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.
