative tax methods are identified, and the advantages and disadvantages of each method are discussed. A new tax system, based on the value-added tax, or "VAT," is proposed. The book shows how the VAT can raise the same or greater revenues as the current income tax system, but with far less economic, political, and sociological cost. The new system takes a humanistic approach to taxation: the tax system is viewed as a servant of the citizen, rather than his master. The VAT is a practical and feasible alternative to the income tax system.
Through the income tax system, the US Government has set up an elaborate and powerful police-state system for regimentation of the individual citizen. You are registered and monitored, and have lost not only your privacy but also most of your Bill of Rights personal liberties to the IRS. This book tells how you can help eliminate the income tax and stop the intrusion of the IRS into your life.
Joseph George Caldwell is the author of The Value-Added Tax: A New Tax System for the United States. A variety of experience has forged his views on taxes and privacy.
He has conducted, directed, and supervised a variety of economic studies, including studies in cost-benefit analysis, public finance, and tax policy analysis, in the US and foreign countries. He directed studies to develop alternative state allocation formulas for the vocational rehabilitation program and alternative matching formulas for the Medicaid and Aid to Families with Dependent Children (AFDC) programs. In Haiti, he supervised tax policy studies of agricultural commodities (coffee, cotton, sisal, mangoes, and meat); the goal of these studies was to develop tax policies that could improve the incomes of small farmers and increase the country's foreign exchange earnings. In the Philippines, he directed efforts to assess the social and economic impact of development projects, including the role of women as beneficiaries and facilitators of development.
A professional statistician, he has designed numerous national sample surveys, and is familiar with the constraints that the Privacy Act of 1974 and the Freedom of Information Act place on the use of information about individuals, both by the government and other organizations. He designed the statistical sampling systems for several state/federal programs. Having made heavy use of the computer since 1960, he is well aware of its power in storing, merging, and retrieving data on individuals.
He has supervised economic development projects in the Caribbean, Southeast Asia, and Africa. In his work as an international development consultant, he has had the opportunity to observe foreign governmental systems firsthand, and to consider both the restrictions that they place on the freedom of their citizens and the opportunities that those systems afford their citizens to effect political change.
As a university professor, he has had the time and resources to reflect on the problem and formulate a solution. Based on his experiences, the income tax / privacy situation in the US is an alarming one, and needs correction.
Dr. Caldwell holds a PhD degree in mathematical statistics from the University of North Carolina at Chapel Hill and a BS degree in mathematics from Carnegie Mellon University.
This is a book about freedom -- your freedom to be a private individual, unmonitored by government. That freedom has been lost in this country -- slowly but deliberately taken away -- ever since the advent of the personal income tax and the requirement to register for the Social Security Number, or SSN.
The only way to regain your freedom is to fight back now. You can stop the IRS by expressing the conviction that it is time to eliminate the personal income tax and the requirement to register for personal identification. This book tells why and how.
But wait! you may say. The government needs tax revenue to pay for everything that the citizens of a modern country demand: defense, roads, environmental protection, education, public safety, public health, and social services. That is true. Government revenue is needed, and this revenue is derived from taxes. What is objected to is the type of taxes used and the structure of the tax system.
The US tax system is a mess. The Tax Reform Act of 1986 has not addressed the fundamental inadequacy of the income tax system. The problem is not simply one of a complicated, burdensome, unfair income tax system. The US tax system cannot produce the level of revenue needed by a modern economy. It resulted in such massive deficits that the US domestic credit market could not cover them; as of 1985, the US is now a debtor nation, owing vastly more to foreign nations than they owe to us. Furthermore, the US tax system has failed to prevent extreme concentrations of wealth. The massive US debt and extreme concentrations of wealth contribute to an unstable situation that threatens US and worldwide economic collapse.
It is clear that leaving the selection of the tax system to politicians and economists has produced a disaster. Not only has an incredibly complicated tax system resulted, with the tax base defined by thousands of IRS regulations, but the system cannot raise the needed revenue. It is time for us to demand a simple, fair system that has good economic and sociological features.
This new tax system does not have to be complicated; taxes can be as simple as sales taxes and yet be very effective from an economic viewpoint. The tax base and rates do not have to be defined by thousands of IRS regulations. Having a complex tax system may serve to produce income for the tax lawyer, tax accountant, and tax preparer. But it does not serve you, the US citizen, well.
A complicated tax system is an economist's delight. A thousand PhD dissertations can address the intellectually stimulating tasks of defining income, measuring the "equity" associated with particular taxes, or predicting the economic impact of various tax changes. The federal government employs legions of economists concerned with the study of tax impact. Much of this effort is wasted on a tax system that is needlessly complicated. The evolution of the current tax structure, with its profound faults, demonstrates that tax policy is too important to leave to politicians and economists. The tax system that has evolved is a monstrosity. It is going to be up to us -- the US citizenry -- to correct this situation. And the way to begin is to advocate elimination of the income tax.
The idea of eliminating the income tax is not new. Until now, however, the idea has surfaced primarily through scholarly treatises on tax policy, or through news accounts of "crackpots" who refuse to pay on the basis of their claim that the income tax is unconstitutional. The objective of this book is to describe, in plain language, why the personal income tax is a bad tax and should be eliminated. It shows you how this tax is very costly to administer, is invasive of the privacy of individuals, encourages the waste of billions of dollars in tax avoidance efforts, and places the US at a disadvantage in international trade. You'll also learn why the personal income tax is impossible to justify on the basis of equity, or "ability to pay," and has undesirable economic side effects, including the discouragement of saving, investment, and production.
Throughout this book the term "personal income tax" is used rather than "individual income tax." Since the tax is levied on your family as much as on you as an individual, the term "personal income tax" is more descriptive of its true nature.
The corporation income tax creates as many problems as the personal income tax. This book tells you why it, too, should be eliminated. Actually, the term "corporation income tax" is a misnomer; the tax is not a tax on income; instead it taxes business profit. For this reason, in this book it is generally referred to as the "business profit tax."
In a free-enterprise economy, the last thing the government should tax is profit. The business profit tax discourages you from earning a profit while it encourages you to distort your business decisions and accounting to minimize your gains. Like the personal income tax, the business profit tax encourages the waste of productivity in tax avoidance efforts. Effort is also wasted in the attempt to estimate profit.
The business profit tax has the additional disadvantage of volatility (extreme fluctuations from year to year). This volatility makes government budget planning difficult and contributes to an increasing national deficit. When you have finished this book, you will not only have a full understanding of this weakness of the business profit tax; you will also be prepared to advocate an alternative that can improve the health of the national economy.
You may ask, if the income tax system is so bad, why does the US Government cling to it so tenaciously? As later chapters will show, the government's commitment to maintaining the income tax is based on the fact that the system provides a justification for intruding on the privacy of the entire population of the US.
In a situation such as a national health threat, large-scale invasion of personal privacy by the government may be warranted. In the case of the income tax, however, the government has set up an arbitrary system of rates and regulations that is totally unnecessary from an economic or other general-welfare viewpoint. The IRS then rigorously monitors all citizens to enforce compliance with these rules. The reason behind this monitoring and its dependence on the use of the SSN as a universal unique identifier are explained in detail in this book.
If the income tax is so bad, why has it lasted so long? There are several reasons. First, tax literature is arcane. The discussions about the inadequacies and costs of the income tax are found in academic journals and economic textbooks that are not widely read. Academic economists have criticized the income tax for years, but no one is reading their books. The US public is, in general, simply unaware of this literature, although it spans decades. Furthermore, the analyses of economists center on the assessment of the worth of a tax from the point of view of economic criteria. Except for the concept of ability to pay, their writings on alternative tax systems have essentially ignored sociological considerations such as regimentation, loss of personal rights, invasion of privacy, and the establishment of what amounts to a national police force for tax enforcement.
Second, the US Government has waged a propaganda campaign of massive proportions, touting the income tax as a beneficial, voluntary tax. It has steadfastly refused to give serious consideration to more humane forms of taxation, leading to the erroneous belief on the part of the public that an income tax is an absolutely necessary component of the country's tax system. The public now confuses the government's need for tax revenue with the need for an income tax. The former is necessary, the latter is not.
Through the income tax system, the US Government has set up an elaborate police-state system of regimentation of individual citizens. You are registered and monitored, and have lost not only your privacy but most of your Bill of Rights individual liberties to the IRS. This book tells how you can help eliminate the income tax and stop the intrusion of the IRS into your life. It describes a practical alternative to the police-state income tax system.
This book is not concerned with the issue of how much
money the government needs to conduct its operations. It addresses only the manner in which it collects that money, and
the identification of a system that can collect sufficient revenue to avoid
deficits.
There are many types of taxes: individual income taxes, sales
taxes, corporate income taxes, payroll taxes, excise taxes, import taxes,
property taxes, inheritance and estate taxes, and many more. Some of these taxes are more intrusive than
others; that is, they require the government to obtain more information about
you.
The personal income tax and property tax are especially intrusive taxes. They require the government to know who you are, how much you earn, how you spend it, who your family members are, what you possess. Other taxes, such as sales taxes, are nonintrusive -- they can be collected while protecting your privacy or even maintaining your anonymity. The value-added tax, or VAT, popular in Europe and around the world, is a prime example of a fair, efficient, nonintrusive tax. Details regarding the success of this "good" tax are presented in Chapter 15.
The worldwide growth of the VAT has been astounding. Since 1954, 39 countries have adopted VAT-based tax systems. It is a superior tax system that deserves consideration in this country. This book aims to overcome the problems that have prevented its acceptance in the US for so long, by taking the case for the VAT to the American people. The target audience for this book is the US public. It brings the issues out in the open and explains them in detail. It describes the drawbacks of the income tax in plain language, exposes the excesses of the enforcement system that is necessary to implement it, and shows how the VAT can avoid these problems.
Given the fact that the VAT is a tried-and-true tax, the basic proposals of this book are simple. First, eliminate the personal income tax and the business profit tax, replacing both with a VAT. Second, eliminate the requirement for individuals to possess a unique identifier, such as the SSN, and prohibit the government at every level from maintaining general systems of records on individuals.
These basic proposals have been derived from an analysis of a wide range of possible tax systems, using the principles of systems engineering. This scientific approach is a vast improvement over the archaic, unsystematic, hit-or-miss legislative procedures that have produced the hodge-podge of our current income tax system.
If these simple systems-engineering-based proposals are adopted, the government can collect exactly the same amount of tax revenue that it currently collects (or more), but without the need for maintaining files on individuals. IRS tracking of individuals is, at the very least, a severe intrusion into the private affairs of US citizens, and, in the long run, is a serious threat to liberty. Furthermore, it is not necessary.
This book is not against taxes -- it maintains that everyone should pay his fair share. The current system, however, is not fair. It is very costly to administer, has extremely high compliance costs, is extremely intrusive of privacy, and creates undesirable economic incentives. It is time for this system to change. This book shows how you as a private citizen can finally stop the IRS.
The day of reckoning has arrived. American citizens must choose, now, between continuing on a course that subjects them to constant monitoring, forced exposure, and control by a central government and dooms them to a future of oppressive regimentation, versus striking out on a bold, new, humanistic course -- based on a concern for the private dignity of the citizen and oriented toward the development and fulfillment of US citizens as unique individuals.
By now you must realize that this book is not simply a primer on tax policy analysis; it advocates the implementation of a particular tax system, which, although derived from the results of scientific analysis and systems engineering, is essentially a value judgment. The preferences that I express may not be your preferences. Because of the critical importance of tax policy to our society, I strongly encourage you to use this book to become aware of the basic concepts of tax policy. You can then use these concepts to form and express your own preferences regarding the choice of a new tax system.
Books on tax reform do not sell well. Books on the abuses of the IRS do not sell well. Then why another book on the IRS and the inadequacies of the US income tax system? Well, there's a big difference. This book offers a solution to the problem. It presents a feasible replacement for the income tax that eliminates the need for the IRS to enforce tax collection on individuals. You can spend a lifetime complaining about IRS abuses and how constitutionally guaranteed freedoms have been trampled on by the government. Unless an alternative method is found to collect the needed revenue, however, these offenses are going to continue. If you want to stop the IRS from interfering with your life, liberty and pursuit of happiness, and if you want to regain the freedoms that were promised US citizens by the Constitution, this book tells you how. But freedom is not free. Your help is needed to restore the Constitution and make America once more the land of the free.
The task of eliminating the income tax will not be easy. As has been done in the past, the government will attempt to summarily dismiss consideration of the proposal to eliminate the income tax with a variety of responses that dodge the issue: "impractical" … "not a serious alternative" … "the proposal to repeal the income tax is naive" … "taxes have to be complicated to be fair" … "all developed countries have income taxes." Faced with strong arguments for elimination, and having no strong arguments for continuation, the government will attempt to perpetuate the income tax system by "stonewalling": by refusal to discuss and consider its replacement, just as it has refused to hear constitutional arguments against the tax in its "Tax Court." This book rejects those emotional appeals for continuation of the current system and challenges you to consider factual arguments why the income tax system can and should be replaced.
Some may criticize this book, saying, "If you don't like the way it is in the US, then leave." Before continuing, let me emphasize one point. In spite of its imperfections, I consider the US to be the greatest country in the world. In my opinion, there is no other country that surpasses it, overall, in terms of personal freedom, economic opportunity, freedom of expression, encouragement for self-development, diversity of opinion, technical and marketing creativity, scenic splendor, abundance of natural resources, efficiency of agriculture, tolerance of nonconforming points of view, standard of living, freedom of mobility, geographic and climatic variation, cultural diversity, ambition, generosity, courage, compassion, and independence.
And, I want to keep it that way.
With the exception of war and the human population explosion and the potential for global environmental disaster that it has spawned, the current unwarranted intrusion of the US Government into the lives of its citizens is the greatest threat to our freedom and democratic system that currently exists. This book describes the nature of that threat and ways that you can act to reduce it. I urge you to actively use this information today to take back your freedom.
The US tax system has an interesting history. The current system is an amalgamation of tax methods from many times and places: the income tax from England, the inheritance tax from France, sales taxes from the Dutch and Spanish, and property taxes from China and medieval Europe. The initial direction of the US tax system was set by the drafters of the US Constitution. They were concerned, in proposing a federal government with considerable power, that its tax powers be restricted. A principal cause of the US Revolution was "taxation without representation." To ensure a strong link between taxes and representation under the new government, the framers of the Constitution specified that all collections from "direct" taxes be apportioned, or allocated, to the states in proportion to their populations.
A direct tax is a tax exacted directly from the person (or entity) on whom the ultimate burden of the tax is expected to fall. In other words, it is a tax for which the ultimate burden falls primarily on the taxpayer: it is not "shifted forward" to others. Examples of direct taxes are income taxes, property taxes, and capitation taxes (a capitation tax is a head tax, such as a poll tax). An "indirect tax" is one for which the ultimate burden is shifted to someone else. Examples of indirect taxes are general sales taxes, excise taxes, and tariffs. When these taxes are generally applied, they have the effect of raising the price of a product, so that the tax burden is passed along to the purchaser.
It is not always easy to determine whether a tax is a direct tax or an indirect tax. In many cases, the burden of a tax levied on one source is shared by several sources. Consider, for example, the case of a city sales tax in an area where there is no county sales tax. Because consumers have the option of shopping in the county, merchants in the city may not be able to shift the entire tax forward to consumers. City merchants will have to absorb some of the sales tax (by lowering their profits, wages, or cost of other inputs) to remain competitive. It may be troublesome for consumers to travel to the county, however, so that many do not bother. In this case, part of the sales tax will be borne by the merchant and part by consumers.
In addition, part of the burden may be borne by the workers if the merchant tries to absorb some of the tax by lowering wages. The extent to which the merchant can do this depends on how sensitive workers are to wages. If they are willing to relocate to the county, the merchant will not be able to suppress wages. If they are unwilling to relocate (or to change jobs to a nonretail firm that does not pay the sales tax), he will be able to.
In general, the determination of the "incidence" of a tax (that is, determination of where the burden of the tax falls) is difficult. It is not only difficult to characterize qualitatively how the burden is distributed, but in some cases economists are even in disagreement about on whom the primary burden probably falls.
Unfortunately, the US Constitution did not specify which taxes were considered direct or indirect, nor did it provide a definition; the Supreme Court has had to make this determination.
The Constitution established a strong central government, and the framers of the Constitution wanted to limit its taxing authority, both to ensure a strong correspondence between taxes and representation and to preserve the sovereignty of the states. Also, the framers were wealthy landowners, who wished to restrict the ability of a strong central government to tax land. The framers originally required that all federal taxes be apportioned in proportion to representation (population), but modified this in the final version to the requirement that all federal direct taxes had to be allocated proportional to representation.
At the time the US Constitution was framed, the principal federal taxes were expected to be taxes on commerce, imports, and consumption, such as tariffs and excise taxes. The framers did not require that these taxes -- which were indirect in nature -- had to be apportioned to the states in proportion to population.
For many years, the US Federal Government was able to support federal activities through various indirect taxes, primarily the tariff. To meet the extraordinary costs of the Civil War, however, the federal government imposed a temporary federal income tax (1862-71). The income tax was levied as a temporary war measure. It was objected to as a permanent measure for several reasons: after the war, it was no longer needed; it was inequitable; agreement could not be reached concerning a definition of income; and its administration was inefficient and intrusive.
The federal income tax was reinstituted in 1895, but was declared unconstitutional because it represented a direct tax that was not apportioned to the states.
In 1909, the corporation income tax was established. Represented as an excise tax on business, its imposition circumvented the constitutional difficulties relative to an income tax. It was imposed at a very low rate -- 1 percent.
In 1913, the Sixteenth Amendment to the US Constitution was ratified. This amendment permitted the federal government to levy and collect a federal income tax, without the requirement to allocate the collections to the states in proportion to population.
Income taxes were established as the result of a quarter-century effort to promote tax equity and reduce great concentrations of wealth. Federal tariffs were considered to impose an unfair burden on certain sectors (labor and agriculture), and income taxes were viewed as a means of redistributing income and wealth.
The personal income tax started out as a tax on a very limited portion of the income of high-income earners -- a tax of only 1-7 percent on a very small proportion (about 1 percent) of income earners. The personal exemptions ($3,000 for single persons, $4,000 for families) exempted most families from taxation. The 1 percent rate applied to income up to $20,000 -- a very large income in 1913. The 7 percent rate applied to people earning over $500,000 per year.
Until the 1930s, state and local governments depended primarily on the property tax for revenue. When property values fell during the Depression of the 1930s, tax revenue fell correspondingly. It was not possible to raise the needed state and local revenue from property taxes, and the state retail sales tax was established as a major new source for state and local revenue.
A massive increase in revenue was needed in order to cover the massive cost of World War II. In response to this need, the federal personal income tax was converted from a tax on relatively few high-income earners to a tax on the general population. Exemptions were reduced, and taxes were withheld from income as it was paid. Aware that few families could save the large sums now required to pay the income tax, the government passed the Current Tax Payment Act of 1943, which required employers to withhold the anticipated amount of the income tax from wages and salaries.
Since World War II, federal income tax levels have fluctuated around an average of 10 percent of total personal income. Many changes have occurred, however, in the nature of this tax. Since income tax brackets were not indexed to inflation, the phenomenon of "bracket creep" occurred -- moderate-income earners (skilled workers and professionals) were driven into high tax brackets. The total income tax (including federal, state, local, and payroll taxes) has risen for these taxpayers from 20 percent of total income in the 1950s to over 50 percent today.
Under a single-rate, or flat-rate tax, the tax burden remains constant over time, regardless of the rate of inflation. Under a graduated (multiple-rate) system having higher rates for higher incomes (that is, a progressive system), however, the tax burden increases if inflation occurs and would decrease if deflation occurred. Inflation occurs in virtually all economies, and the tax burden corresponding to a specified set of tax brackets hence increases as incomes grow due to inflation and individuals are forced into higher and higher brackets. This phenomenon is called bracket creep.