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April 2017 Policy Study, Number 17-7


A Commentary on Property and Taxation


Part 12



There seems to be little use in dwelling on the direct taxation, so we’ll move on to the second general category of indirect taxation.  To initiate this change, I suggest we take a serious look at a true retail sales tax.  This method (an “excise” tax) is one of the very few, and limited, methods of indirect taxation our Founding Fathers prescribed for us in our Constitution; the other two methods are duties and imposts, and “all duties, imposts and excises shall be uniform throughout the United States.”  (Emphasis added).  (Article I, Section 8).  Please take note that once again each specific tax is to be uniform and NOT progressive.


The point of retail sale is, in reality, and whether we like it or not, the point in the economic chain of events where any and all tax burdens are finally satisfied, simply because the tax incidence (burden) can be passed no further.  With retail sales tax, the burden that one shoulders, as a taxpayer, would be readily transparent to all, as it must be.  If the tax burden is not visible, then many people are deluded into believing that they are receiving a bargain from government or, worse yet, that they are receiving something for nothing.  With this state of affairs comes unlimited and unrestrained government.  Why?  Because they will use their vote to support candidates who will provide this falsely perceived “good deal.”  They believe that they are making a rational decision, and if what they perceived was the reality of the situation, they would be.  But what they perceive is not real.  It’s a mirage.


Although little can be done about the ubiquitous regressive nature of taxes, we can certainly implement a system that is much more transparent to the taxpayer so that he may readily comprehend the tax burden he must shoulder.  Bear in mind, this is not a call for additional taxation.  It is a plea to change the method we use to collect tax, a further change as to the objects on which we levy a tax. and most importantly, a change to make it entirely visible to the taxpayer.


There are many reasons we should contemplate a change in the way our government bodies procure revenue.  The most compelling reason shall be saved for last by design:


1) It is doubtful in my mind that our Founding Fathers contemplated any beast vaguely resembling an income tax.  The proof should be in the fact that they didn’t implement one.  They didn’t even mention an income tax in our founding documents or, as far as I have been able to find, in their correspondence of the day.


There was an attempt to establish an income tax in the late 1800s, but it was promptly declared unconstitutional.  It has only been in the twentieth century, with the passage of the Sixteenth Amendment in 1913, that our lawmakers finally contrived a method of income taxation that could withstand a constitutional challenge.  It may pass the muster of a constitutional challenge because of the nature of the “voluntary assessment” provision of the law.  But the fact that it must be enforced through guile, threat, duress, and coercion tells me this is not truly a voluntary system, which hence makes it suspect in my mind.


In fact, it wasn’t until the implementation of the “temporary” Victory Tax and “withholding at the source,” which were enacted for the World War II effort in the early forties, that we developed the system we struggle under today.  The point being, for all practical purposes, that for the first three-quarters of this country’s existence, we progressed quite nicely without an income tax.  We didn’t need an income tax then, and we don’t need it now.


2) The fact that the great majority of the tax we pay has been pre-collected in the chain of economic activity somewhere in advance of the point of retail sale does not preclude the additional fact that the actual burden of tax is borne by the retail consumer at the point of retail sale.  Yes, it is true that a retail tax is regressive; but it is no more or no less regressive than our current method of collecting tax, simply because that tax burden exists in the product and is incorrectly perceived to be an authentic cost of the product, rather than the aggregation of taxes that it is.  Income tax is also regressive, so it is of no real advantage to the less fortunate.  On the contrary, to the disadvantage of the victims of an income tax on production, it obscures or, more probably, conceals the truth from them.


3) The federal government already collects taxes on sales, and, with but a few exceptions, the states do likewise.  It is evident the machinery to collect a sales tax must already be in place.  The mere fact that the rates would change and larger amounts would be collected should add very little expense to the collection process.  The scope of collection for sales would broaden, and this would cause some increase in collection costs; but these would be minuscule compared to the cost of current tax preparation and to the costs addressed in the next two points.  All things considered, a shift away from our Rube Goldberg income tax scheme and the onerous compliance costs that accompany it to a transparent consumption tax would create a tremendous net savings to our economy.


4) When we think about an excise tax (consumption or sales tax), we normally envision it as being applied as an added cost to products with prices we are already familiar with.  That is, a tax added to products that already contain the compiled aggregate of taxes levied through the use of income tax and other taxes, user fees, tolls, etc., throughout the entire length of the chain of economic events.


If we were to establish an excise system of taxation in lieu of income tax, the cost of the finished products we purchase could be decreased by almost exactly that amount attributable to the compiled aggregate of income tax now included.  OK, once more — this time in English.  If we have a product we wish to purchase that now retails for $100 plus tax, but has included in its retail price $35 of income tax passed through from the producers, the price from which we would now calculate our excise tax would be $65dollars, not $100.


There is little doubt that companies would try to maintain the current retail price to enhance their profit margin.  But competition will win out.  First one and then another will lower their price to capture a larger market share.  Although this will lower their profit margin per unit of sales, it will increase their overall net margin at the expense of their competitor’s sales.  Profit margins will readily return to previous levels, and the true product cost to the consumer will drop because now the cost no longer includes all of the income taxes that have heretofore passed through to the consumer.


5) It is true a business has a bona fide need to keep records for the express purpose of making business decisions.  Apart from the aforementioned purpose, businesses are forced to endure substantial additional costs that add nothing to production but are solely incurred as a result of complying with our myriad tax laws.  These costs to our economy run to the billions and billions of dollars.  You should take this next statement with a grain of salt, but I have seen it written that the cost of income tax compliance to our economy is very nearly equal to the revenue collected.  If this statement is only 10 percent true, it still serves to show that the income method of taxation on production is an inefficient and unnecessary drag on our economy.


6) When considering a business decision, one of the first, if not the very first, questions the business asks is, “What are the tax consequences of any given decision?”  The questions, “Can we produce the same quality product for less?,” or, “Can we produce a better quality product for our current cost?,” take a backseat to, “Will this increase the bottom line on our 1040 Form?”  I hasten to point out that the answers to the first two questions are not necessarily in conformity with the last because the tax consequences to the business may require a course of action that enhances the bottom line, but can be a disfavor to the consumer.


Here’s a simple explanation.  Suppose a company was contemplating the capital purchase of a new machine that would allow them to produce 10 percent more product with the same amount of labor.  This would lower the cost of the product to the consumer, and one would think, add to the company’s bottom line.  But because tax laws restrict the company to depreciating the cost of the machine over a period of seven years, and this restriction causes the company’s bottom line to drop the first four of those seven years, the company decides to continue using its old machine.  The increased production and the lower cost to the consumer are lost.


My first impulse is to say that this is really a stupid way to make a decision.  Upon further reflection, one will see this decision is entirely rational.  After all, a business’s first obligation is to its stockholders.  The real problem is caused by the introduction of a factor (taxes) quite outside the realm of factors that need to be taken into account for actual production.  This causes far too many inefficient and even counterproductive decisions to be made and implemented, even if they are entirely rational.  I hope you can see that it isn’t just the hidden tax burden that costs the consumer, but also the increased costs of production that tend to follow decisions based on tax consequences.




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