Sunday, September 16, 2007

The Federal Income Tax: Economic Encouragement for Crime

Some of the most glaring examples of unintended consequences throughout history have been the effect of government taxation on societal trends. In this paper we will concentrate on the United States Federal Income Tax and its implicit (and effective) encouragement of illegal activity.

There are some general assumptions I have necessarily made and which I will state here.

· Some mechanism must exist in any governmental system for the collection of taxes from the governed. Otherwise that government could not function. Whether the functions of that government are just and derived from the governed is irrelevant for purposes of this paper.

· Every society defines certain activities as illegal. Common examples are drug-dealing, robbery and not paying taxes owed to the government. Another such activity of particular interest to the United States at this point in time is that of illegal immigration.

· Citizens of any society will tend to maximize activities that are in their self interests. That is just human nature. There is of course a balance between self interests and societal interests but unless there is a direct conflict the self interests usually win out.

The U.S. Government assesses Federal taxes in several general areas. On individuals, taxes are assessed on income attributed to that individual. There are 2 main areas of federal individual income taxes; ‘standard’ income tax and FICA. On organizations (chiefly corporations), taxes are assessed on profits.

The U.S. Government officially grants tax-exempt status to certain profit-generating organizations that it deems beneficial to society. For the most part these are charitable organizations. This is done to encourage activities these organizations perform.

In the individual arena, notice the fact that ‘income attributed to the individual’ is taxed. Ideally, that would be the same as ‘income earned by the individual’. However, this has never been the case throughout history and certainly is not in the present-day United States.

Income is ‘attributed’ to an individual if the individual voluntarily reports that income to the Government or if the organization employing the individual reports that income to the Government. Individuals engaged in illegal activities never report their income, of course, and not even all individuals engaged in legal activities report their income.

As already stated in the general assumptions above, not paying taxes owed to the Government is itself considered an illegal activity.

The IRS estimates that at least 30% of all income earned in the U.S. economy is never reported, and thus never taxed. The word ‘earned’ in some of these cases may seem strange, but what else would you call money ‘received’ from illicit activities? That 30% figure includes money made by overt criminals (drug-dealers, thieves, etc), illegal aliens and otherwise-legal citizens that just don’t report their income to the IRS.

Individual Federal income taxes in 2005 amounted to approximately $2 trillion. Estimates by the IRS as to ‘lost’ income taxes from unreported ‘income’ was $700 billion. The breakdown of that unreported ‘income’ estimate was $300 billion gained from illegal activities and $400 billion gained from legal activities (mostly involving cash transactions).

The effects of a Federal Income Tax in the U.S. in 2005 were as follows:

· Americans who earned their income legally and paid taxes on that income were forced as a group to pay $700 billion (over 30% of the $2 trillion total) more Federal taxes than was their fair share. Assuming you were a legal American in 2005, over 30% of your Federal tax bill went directly to pay the tax bill of criminals.

· Every dollar earned thru criminal activity was effectively exempt from Federal taxation. Every dollar earned legally was subject to Federal taxation. At average individual income tax rates of 30%, this means that ‘income’ from criminal activity benefits it’s ‘earner’ 30% more than the income of legal earners.

The first effect, forcing legal Americans to subsidize criminals, is immoral and some would argue un-Constitutional. That it is immoral for any government to force its citizens to subsidize officially-recognized criminals should be clear. That it is maybe un-constitutional depends on interpretation of article 1 section 8 of The U.S. Constitution (‘all Duties, Imposts and Excises shall be uniform throughout the United States’).

The second effect, making criminal economic activity more profitable than legal economic activity, could be construed as a criminal offense itself. The arguments could be made that this is encouraging anarchy and acting as an accessory to crime.

Making criminal activities more economically profitable (dollar for dollar) than legal activities without a doubt introduces severe conflicts between self interest and societal interest.

It is highly doubtful that any supporter of the Federal Income Tax will ever address these unintended consequences. I will give our Government the benefit of the doubt that these consequences were indeed unintended, though it is also strange that our Founding Fathers clearly recognized the historical economic evils of an income tax in the 1780s but their wisdom was later ignored.

Plato, in The Republic, wrote that “When there is an income tax, the just man will pay more and the unjust man less on the same amount of income.” He wrote that over 23 centuries ago! It was true then and it’s true now.

Law-abiding Americans should demand that their government stop giving economic enticements to criminals. This has gone on long enough! Replace the Federal Income Tax with a form of taxation where criminals can’t escape it just by mis-reporting their income.

There is a bill before the U.S. Congress to completely replace the Federal Income Tax system with a National Retail Sales Tax for spending above the Federal poverty level. Along with its many benefits is the fact that criminals cannot escape paying their share. If they eat they pay the tax. If they buy clothes or a car they pay the tax. They pay just like the rest of us, based on what we decide to purchase. But just like them, we law-abiding Americans get to receive all our income rather than having the Government confiscate it from us as it is earned.

This bill (HR25 / S25) is commonly known as The FairTax. It lowers the tax bill for every law-abiding American primarily because it forces the criminals to pay their own tax bill.

Now isn’t that Fair?


Anonymous said...

While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan, FairTax's theoretical underpinnings have been professionally reviewed, and its acceptance in the professional / academic community continues to grow.

Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown, because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system.

Here is why the FairTax MUST replace the income tax. It's:

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity

Its benefits are as follows:

• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or "pre-bate"
• "Prebate" is "advance payback" for monthly consumption to poverty level
• FairTax's "prebate" ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates

• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
• No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets

For the COUNTRY:
• 7% - 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie" increases
• No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow

It's well past time to scrap the tax code and pay for government the way that America's working men and women are paid - when something is sold.

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