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April 2017 Policy Study, Number 17-7

   

A Commentary on Property and Taxation

   

Part 8

   

 

We have all heard statements along these lines:  “With the flat tax, you will be able to file your income-tax return on a postcard,” and “We will be able to do away with the IRS as we know it.”  While the first pronouncement may have a kernel of fact in it, I certainly don’t believe it is true in its entirety.  And I believe the second statement to be out-and-out folderol.  Not all of us will be “lucky” enough to fall in the short-form category.  Only those of us who draw our entire compensation in the form of only a wage or only a salary and have no further claim to any deduction or credit may be able to file such a short form.  The distinction to note here is that you are already working with your bottom line — your absolute net taxable income.  Someone else has already computed it, quite possibly to your disadvantage.

 

The rest of us who want any input in determining what our net-taxable income might be, fall outside of the aforementioned category.  These would include persons who have abnormal medical bills; anyone who makes investments that are over and above the limits of the government-sanctioned plans, such as IRAs and 401ks; anyone who receives income from outside investments; and undoubtedly others I haven’t even thought of.  All businesses, large and small, will fall into this category.  There will still be a battle over of just what net-taxable income consists and of just exactly what that amount may be, as is currently taking place.  And this is entirely necessary.

 

It shouldn’t take the proverbial rocket scientist to conclude that a business which operates with a handsome net profit of even 20 percent would not last very long having to pay a flat 28 percent corporate tax levied on its gross income.  Throw in the fact that some businesses (like supermarkets) operate on moving a high volumes of merchandise and a net profit margin of less than one percent.  It should become quickly evident that it is highly unlikely that we can enact a flat tax levied on gross income that would not destroy our economy.  Therefore, if we levy the tax on the gross revenue, we destroy business.  Else, if we levy the tax on net revenue, we continue to navigate the same labyrinth that is the tax code that we have at present.

 

Do you believe it will be to your benefit to file the short form?  What do you really think the chances are that we will get rid of the IRS, even as we know it?  Income tax, whether in its current form or in a flatter-fairer version, like all taxes, exhibits a tendency to aggregate and embed itself into what appears on the surface to be the real cost of a product.  In truth, a large portion, of what we pay for our goods and services is that embedded tax.  Whatever that percentage might be, all who earn their own keep by the sweat of their brow pay it equally.  That is rich and poor alike.  Because of this, it is my opinion that income tax behaves in a decidedly regressive manner.  The edifice of progressiveness in our income tax is an illusion, a mirage if you will.  What you see is NOT what you get.  To continue to believe in the progressive nature of the income tax, for me anyway, would be self-delusion.

 

I will now attempt to summarize all the prior discussion for the future benefit of the reader into the following three short paragraphs.  I suppose after reading it you will ask yourself, “Why didn’t he just tell me this to start with?”  My answer is that I don’t believe it would have meant nearly as much to you as it might after having thought your way through the process.

 

The tax assessments (VAT, income tax, and all others) on each producer (individual or business) at each step of the process are merely compiled; the aggregate tax becomes a very significant portion of the cost of the final product or service to the consumer, whether or not said consumer is even aware of the embedded aggregate tax.

 

As you can see, the burden of tax did not remain with the original entities.  It was sent out the loading dock door along with the product to the next entity in the economic chain of transactions.  This process continues until someone can no longer pass it along.  That someone is the ultimate consumer.

 

What should also be noted is that this unseen aggregation of pre-collected taxes, now buried in the cost of the product, is already a flat tax and is being paid at the same rate by all unsuspecting consumers, rich and poor alike.  It seems evident to me that the progressive nature of our income taxes, as well as when and who satisfies the burden of the tax, are all a mirage.

 

If you believe and remember nothing else of what you have just read, I want it to be this:

 

PRODUCERS DON’T BEAR THE ULTIMATE BURDEN OF TAXES — CONSUMERS DO!

 

If government is necessary to affect our “Safety and Happiness,” and I grudgingly concede that it is, we have to raise revenue to fund the workings of our government one way or another.  So what’s the big deal?  Why does it matter in the least how the government generates its revenue?
Several points should be clear from earlier in the chapter:

 

1) Producers, both individuals and businesses, receive what they demand for their product.  Note, it wasn’t stated that they received what they desired.  The difference is this:  while one can desire almost anything for his product, it is unlikely that desire will be fulfilled.  On the contrary, as long as we have not become slave labor, the fulfillment of our demands, whether we are an individual or a business, is enforced by the choice not to produce the product if our demands are not met.

2) Both the individual and business respond to an incentive and are driven by the motive of self-interest, some would say greed.  There’s not much doubt that greed is a factor in motive, but it really doesn’t capture the full spectrum of possibilities contained in the more general term “self-interest.”

3) Taxes are introduced into the cost of the finished product along the entire length of the economic chain of events.  Furthermore, these taxes are quite opaque to the average, ultimate consumer.

 

   

 

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