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April 2017 Policy Study, Number 17-7


A Commentary on Propertty and Taxation


Part 5



Allow me once again to expand on my comments about Article II.  There, you were introduced to the argument that income tax could produce this not-so-peculiar phenomenon.  (In fact, anything that diminishes our God-given right to private property will produce this not-so-peculiar phenomenon.)  It’s true that income tax works in kind of a backward fashion.  That is, most of us are not directly reliant on the government for our pecuniary sustenance; but because the income tax has a little-questioned claim on the fruits of our labor, we are dependent on the goodwill of the legislative branch for whatever they leave us.  The precedent for this has been long established; and now it is just a question of how much they demand.  It can be anywhere between 0 and 100 percent.  Presently, it seems that the tax rate selected and upon whom it is enforced is calculated to generate the maximum amount of revenue without causing a revolution (whether that revolution be armed or merely at the ballot box is open to some question at present).  More people are refusing to comply every year.  In any event, it does leave the productive portion of society very dependent on the legislative branch.  Consequently, income tax, with its many rates, targets, and tax breaks, can and is being used to shape our wills and manipulate our actions.


When the sovereign individual no longer has undisputed first claim to the fruits of his labor, he no longer has undisputed first claim to the property of his own labor.  He has been reduced to the condition of a serf.  If we are to survive as a free and sovereign people, it is entirely necessary that governmental use of the income tax, and any other actions that diminish our rightful claim to private property, be banished forever from the whole of this land.  That means rescinding any laws which diminish that claim, as well as, repealing the Sixteenth Amendment and eliminating the IRS, not just as we know it, but branch, stem, and root as well.  Our whole philosophy of governance and taxation must be changed to coincide with the concept of private property undoubtedly held by our Founders.


Our writer . . . tells us that formerly the right of taxation was in the King only.  I should have been glad if he had pointed us to that time.  We know that Kings — even English Kings — have lost their crowns and their heads for assuming such a right.  ’Tis true this strange claim has occasioned much contention, and it always will as long as the people understand the great charter of nature upon which Magna Charta itself is founded — No man can take another’s property from him without his consent.  This is the Law of Nature; and a violation of it is the same thing, whether it be done by one man who is called a King, or by five hundred of another denomination.  (Emphasis added).  (Samuel Adams, writing in the Boston Gazette, January 9, 1769).


The progressive income tax is a mirage.  A “mirage” is an illusion, something that falsely appears to be real, or appears to be one thing when in fact it is quite another.  The object of this portion of my essay will be to convince you that the progressive nature of the income tax is just such an animal . . . a mirage.  The pervasive and manipulative influence of the federal income tax system on the lives of the American people can hardly be overstated.  There are few who would defend its often intrusive and pernicious effects on their lives.  But do you understand how it truly behaves and its real impact?  When it comes to income tax, are you sure what you see is what you get?


The private revenue of individuals, it has been shewn (sic) in the first book of this Inquiry, arises ultimately from three different sources; Rent, Profit, and Wages.  Every tax must finally be paid from someone or other of those three different sorts of revenue, or from all of them indifferently.  I shall endeavour (sic) to give the best account I can, first, of those taxes which, it is intended, should fall upon rent; secondly, of those which, it is intended, should fall upon profit; thirdly, of those which, it is intended, should fall upon wages; and, fourthly, of those which, it is intended, should fall indifferently upon all those three different sources of private revenue . . . Many of those taxes . . . are not finally paid from the fund, or source of revenue, upon which it was intended they should fall.  (Emphasis added).  (Adam Smith, Wealth of Nations, Book V, Chap. II, Part II).


Everyone undoubtedly has their own ideas about how our tax system works and its effects, especially in their own circumstances.  Just as surely they feel they have a reasonable enough understanding of the income tax system to comfortably answer the questions posed above, with little fear of reproval.  That may be the case; but after reading the snippet from Adam Smith, are you still confident you know how income tax really works?  This author does have some specific ideas on how he believes income tax behaves; but he is quick to remind you that he lays no claim to total accuracy on the subject.  Yet, I think you will find the case put before you interesting, if nothing more.  It may well introduce you to a perspective on income tax you have never before considered.  I ask that you approach this with an open mind and reserve your judgment on the efficacy of my argument until you have completed the tract.


When we think about how our tax system works, the questions most often asked are:  at what rate and on whom or on which entity is the tax levied?  And then we pray that it falls on someone else.  I believe, to better analyze and more fully appreciate the workings of a tax system, that there is a far better question to ask:  at what point in the chain of economic transactions is the tax burden satisfied?  In other words, regardless of the initial payee or in which position in the economic chain of transactions that the tax event occurs, who is it that cannot escape the tax consequences?


At this point, I could give you what I consider to be the answer; but it would be useful for you to think through the problem in somewhat the same manner that I originally did.  With this in mind, I present you with an example that most people find more tractable than income tax itself, simply because it is more transparent, if not readily apparent.  The object of our initial discussion will be the “value-added tax.”  A VAT does just exactly what the name implies.  It places a tax on the incremental increase in value of production at the end of each productive process, that end being the point in the economic chain of events where the product changes hands and an economic transaction occurs.


The cost of production for that increment is established.  The cost of production includes:  the cost of the original raw product; any added raw product; the cost of facilities and equipment; the cost of labor and intellectual talent; the cost of insurance; etc.  At this point, the cost of production also includes any and all taxes that have been levied on this product prior to the acquisition of this product by the current holder.  To these costs is added whatever profit margin the current holder thinks that the market will bear.  The VAT is then calculated from this figure and added to the cost of the product.  This will become the raw product price for the next buyer in the economic chain of events.




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