Replace Income Tax with Consumption Tax
The case for replacing the income tax is so compelling that it hardly needs discussion.
The internal revenue code is so long and complicated that no one could really understand it, not even tax professionals much less ordinary citizens. Pundits debate its length, with estimates ranging from 70,000 pages down to 2,600, but either way it is too long.1 Lobbyists have riddled it with loopholes. Tax lawyers regularly find ways to avoid taxes, and the government spends substantial amounts trying to eliminate those ways. The accounting profession devotes a major amount of its time accounting for taxes and figuring ways to minimize them. All of this is sterile, because consumption taxes would be fairer and virtually without cost to collect.
With so much wrong with the income tax, we should ask why it was not replaced many years ago. There are two answers. The one that is publicly advanced is that a consumption tax is regressive, whereas an income tax is progressive. Regressive means that the poor pay relatively more than the wealthy when compared to a progressive tax. Advocates of the federal income tax claim that it is progressive, because the very poor do not pay any tax and the less affluent pay tax at a lower tax bracket than the more affluent. This is true up to a point, but the code is actually so riddled with complicated ways to reduce taxes that its progressiveness is watered down. Tax avoidance is mostly available to people with high incomes who can afford expensive lawyers. In balance, many economists contend that the code is slightly regressive, with the loopholes offsetting most but not all the effect of higher tax rates for those with higher income. The supposed regressiveness of the income tax actually serves the same purpose as income redistribution, but Natural Governance does it far more beneficially.
The second answer is less intuitive. The public expects the federal government to stimulate the economy and create jobs. Because there is at present no simple and universal way the government can transfer money to the citizenry,2 the only way to increase the level of economic activity is to either spend money or force the public to spend money. In many cases, that is beneficial. Spending money for such purposes as hospital staffing and construction, schools, and police and fire departments, provides both tangible benefits and an increase in economic activity and prosperity. Unfortunately, wasteful expenditures still stimulate the economy. The government could pay people to dig ditches and pay others to refill them, which would create jobs but provide no ancillary benefit. The Internal Revenue Code is similar—it creates jobs that are not only without benefit, but are actually detrimental.
Therein may lie the real reason we still have the income tax. If the government eliminated it one morning, there would be a loss of jobs that would cause the economy to suffer. If Congress were to seriously consider such an action, there would be enough of an outcry to prevent it from happening.
Fortunately, Natural Governance addresses both concerns. By providing Universal Basic Income (“UBI”), the regressive aspect of a consumption tax is reduced or eliminated. Although a consumption tax benefits those with higher income, the UBI benefits those with lower income. The two taken together can achieve any level of income redistribution. Raise both UBI and consumption taxes, and income redistribution is increased.
The UBI also causes money to be spent usefully. The best decisions are made by those most immediately affected by those decisions. Both UBI dollars and dollars spent because of Internal Revenue Code requirements will create jobs. However, UBI dollars go toward goods and services people need or want, whereas IRS dollars are wasteful and sterile. Do we really think that lawmakers in Washington can spend the public’s money better than the public itself?
Admittedly, there are some potential recipients of UBI that should not receive it. However, the preemption [hyperlink to Universal Basic Income (UBI), third paragraph] capability allows the government to redirect that money when warranted.
Americans For Fair Taxation, fairtax.org, makes an excellent case for eliminating the income tax in favor of a consumption tax. The organization even addresses the regressive aspect of consumption taxes by proposing a payment similar to UBI which they term a “prebate.” However, they have not addressed the effect on the economy of losing all the jobs required by the income tax. That may be why they have not prevailed despite an ongoing and effective lobbying effort going back to 1999.3 Natural Governance does address this issue with the UBI.
One provision of the Natural Governance consumption tax component is that the most prominently stated price be inclusive of taxes, and that the purchaser not be forced to do the arithmetic. The principal purpose of marked prices is to give prospective purchaser a basis for making a decision—not to disclose the components of price. Vendors do not normally state how much of the price goes to labor, to rent, or to profit. Likewise, the tax can be disclosed, but the total price must be at the forefront. Many parents have had young children count their money carefully and decide what to buy, only to find that after sales tax they did not have enough to make the purchase. This should not happen; the public should not be burdened with the requirement of computing the end price of what they want to buy.
An incidental benefit of consumption taxes, when combined with UBI and the elimination of means-testing, is that they facilitate a workable Alien Visitation [hyperlink to Alien Visitation} policy. All non-citizens purchase something while in the United States. Illegal aliens probably don’t purchase much, but they still eat and stay somewhere. If they are farm workers, their employers may provide for them, but either way there are purchases made and consumption taxes paid. Elimination of means-testing as proposed by Natural Governance will lessen the need for alien workers, which when combined by the additional cost of consumption taxes on their behalf, will reduce their numbers and tend to limit the number to those really needed. Recreational tourists, students, guest workers, and medical tourists will all pay consumption taxes on their purchases, and will not receive UBI. This will increase the economic benefit of overseas visitors, and make UBI and the other social costs of Natural Governance more affordable. Note that under Natural Governance, non-citizens must provide their own health insurance and must provide for the education of their children. This reduces the chance of their becoming a financial burden, and lessens opposition to their being allowed to enter the United States.
[1] http://www.slate.com/articles/news_and_politics/politics/2014/04/how_long_is_the_tax_code_it_is_far_shorter_than_70_000_pages.html
[2] Actually, the government can and does transfer money to those that qualify as low income, but that has its own set of adverse effects that are widely discussed throughout this website.