by Rod D. Martin
October 3, 1997
The recent hearings on abuses by the IRS have shown all too clearly the dangers of handing anyone arbitrary power. The key word here, moreover, is “arbitrary.” As Nobel Prize-winning economist F. A. Hayek showed more than fifty years ago in his classic “The Road to Serfdom,” a arbitrary bureaucracy can destroy liberty just as surely as the worst tyrant. No one who watched the hearings will deny this.
It need not be this way. But just any ole tax reform won’t do. We must design a new tax code that rigorously conforms to three guiding principles: Workability, Visibility and Fairness.
The chief guiding principle of tax systems historically has been workability: will the system collect all the taxes owed? But if this is our only aim, why not hire the mafia to collect taxes (some might say we already have)? This principle by itself is not enough.
The second principle, visibility, has been consciously designed out of every major tax system in the world. The reason is simple: if you want to be able to tax the people arbitrarily and without accountability, you must design a tax code they can’t figure out. France’s failure to do this in the 18th century helped bring on the French Revolution, and every government since has taken notice. By contrast, if you want people to know exactly what they owe and why — thus making it politically difficult for government to raise taxes and spend wantonly — design an open, simple code.
The third principle, fairness, should be obvious, but again has been purposely abandoned in our system. In the euphoria of socialistic hubris, our government created a “progressive” income tax, which is to say a system which takes more from people based on how much they make. This is obviously immoral: the Bible tells us that to discriminate between the rich and poor simply because of economics is wrong, and its own tax system, the tithe, models this by setting a flat rate for everyone. But greed and envy have dominated this century, and such basic principles of justice been thrown out in favor of the perverse system we have. As one of my recent columns demonstrated, the cost of this has been a stunting of the American economy by over half in the last fifty years, and the creation of a legal system based on theft. It’s clearly time for a return to the principle of fairness.
How would a tax system based on these three principles look in practice? Well, first it would center on a flat income tax. Some critics want to go to a national sales tax and abolish the IRS entirely; but I must disagree. As the tithe illustrates, there is nothing inherently wrong with a tax on income; and an IRS stripped of its ability to arbitrarily enforce the present labyrinthine tax code would be no threat. On the other hand, a national sales tax plainly violates our second principle, visibility: because it is simply added to the cost of various products, and because it is easy for government to set different rates on different items, no one ever has a clear idea of what they’re paying per month under a sales tax regime. This fuzziness helps big government, not the people.
A flat tax eliminates all problems. Easy to administer, most of the IRS could be dismissed immediately. Easy to understand, everyone could figure how much they owe with simple calculations in their head. If government sought to raise the tax, they couldn’t hide behind twenty-three deductions and exemptions as they do today: they would have to say precisely how much taxes were going up, whereupon everyone would immediately calculate the intensely personal cost and begin to oppose the re-election of their spendthrift legislators. And above all, a flat tax would be fair. No one except the hard-core socialist can argue with that.
Some question the workability of a flat tax, but this is easily answered. Hong Kong, which has the functional equivalent of a flat tax, has had the fastest growing economy in the world these past fifty years. At the end of World War II, its average personal income was less than $200; today, it rivals the United States at $25,000. The former British colony consistently enjoys budget surpluses and even has reserves (as opposed to debt) of around $60 billion. And far from overburdening the poor, the flat tax system has made them rich compared to all their neighbors, while collecting 75% of all taxes from the wealthiest 10% of the population. Clearly the system works, and works wonders.
Even more important than simply enacting a flat tax is eliminating withholding. Withholding works just like the rest of the present tax system to lull taxpayers to sleep: they become accustomed to what is taken from their check and, knowing they will likely get an indefinite refund, don’t think much about it. Our new tax system must end this. At the end of each month, a worker’s pay stub should show what the employee owes, and the worker must be responsible for writing a check for that amount just like all his other bills. When he is forced to write the check, when he actually has to take money from his pocket and hand it to the government, only then will he demand accountability in Washington for how his money is spent.
Finally, our new tax system must eliminate capital gains tax — which is the equivalent of taxing a farmer’s seed corn — and inheritance tax, which is nothing more than blatant socialism. Far from increasing government revenues, these taxes have distorted and stunted economic growth disastrously, and in the process cut the actual tax revenues for which the government is so greedy. Moreover, these taxes, which ironically hurt the striving middle class far more than the rich, set a federal example that teaches class envy as good, theft as okay so long as it’s done by majority vote, and redistribution of wealth as the chief means of progress. All these lessons are false, and it’s time we stopped using our legal system to teach them.
A tax system based on these principles will more than double American economic growth in the next generation. But more than that, it will give Americans back the freedom they’ve lost to an army of IRS agents, tax lawyers and accountants, and it will promote values we can all believe in. This is plainly the tax reform that we need now.