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April 2017 Policy Study, Number 17-7


A Commentary on Property and Taxation


Part 13



7) So far in our discussion of an excise (consumption or sales) tax, there is another very import aspect that we haven’t spoken of yet.  It is the issue of fairness.


Some folks sing praises for the fairness of our current “progressive” tax system.  We take from those that have for the benefit of those who don’t.  But what if we applied this same type of logic to other aspects of our daily lives than economics?  Say, education.  Your child works hard in math class and receives an "A," but your neighbor’s child gets a "D" for whatever reason, be it inability or lack of effort.  The instructor, to be fair of course, now has to drop your child to a “B” and raises the other child to a “C”.  Or how about sports?  Your son’s high school football team is very good and is therefore given a handicap.  They only receive four points for their effort in attaining a touchdown to the opponent’s normal six points.  These things would happen all in the interest of fairness, of course.  How many of us perceive these hypothetical events as being fair?  If these aren’t fair, why is a progressive tax fair?


With an excise tax based on consumption, you pay in direct proportion to the benefits you receive.  That is, you pay tax according to your consumption level.  The more you consume, the higher your standard of living.  You pay according to how well you live.  An excise tax is equitable.


Suppose we have an individual with a million dollars.  Under today’s system, we consider him a wealthy person, and we feel entitled to tax from him some of his capital for no other reason than he has more than most of the rest of us.  Where is the fairness or justice in this?  Merely possessing that million provides him no benefit.  In fact, if it just sits some place, it provides no benefit to anyone.  It is no different than having a million Kleenex tissues sitting around.  You only get a benefit from the Kleenex when you use (read “consume”) one.


But what if he invests it, you ask?  At this point, he still receives no benefit, although he does have potential for benefit.  At this point, the direct benefits accrue to the producers who receive an income from the production enabled by this investment and to the consumers who are able to purchase and use the product.  Even in the event our individual receives a return for the use of his capital in the form of interest or dividend, he doesn’t have benefit if he chooses to reinvest.  It is only when he elects to withdraw some of his capital and exchange it for something he can consume that he receives some benefit.


The only benefit I can ascertain that merely possessing a positive net worth statement provides is the ability to borrow against it.  It will not put groceries on the table or shoes on the feet of your children; and you can’t even use it to satisfy the claims of the taxman.  Let’s assume invested capital stimulates our economy and provides benefits to others in the form of jobs and (goods and services) product.  And we all agree these things are desirable.  Then doesn’t it seem to be counterproductive to you to apply a penalty, in the form of a tax, to the investor’s behavior of doing what actually benefits the rest of us?  Incentives produce more of a given behavior.  Penalties result in less.  If our sole aim is to raise revenue for the government to function, it doesn’t seem to be rational to do it at this point in the chain of economic events.


On the other hand, what if we apply our tax at the end of the chain of economic events, the point of retail sale (consumption).  There it will not interfere with business decisions that should be based entirely on the considerations of efficient production, not income tax consequences.  It will encourage more personal savings, more investment, and more production — things, we say at least, we greatly desire.  And these things will increase the standard of living for all of us.


And although an excise tax is constitutionally mandated to be uniform, it would provide for progressivity by its very nature.  However, the progressivity would not be based on one’s income, but rather on one’s standard of living, the benefits one receives.  This is fair because our standard of living is determined by our ability to consume.


To help us visualize the point, let’s revisit our old friends Joe Hardscrabble and Gatsby Goodtimes.  As you might imagine, their standards of living are very different.  When it comes to transportation, Gatsby drives a brand-spanking-new, top-of-the line Cadillac, and Joe drives a very modest, 10-year-old used Chevy.  Concerning housing, Gatsby lives in a penthouse and Joe in a trailer.  When it’s time to dine, Gatsby sups on lobster and caviar, while Joe eats beans and rice.  The disparity that exists between their respective standards of living is painfully obvious.  It is quite clear that Gatsby is receiving a good deal more in benefits than Joe.  That’s the bad news.  The good news is that with a uniform excise tax, there will be an absolutely direct and proportional disparity in the amount of tax burden each will be required to bear.


Again, we’ll make some assumptions.  Gatsby purchased his Cadillac for $60,000, and Joe purchased his Chevy for $600.  In this example, our excise tax will be levied at a uniform 10 percent.  Gatsby is about to consume a benefit (the Cadillac) that he has valued at 100times more than Joe’s Chevy; therefore, Gatsby’s tax bill will amount to $6,000, and Joe’s will be $60.  Gatsby’s tax bill is 100times more than Joe’s.


How do we establish how much a benefit is worth?  We establish it voluntarily when we decide what portion (normally in dollars) of our assets we are willing to trade to acquire the desired benefit.  Gatsby and Joe decided on the disparity in the benefits that they were willing to settle for when they made their respective purchases of different automobiles.  And the impact on their respective tax payments was absolutely proportionate to the benefits each received.


“But,” you ask, “why should Joe pay any tax at all?”  There are at least two good reasons.  The first we have already talked about.  It is justice — simple justice.  If Joe is to receive the benefits of government, then Joe should pay his proportionate share for the cost of those benefits.  Joe has no rightful claim to the benefits of government at the involuntary expense of his brother Gatsby, no matter that his brother could well afford it.


The second reason is not so straightforward.  It is because of an inherent foible in human nature.  When man perceives a benefit to himself at little or no cost, or even a cost much discounted to that of his brothers, he has the very human tendency to exploit that condition.  If he senses it is a good deal for him, he will pursue it.  It gives him a competitive advantage.  Thus, if he perceives he can gain in respect to his brother through the use of government, though it be at the expense of his brother, he will be for it.  And if it takes a larger and more powerful government to achieve his desired ends, then he will support a larger and more powerful government.


This would only be a minor concern if we were only dealing with Joe.  But we all know Joe is in the majority.  There are, and always will be, more less-well-to-do people than rich people.  This presents a major problem when the government operates solely on democratic principles.  The majority will now vote for larger and more powerful government.  Isn’t that exactly what is happening?  How long will it be, if it hasn’t come to pass already, before our government dominates the individual beyond all hope of recovery?


It is altogether necessary that everyone pay their commensurate share of the burden for the benefits they receive.  Each of us must be made sensitive to the corresponding burden of others by the acceptance of that commensurate burden upon ourselves.  A consumption tax will accomplish this in a natural and equitable manner.


8) Do we desire a limited government?  Do we desire a government that can be held accountable by the citizen?  Do we desire “a government which derives its just powers from the consent of the governed?”


If the answer to any of these questions is “yes,” it is "we the people," the governed, who must retain their authority.  The income tax is incompatible with these desires.  It might not be too strong to suggest it is anathema to these desires.  What causes me to say this?  Because income tax takes from the citizen one of the most effective means of restraining government in his arsenal of all too few weapons.


Let me explain.  I have heard it said that our freedom rests on three boxes:  the ballot box, the jury box, and the cartridge box.  The ballot box is obviously the power of the vote, but its effectiveness in electing qualified leaders seems to me more questionable every day, though this is the fault of the citizen and not the ballot itself.  The jury box is not so obvious.  To retain final control of government, it is necessary for a jury of our peers to have the authority to bring in a verdict in “the teeth of both the law and the fact.  This is a power that is being forcefully ripped from our grasp today by the judicial branch.  The cartridge box is again obvious.  It is the last resort of an unsatisfied people.  Our Founding Fathers felt justified in their use of arms and told us why in the Declaration of Independence.  If you haven’t read it for a while, you should.  Just substitute Washington D.C. for England and think of their protestations in today’s terms.  It will cause you to think.




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