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Quick Fix: Income Tax

Since a few people are beginning to read this crazy blog I’m starting to feel motivated to write more frequently than every three weeks.  In order to add some structure, I intend to introduce a series of topics which I will call “quick fixes.”  These will be thing which could easily be done that would have a major positive impact on our system.  By “easy” I mean that they are conceptually simple, not necessarily politically easy and by “positive” I mean conducive to a stable system of individual liberty.

Perhaps the simplest and most beneficial change that could be made to our system is to abolish direct federal taxes.  Instead of taking taxes from every individual in the country, the federal government should collect them only from the states.  You could determine each state’s liability in some simple way such as proportional to their number of federal representatives.  Then have each state cut a check to the federal government once per year.

The most obvious benefit from this would be that we wouldn’t need the IRS any more which costs us about $10 billion per year.  This drastically underestimates the savings from such a policy though because it ignores the countless hours spent by private accountants and lawyers trying to manipulate the 16,845 page tax code.  These benefits, while substantial, are purely economic.  The more important implications relate to individual liberty.

The government uses taxes for essentially two purposes (other than the necessary and appropriate purpose of taxation).  The first is to redistribute wealth and the second is to micromanage individual behavior.  If they don’t want you to smoke, they put a tax on cigarettes.  If they want you to buy a house they give you a tax credit.  In fact, pretty much every time the feds propose a “tax cut” it is really a tax credit which is really a handout from the government to people they like or for behavior they like.  This is fundamentally different from a tax cut.

Now one of the reasons I like this issue so  much is that the argument against it is essentially the same as the argument for it.  Because of this, the debate forces people to identify the real issue and decide where they stand on a fundamental tenet of individual freedom.  That tenet is competition.  Now I can hear you saying “but wouldn’t the state governments just use their tax codes to do the same things that the federal government is doing now?”  The answer is that some of the states will and that’s fine with me because I can go to one that doesn’t.  If one state tries to tax the rich too much, the rich will leave.  If they put excessive taxes on business, then business will leave.  If they tax smokers too much then smokers will leave.  If they want to live in a world without smokers, they will embrace this outcome.  If, in fact, what they really want is to leech off of them, then they will be less thrilled.  This situation will cause states to compete over tax payers.  This competition will mean every state will have to find a system of taxation that is acceptable to their population.

Competition between governments would allow people to select the type of government that they want.  If you want to have government provided healthcare and you are willing to pay for it, you could go to Massachusetts.  If you don’t, you could go to Texas.  Everyone should be happy right?  The problem is that this would not allow government to use the tax code to redistribute wealth and micromanage people’s behavior.  These actions are compulsory by nature and they therefore require a captive victim.  You can’t rob from the rich if the rich are able to escape.  You can’t force the healthy to subsidize the health insurance of the unhealthy unless the healthy can’t get away. 

The argument in opposition to this policy, although it may be cloaked in creative language, will always amount to the fact that it will prevent government from doing these things.  They will say that competition in government is destructive.  What they will mean is destructive to the ability of government to redistribute wealth and micromanage individual behavior.  They will be right about this and that is exactly the point.  We don’t want that!  They do want it.  Let’s have that debate.

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Categories: Quick Fix, Uncategorized
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