During the 19th and early 20th centuries, America was economically fixated on two issues - the influence and anti-competitive nature of monopolies (trusts), and the imposition of an income tax to fund the federal government. While anti-competitive trust-type issues continue to crop up in the U.S. today (e.g. Microsoft, various telecom issues, 'big oil'), debate over having a federal tax based on strictly income has been relegated to the outskirts of ultra-conservative and libertarian "fringe" groups. In mainstream circles, debate centers around the level and structure of taxation - progressive versus flat - rather than the nature of the tax - personal income - itself.
Reading the Constitution sans amendments after the Bill of Rights, it can be rightly discerned that income tax, outside of a constitutional amendment, is unconstitutional. The Constitution firmly sets forth the method by which the federal government is to be funded - first by revenue from tariffs, and secondly from funds requested by the federal government from state treasuries.
Necessity of Additional Tax - Times have 'a changed
Many on the populist/conservative/libertarian side today advocate for a strict return to federal revenue funding as set forth in the Constitution. Under most every other condition, I am in support of a return to original intent. However, this is one instance where we must consider the radical changes that have taken place between 1789 and the 21st century.
First and foremost, let us take population. At the time of the signing of the Constitution, our population was approximately four million. Today, we are 30o+ million (and most of those here legally!). Obviously, the defense and infrastructure to support 300 million people, plus a vastly expanded geographic area, is exponentially more than that of four million primarily along the Atlantic coast.
Secondly, and perhaps more significantly, the nature of our economic situation has changed since the late 18th century. America has always enjoyed a high standard of living. In fact, prior to the Revolution, the standard of living of the average American was higher than that of the average Englishman. But the economics were much different, as well. At the time of the signing of the Constitution, America was a sparsely populated area, with abundant agriculture which allowed for an over-producing class of industrialists and tradesman. Our domestic farm and industrial capacities resulted in massive over-supply relative to the domestic population, which resulted in highly profitable trade opportunities. Simply put, our small population consumed much less than we produced, and we sold the glut to the larger populations of Europe.
Obviously, today things are much different. With a population of 300+ million (legal), the United States is the third largest country in the world. With a GDP of approximately $14 trillion, American has (pay attention here, Sino-philes), by far, the largest economy in the world. Even more impressive is to consider that China's GDP - about $10 trillion, is the result of a population of 1.3billion. The United States manages 40% more with a population of just .3 billion. But that's a digression. Back to the main point.
I love and firmly subscribe to the doctrine of original intent. However, I do believe that the economic system established by the Constitution did not, and could not, anticipate the necessity of government today (even sans any 'entitlement' programs), nor the economic dominance of the modern American state. I do believe that, in regard to original intent, an overriding principle of the Constitution was a belief in and implementation of the free-market theories of Adam Smith. In the year 1790, the world was not the market as is the case now. The framers, I believe, would have no doubt supported the idea of free trade versus protective tariffs given their belief in free market efficiencies.
This does, however, leave us with the question of the validity of income tax. At its core, an income tax is a violation of due process. The framers understood that the various forms of property- wages, liquid assets, real property, stocks, bonds, etc. - formed an individual's private property. In today's terms, we would refer to it as a "portfolio." Just as you cannot deprive an individual of real property without due process - foreclosure, punitive seizures of stocks, etc. - you cannot deprive an individual of real monetary property, in this case wages, without due process. Legally speaking, the two, liquid assets and "property," are the same. This argument is set forth by some today to point to the unconstitutional nature of federal income tax. But, regardless of the validity of the spirit of the argument, and regardless of the suspicious environment in which the 16th amendment was passed, income tax has been made, through constitutional process, a legal funding mechanism of American federal government.I would add that, although it may be legal, that does not make it right.
Back to Original Intent
As previously stated, I am a big believer in original intent, and I believe the incarnation of today's progressive federal income tax system is diametrically opposed to the original intent of the Constitution from both political and economic perspectives.
If we agree the original intent of American political philosophy was to establish a government under which the protection of individual liberty was the focus from the standpoint of the citizenry, and the allowance of a free market was the primary concern from an economic standpoint, then we have to understand how a progressive income tax is wrong. I would also point to the strong belief among our framers that local government is preferable to federal. The Constitution plainly restrains the federal government to those powers specifically enumerated, reserving all other rights to the states, and the people. As President Reagan so rightly pointed out in his 1980 inaugural address, the federal government did not create the states. Rather, the states created the federal government. That was, without a doubt, the original intent.
Return the Power of the Purse to the States
For a while, I was receptive to the idea of a consumption tax - a national sales tax - to replace the income tax. In my mind, as appealing and "fair" as a flat tax is, it is still the seizure of property (wages) without due process. Even moreso, while a flat tax is much more fair, it also is forced, considering in no degree of individual decision to pay or not to pay. That is just un-American to me. A consumption tax solves that problem. You, as the consumer, make the personal choice to purchase or not to purchase, with the full knowledge that a portion of the price you are paying is diverted to fund the federal government.
In theory, I still like the idea. However, in practice, I am increasingly afraid such an action would result in the suppression of another pillar of the American system, the free market. Technically, consumers would still be "free" to make choices in goods and services. However, as has been demonstrated by state sales taxes on various products, a consumption tax lowers the level of consumption. Beyond the immediate effect on federal government funding, there is a good chance such a tax could suppress consumer spending, holding money out of circulation, resulting in lower sales across the board, resulting in lower shareholder value across American companies, resulting in lower dividends, resulting in lower personal income, resulting in less cash to spend, etc. It is easy to discern the vicious circle here. Mainly for this reason, I do not believe a national consumption tax to replace an income tax would be a prudent idea.
So return even deeper to original intent - powers not enumerated to the federal government are reserved to the states. Outside of the 16th amendment, the Constitution allows specifically for two methods of revenue for the federal government - tariffs, and formal requests from the federal government made to state treasuries. As explained above, given the demographics and economics of modern America, tariffs would be counter-productive, and even serve to undermine the pillar idea of a free market economy. So, revisit the notion of the feds being funded by the states.
Many would classify this notion as outdated as the third amendment which prohibits the Federal government from quartering troops in private dwellings. But is it really outdated? Let's take the obvious - the United States is just that, a union of the many states (remember the Civil War?). We are not the "Federal Union of America" on purpose. Our founders believed that the more closely citizens were engaged with their government, the more effectively the republic would
function. And the most efficient method of forming a national defense and for promoting the general welfare of citizens in the new continent was to form a confederation of the post-colonial (read 'state') governments. Back to the point, the states created the federal government.Since the federal government was the collective creation of the states, should not the funding of the federal government be the duty of the states? Think of the federal government as the enterprise company, and the states as the venture capital fund. I believe that model holds true.
If we undergo such a radical change in government revenue, that states should provide the bulk of funding for the federal government versus the individual citizen, how exactly would that play out? It is an easy theory to propose, but in order to ensure the viability of free markets and the funding levels necessary to maintain government, a practical implementation of the idea must be defined.
Funding the Fed by Free Market Competition
As things now stand, you will pay the same amount of federal income tax whether you live in Maryland, Alaska, or Texas (assuming your income levels and deductions are proportionally equal). How would this change if the federal revenue stream was shifted from individuals to states?
First, let's discuss the nature of the revenue stream from the states. I could see a Constitutional amendment which repeals the 16th amendment, while concurrently establishing federal funding levels from state treasuries (which is kind of like 'asking the states') based on a percentage of state GDPs. In other words, California, Mississippi, Virgina, and all other states are responsible for paying the federal government X% of their overall annual gross domestic products. And this would be a flat rate across the country, so that "rich" states paid the same, percentage-wise, as "poor" states.
Here, I must digress to stave off a potential argument: Rich states pay more taxes, but poor states receive more federal benefits (this might even reverse the Democrat/Republican dynamic!). Okay, theoretically, yes, this is true. However, theoretically, it is also arguable that "rich" states have much more of a vested interest in international stability and national security than "poor" states, and considering that a good degree of federal revenue would be dedicated to these purposes, it shouldn't be an issue that "rich" states trade a little of their revenue for entitlements versus a strong national defense.
That being said, there is also the issue of a geographic free market that this system creates. This is my favorite aspect of this approach. Funding the Fed based on a percentage of state GDP will actually result, I believe, in competition among the states to attract populations. As we know, increased competition ultimately benefits the individual consumers, in this case, the citizens of particular states.
With Federal contributions being set according to state GDPs, states would be forced to find ways to raise revenue in their coffers earmarked for federal funding. This would likely take the form of state levied income taxes, state levied corporate taxes (although corporate taxes really don't exist - that's another post), and other tax/incentive packages. The result will be a competitive market among the states to attract higher-earning industries and higher-earning individuals with various tax packages. Today, states engage in this to some degree, but assuming the needs of their citizens are met to the degree of producing a relative complacent constituency (read as 'good for incumbents'), states typically aren't concerned about going above and beyond in terms of economic development. However, if state politicians understand that a dedicated part of their treasury is tied to funding the federal government, incentive exists on two levels. First, since the feds take money "off the top," the greater the gross intake to state treasuries, the more ability the state politicos will have to live up to their promises. Secondly, the more that state treasuries directly contribute to the federal government (rather than individual citizens), then theoretically the more influence particular states will have with the feds. States which are currently "poor" and thus would exercise little influence would no doubt launch aggressive programs to attract population and wealth to their boarders, in order to gain influence within the federal government. Wealthy states would implement programs designed to keep their influence at a premium. It doesn't take an Ph. D. in economics to discern how individuals would benefit from this entire arrangement.
Impact on the Individual
The direct impact on the individual citizen may not be immediately indiscernible. The bottom line is, to maintain the infrastructure and security that 21st century America demands, some level of personal tax must be paid. We must be careful that this tax does not have a detrimental and counter-productive result in regard to the economy (as I now think a consumption tax would), but also doesn't punish success and innovation (as I believe our current progressive tax system does). A tax system more in-line with original intent, as described here, would be the most preferable.
All that said, as an individual, a tax based on the amount of money the individual makes would ultimately be paid. The question is whether this tax be levied by the Federal government, or by the states with a backend requirement of state-subsidy to support the Federal government. While the Constitution sans the 16th amendment does not enumerate the power to collect income tax to the Federal government, it also does nothing to prevent the states from collecting a tax based on citizen's incomes.
As a benefit for the individual, this system accomplishes the same as introducing competition into a retail marketplace. Instead of a single tax system directly effecting individuals, you now have 50 such systems, each of which is geographically bound. That equals competition. That means individuals can, on a state-by-state basis, evaluate which taxation system devised by the state (with the knowledge of funding both state functions and a required contribution to the Federal system) is the best for them, and voluntarily enter into this system through state citizenship. The free market wins again.
3 comments:
Might I suggest an idea that goes way back -- Old Testament times -- and was well known and well regarded in the late 19th century? A wide variety of renowned economists have agreed that it is logical and just and efficient (but few have seemed to deem it to be in their own personal best interests to go beyond acknowledging those truths to recommending implementation, which leads me to wonder about their motives).
It differentiates between that which the individual creates -- his wages, his savings -- and that which the community creates, both through its simple existence and through public investment.
What is the effect of public investment? Any worthwhile public spending -- schools, fire protection, paved and plowed highways, police and ambulance, libraries, a bus system, a new bridge, a subway system, an new stop on a subway or exit on an interstate highway -- adds more to local land values than it costs. (And if it doesn't, it probably doesn't make sense to do it! Think of the Bridge to Nowhere, or virtually any pork project.)
What is the effect of an increase in population within any given area? It drives up land values. That will show up in higher selling values on houses and condos, higher monthly rental prices for apartments, higher commercial property selling and renting prices -- but the buildings themselves do not appreciate: like anything else manmade and replicable, they depreciate -- about 1.5% according to a 2006 FRB study. It is the land which increases in value, in proportion to its proximity to the amenities people and/or businesses find desirable.
Therein lies a natural revenue source for funding public spending. It is efficient. It is just. It does not take from the individual (or the business, for that matter) that which he/it creates. Rather, it recaptures for the community that which the community has created.
Income taxes are a burden on the economy. They are a clumsy tool to recapture for the commons that which the commons needs. They penalize the industrious.
Sales taxes are no better, and possibly somewhat worse. They create middlemen, who pocket a windfall as their own profit. They force the buyer to pay far more than the value the worker/business has created.
But if we treat land value -- first, the locational value of sites -- as the rightful revenue source, and tax it rather heavily, we haven't taken from any individual or business that which he/it created; we've merely recaptured for the community that which the community created in the first place.
(Which is to say that funding the Bridge to Nowhere might be fine -- as long as we collect back from the enriched landholders at both ends of the bridge the economic value we created, rather than making a mighty generous permanent gift to the lucky recipients of our largesse. Tax the land value, year by year, and use that to fund the next project somewhere else! They might decide they don't need the bridge after all, particularly if they don't plan to put the land to any particular use.)
Site value alone may not be sufficient to meet all our revenue needs. So what? It is legitimate to tax it -- heavily -- as our underlying revenue source, BEFORE we start taxing sales at all, or wages at all. (And if we must tax wages at all, let's start with the very highest wages only, not the first dollar people make, or even wages at the median. If we must tax sales at all, let's start with luxury goods, and perhaps so-called sin taxes, not taxes on the essential products that people below, say, 200% of median income are likely to spend their money on.)
But if we agree that wage taxes are generally undesirable, and sales taxes undesirable, and find that site values are not sufficient to fund all the vital services, there are still some other things we can -- and should! -- tax just as legitimately as we can collect the economic value of land.
Water rights, which some landholders seem to have, are similar to land. The landholder didn't create the value of water, and all of us need water. Should we have to pay the landholder for it, or pay the community for it?
The electromagnetic spectrum, we say, belongs to the American people. Well, we say that about the "airwaves" anyway. But so far, we've been content to let our corporations treat it as their own private property. They buy it and sell it among themselves, keeping the profits for their shareholders and highly-paid managers. Why shouldn't we tax that economic value highly? Collect the economic rent, as our common treasure. Don't sell any more spectrum outright. Don't auction off long-term leases that don't collect the rent as it rises, as it naturally will. Corporations are rent-seekers. Well, we shouldn't let them keep the rent: it is ours -- all of ours.
Airport landing rights are a scarce resource in some places. Who should benefit from that? The airlines? No!
Oil and natural gas prices have risen. Have royalties paid to the commons, for natural resources extracted from federal land risen with those prices? No! Are royalties even paid to the commons for oil drilled from privately-owned land? Why on earth should corporations who own land, or individuals who own land be entitled to those royalties on natural resources??? Tax that income -- but do it as royalties, not as an income tax. And tax it heavily, since we aren't taking from them anything they created or are rightly entitled to.
The right to pollute is another similar asset. Don't give it away to the biggest polluters in proportion to how much they pollute now! Auction off short-lived permits to pollute, and do it again when those expire. (See Peter Barnes' Capitalism 3.0 -- available as a PDF file or as hardcopy for more on this.)
I've only scratched the surface, but you get the idea.
Think about the kinds of monopolies that such an approach would break up. It would have very desirable effects on a number of monopolies that some of us don't immediately visualize as monopolies: the collection of individuals and corporations who are enriched by privatizing our natural resources and our most valuable land. There is a 1-acre site in Manhattan, not far from Grand Central, that is expected to sell for $1 billion. The buyer will likely tear down the existing building -- at some expense -- so that site should be valued at over $1 billion -- yes, billion with a B. Should the seller be able to walk away with that increase in land value over whatever he paid for the property? Did he make it valuable? (Remember, the building will probably be torn down as obsolete.) That would be, at best, a "polite fiction" -- but one which is quite unjust to the rest of us. And our tax code allows him to do a 1031 exchange and avoid paying even a capital gains tax on the profits. (It isn't capital; it is LAND.)
Those who wrote our Constitution were landholders, and some of them were slaveholders, and they weren't about to explicitly devalue their greatest sources of income -- and privilege -- and their individual posterity's inheritances in how they framed things. So I approach "original intent" with a bit of skepticism and suspicion, at least where property is concerned. To the extent that the framers protected the interests of "people like themselves," I think we need to re-examine the effects in the 21st century of conforming ourselves to their conceptions of justice and "rights."
Wages and savings are very different from land and natural resources, and must be treated differently. (Even when someone has traded their savings for land or to purchase a slave!) And to the extent that one person's (or corporation's) property rights limit another person's right to himself, we must re-examine the property rights.
As one of my favorite economic thinkers puts it, there are two basic principles of justice:
1. Every person has a right to himself or herself.
2. All persons have equal rights to the gifts of nature.
To me, the first of these rules out a wage tax or a sales tax, at least until the annual economic value of "gifts of nature" are virtually fully taxed.
I place these ideas far about the framers' ideas of "property rights."
What do you think?
LVTfan
ah --- that last should have read "far above"!
Great, well thought-out post. You've obviously spent a lot of time considering this issue, as I have. As you can imagine, I do disagree with some of the points you make here. To give my point of view, I'll take your comments and reply on a per-point basis (in italics), as best I can.
First, I would make one overarching point that, from my point of view, the heavy taxation of land is both discriminatory and regressive. By this, I mean that, rather than spreading the tax burden among all citizens to dilute its detrimental effect on any single group, a heavy land tax singles out developers and landowners. That is the discriminatory part. The regressive part is the same as with a consumption tax - heavy land taxation would serve to depress development and purchases, leaving to a relative stagnation of land prices, which would have a negative effect on the treasury, and reverse many of the statics which you quote.
Ok, two overarching points. The big point of my taxation strategy was not so much to define the method of taxation, but to change the way, more in line with original intent, in which taxes are collected. We both seem to agree that income taxes and sales taxes are punitive and regressive. However, rather than imposing a single tax structure over the citizenry as a whole, why not allow the states to compete for the best tax structure. This would be good for consumers, the economy, and ultimately, the treasury.
Now, that being said, on to some finer points:
It differentiates between that which the individual creates -- his wages, his savings -- and that which the community creates, both through its simple existence and through public investment.
I wonder if this isn't a bit of a vicious circle. Community - outside of private corporations and individuals which you discuss later - is the government investment in an area. Be it federal, state, or local, we're talking about the usage of government revenue, and the only source of government revenue, practically, are taxes. I may be misunderstanding something here.
Therein lies a natural revenue source for funding public spending. It is efficient. It is just. It does not take from the individual (or the business, for that matter) that which he/it creates. Rather, it recaptures for the community that which the community has created.
I believe in this comment lies our fundamental philosophical disagreement. If I am understanding what you're saying, you assume that land belongs first and foremost to the particular community, and then private interests acquire that land to the loss of the community.
First, I would say that land is a source of revenue for the local governments. I pay the property taxes on the lot on which sits my house, which then goes to fund my local government, schools, etc. True enough, these tax dollars don't go to the state or the feds. However, should states deem it to their advantage to tax land, in the way you describe or otherwise, this is perfectly allowable under my system. The state must develop a taxation system to meet their GDP requirements for funding the federal government, but this could be done. I'm not sure many states would opt for this option, but it would be on the table.
From a philosophical standpoint, I do not accept the fact that the land primarily belongs to the community and is acquired by private concerns. And I understand that many laws are set up in this way, but I don't agree with it. I believe that the order of things, from a political standpoint, start with the Maker, trickle down to the individual, down to the collective "people," down to the law of the land, and ultimately to the government (formed at the end of this train).
Those who wrote our Constitution were landholders, and some of them were slaveholders, and they weren't about to explicitly devalue their greatest sources of income -- and privilege -- and their individual posterity's inheritances in how they framed things. So I approach "original intent" with a bit of skepticism and suspicion, at least where property is concerned. To the extent that the framers protected the interests of "people like themselves," I think we need to re-examine the effects in the 21st century of conforming ourselves to their conceptions of justice and "rights."
Framers were landholders, some were slaveholders, granted. But, as harsh as what I'm about to say sounds (and believe me this in no way reflects my belief system), at that point in history, slaves were considered the same as land (property). This was a shameful institution which persisted at the time, but that is the truth.
Therefore, let us just consider the framers as "property" owners. And you are correct, they did not want to implement a system that would devalue their property. But they also didn't want to implement a system that devalued anyone's property or suppress development. True enough, in the 18th century, being a landholder was probably the ultimate goal of a citizen. Is the 21st century really that different? Is "The American Dream" not simply a suburanized version of 18th century reality? The fact is that in the 21st century, as opposed to the 18th, anyone in America today has the legal opportunity to own property, and therefore, the ideal of "pursuit of property" put forth by the framers is actually more applicable today than in their own times.
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