Income taxes are bad for families. No income tax codes truly reflect the importance of families and children to our future national success.
In my opinion, our nation’s future is vested in each successive generation, our children. Income taxes are bad for families since neither the United States nor most state income tax codes reflect the importance of families to the future success of our nation and our children. To put it another way, the most important business of our nation is raising our children, not business or corporate wealth. The home is the factory of the family, the family vehicles are the distribution fleet of the family, food is the fuel of the family, and washers, dryers, and refrigerators are the equipment needed to raise the next generation of United States citizens.
If my hypothesis is correct, the United States and state income tax codes should reflect the importance of the business of raising the next generation. The expenses accrued while raising the next generation should be treated in the same way that income tax codes treat business and corporate expenses. Family expenses are not deductible directly from gross income and structures and equipment used by families are not depreciable. Consequently, the United States and state tax codes are bad for families in comparison to the benefits provided by business and corporate income tax codes. The only way to correct this inequity in income tax codes would be to extend all tax benefits extended to businesses and corporations to family income taxes.
United States and state income tax codes are also great for criminals. Criminals take advantage of these tax codes to minimize their taxes on enterprises, including shell corporations, used to hide and launder income derived from criminal activities. All of the structures, equipment, salaries and benefits for criminal and legitimate employees, associated with a criminal entity can be deducted or depreciated under the business and corporate income tax codes. Obviously, most of the nefarious income derived from criminal activities is never taxed under any current tax code. Only a consumption tax would tax any significant amount of currently untaxed criminal income. Taxes would be collected when criminals purchase most of the luxury items they desire as a result of their criminal enterprises. The income tax code benefits criminals derive from their enterprises continue until the true nature of their enterprises is discovered by law enforcement and their front and shell businesses are closed.
Economists, politicians, and pundits have proposed numerous alternatives or replacements for the United States and state income tax codes. One potential solution to the unfair income tax code treatment of families raising future generations, is replacement of income taxes with consumption taxes.
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Sales taxes are a potential solution to the unfair treatment of families, future generations, by our income tax codes which would require total replacement of income taxes with sales taxes, a consumption or purchase tax system. The tax system proposed is sales taxes on all transactions and purchases related to land, raw materials, capital expenditures, all securities, goods, and services. No business deductions or exemptions would be allowed under the system of proposed sales taxes. Low to moderate tax rates would be paid by the entire economy from raw material extraction to final consumption where even criminals would pay their fair share of taxes. Consequently, taxes on a box of cereal would include sales taxes on purchase or rental of farm land, purchase of crop seeds, fertilizers, water, all necessary farm equipment, sales of grain to manufacturers, all other cereal ingredients, payment for applicable independent transportation of grain to manufacturers, rental or purchase of manufacturer facilities, land, equipment, packaging, each independent transport of cereal to independent distribution centers and/or retailers, and sale of cereal to each final consumer. Consequently, sales taxes simply become part of the cost of the products, commodities, goods, or services purchased. The tax codes would be greatly simplified and investigation would be primarily accounts payable and receivable audits.
THE VALUE ADDED AND FAIR TAX
The proposed system of sales taxes system would differ from value added taxes (VAT) common in the European Union (EU). In the EU system, the amount of VAT that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed. Obviously, VAT require detailed cost and tax accounting at each stage from dirt to the final consumer in the cereal example. With this in mind, each step has potential for deceptive accounting.
Many economists, pundits, and politicians favor replacement of income taxes with fair taxes. In my opinion, the disadvantages of fair taxes far out way the advantages discussed in the article What Is the Fair Tax Act Explained – Pros and Cons and others. The primary disadvantage of the proposed fair tax system is that fair taxes constitute a business and corporate welfare system. Virtually all business and corporate expenses are excluded from fair taxation. The fair tax system is as unfair to families, our next generation, as current income tax codes because final consumers, families, pay virtually all of the fair taxes. In addition, the proposed œfair tax rate of 23% is an internal sales tax which is effectively a rate of 30% according to the above linked article. The effect is that businesses and corporations pay little or no taxes while consumers pay a 30% sales tax. These experts expect We the People to believe that businesses and corporations will pass all of their tax savings on to consumers, think ENRON, Bernie Madoff, the hidden fees used in the banking system, and airline corporations.
Again according to the above linked article, the fair tax proposal would also create a new entitlement described as follows:
(The) “prebate” “ or annual consumption allowance ¦designed in part to relieve poverty-level Americans by providing a monthly check that would essentially offset all of their sales tax expenditures. The amount of the allowance would be based on poverty-level guidelines and would increase for larger families. Though the “prebate” is geared toward poorer families, everyone would receive monthly checks, regardless of income. The “prebate”¦ is the most expensive element of the entire plan¦. (It) would be the largest entitlement program in American history, and would constitute a welfare payment, even for those without a need.
To me, the idea of a prebate has two disqualifying problems. First, what are they thinking? We do not need to create the largest entitlement program in American history while attempting to replace our current income tax system. Second, everyone in the United States should contribute to the costs needed to promote the general welfare, and secure the Blessings of Liberty to ourselves and our Posterity¦.
CONSUMPTION TAX
In addition to the pro-family benefits of the proposed system of sales taxes, the tax system would result in a drastic reduction of the size, power, and influence of the Internal Revenue Service (IRS) resulting in major government cost reductions. The only possible function of the IRS with the system of sales taxes, purchase or consumption taxes would be auditing purchase and sales accounting of businesses and corporations. This impact on the IRS is similar to the reduction or elimination of the IRS resulting from the proposed fair tax system.
A solution, to the unfair treatment of families by income taxes, is replacement of income taxes with a consumption tax system.
In contrast, the proposed system of sales taxes, would require a periodic tax payment directly to the appropriate government entity by the purchasing business or corporation. As a result, it may make more sense to call the proposed system a purchase tax system. The proposed taxes would be based on total cost of all purchases of each type product or service accrued during the relevant tax period. Businesses would simply be required to account for the total cost, purchase cost plus purchase tax, of products and services purchased and pay the appropriate tax. For example, if a business bought 1000 widgets a month costing $100 each with a purchase tax rate was 5%, the business would spend $100,000 for widgets and pay $5.000 in sales taxes monthly. The total monthly cost for widgets would be $105,000 which would be added to the other costs accrued in manufacturing their final product. The sales price of that product would be calculated in a manner that would ensure competitiveness in their market and adequate profit to remain in business. The process would be repeated at every step of the manufacture or industry cycle until the final product or service was purchased by the end consumer. Free market competition for goods and services at every level would ensure the lowest final consumer price.
My preference would be a flat tax rate for all businesses and corporations. However, if necessary for implementation of the system, a progressive tax scale could be developed. Taxation rates could vary based on the cost of living, land, labor , and capital where the product or service is produced or purchased. The business or corporation segment of the economy or position in a given supply chain within a given economy segment could also be used to determine tax rates. National indices are available to determine local, state, and regional costs of the majority of the segments in the economy. These indices would be used to set local, state, or national progressive rates for sales taxes on purchases and consumption in the proposed system.
If progressive tax rates are needed, my suggestion would include no more than four tax brackets. Small localized entities would pay the lowest rate while state, regional and national entities could be taxed at increasing rates. If the four proposed brackets could not produce sufficient national revenue, the bracket for large national businesses and corporations could be further divided into two or three brackets based on comparative entity size.
Use of the proposed system of sales taxes to retire the national debt is another potential benefit of the proposed system. This could be accomplished with a temporary increase in the tax rate on national businesses and corporations or at all levels of the economy. For example, with a base tax rate of 5%, if a temporary rate increase on national entities of 2% would eliminate the national debt in 20 years, the tax rate would decrease from 7% to 5% after twenty years. For this idea to work, two critical changes in the national budgeting process would be required, a presidential line item veto and a balanced budget. The only way to ensure that this idea would retire the national debt is through the constitutional amendment process or laws requiring the presidential line item veto and a balanced budget. Although constitutional amendments would provide the best assurance that the debt would be retired, laws would probably suffice if We the People held politicians to account.
As with VAT, the primary criticism of the proposed tax system is that it could increase end consumer costs since taxes at each stage of the process would be passed on to final consumers. This criticism is true. However, the same criticism is true for business and corporate income taxes. The costs of income taxes, tax accountants, tax and compliance attorneys, and business and corporate tax loophole lobbyists accrued at each stage of every product or service cycle are currently passed on to consumers. Free market competition would ensure minimization of all such costs. In my opinion, careful evaluation of total costs of the current system of business and corporate income taxation are probably higher than the total costs associated with the proposed system of sales taxes on purchases and consumption.
Finally, under the proposed system, the sales tax rate paid at the end point of the product or service chain would revert to a standard sales taxes paid by the final or retail consumer and transmitted to the appropriate government entity by the final seller or retailer as with current sales taxes. This is the point in the system where employees and criminals would be taxed. Final consumption is also the point where progressive tax rates may be most appropriate although my preference would be the lowest possible fixed tax rate. If progressive rates were necessary to institute the system, my suggestion would require that basic low cost goods and services necessary for a moderate standard of living would be taxed at the lowest rate. The tax rate would increase with two or three brackets between the base rate and luxury taxes for every category of products, goods, and services. Depending on the price range of luxury goods, products and services, luxury items could have a variety of luxury tax brackets. For example, men’s denim jeans below $50 might be taxed at 1%, from $51-$100 at 2%, from $101-$200 at 4%, the luxury tax from $201-$500 at 6%, and above $500 the luxury tax rate could be 10%. From my point of view, this consumption tax system is fair to families and every person in the United States of America. Everyone would participate in financing the benefits derived from the blessings of citizenship, living in, and spending time in our nation. The system would also derive revenue from visitors and guests in our nation.
The retail and final consumer sales taxes are the only point where excessive profits from criminal enterprises would be taxed. Most criminals seek a life of crime for the life style and luxury easy money provides. Everything in life that they desire and crime provides would be taxed at luxury rates including their food, clothes, homes, appliances, cars, entertainment, electronics, leisure activities, vacations, and etc. would be taxed at luxury rates. The taxes paid by criminals through a system of sales taxes would automatically result in a significant increase in tax revenue, in my opinion.
Profits on the sale of stocks, bonds, commodities, and etc. would be taxed at end consumer rates paid by the seller eliminating capital gains taxes. Profits would be calculated using the current cost basis system used in conjunction with the current IRS Schedule D Form for taxable income from sales of stocks and bonds, etc. The consumption tax on these transactions could be progressive and based on the profits derived in the sales transaction. The brokerage institution handling the transaction should collect the taxes from the seller and pay the appropriate government entity.
Alexander Hamilton, Founder and first Treasury Secretary, preferred the consumption tax.
A FOUNDER’S TAX VISION
In conclusion, some historical perspective on taxation seems appropriate. The power to levy taxes is a sensitive issue. The Frames of the Constitution knew they had to balance the necessity for a national government that had all the powers requisite to the complete execution of its trust with the people’s disdain for oppressive taxation and taxation without representation. In The Federalist No. 35, Alexander Hamilton discussed this critical balance writing,
There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or to sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to a judicious exercise of the power of taxation it is necessary that the person in whose hands it is should be acquainted with the general genius, habits and modes of thinking of the people at large and with the resources of the country.
Hamilton also favored a progressive, wealth based, taxation policy. In The Federalist No.36, he wrote:
Internal taxationmust naturally tend to make it a fixed point of policy in the national administration to go as far as may be practicable in making the luxury of the rich tributary to the public treasury, in order to diminish the necessity of those impositions, which might create dissatisfaction in the poorer and most numerous classes of the society. Happy it is when the interest which the government has in the preservation of its power, coincides with a proper distribution of public burdens, and tends to guard the least wealthy part of the community from oppression.
One important consideration is implied by Hamilton’s support for progressive taxation. He suggests that those who stand to lose the most if the nation fails should provide relatively more in taxes to ensure that government succeeds and protects their wealth and enterprises from external and internal danger.
Finally, Alexander Hamilton was a strong proponent of consumption or sales taxes. In The Federalist No. 12, He wrote,
In America it is evident, that we must a long time depend, for the means of revenue, chiefly on such duties (customs and commodity taxes). The pockets of farmers, on the other hand, will reluctantly yield but scanty supplies in the unwelcome shape of impositions on their houses and lands (property taxes). And personal property is too precarious and invisible a fund to be laid hold of in any other way, than by the imperceptible agency of taxes on consumption [sales taxes].
In The Federalist No. 21, Hamilton continues his support for consumption, or sales taxes, as follows:
It is a signal advantage of taxes on articles of consumption [sales] that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed “ that is the extension of revenue. If duties are too high they lesson the consumption [sales]“ the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens, by taxes of this class, and it is itself a natural limitation of the power of imposing them.
Alexander Hamilton provided some interesting arguments for consumption, or sales, taxes which seem relevant to the taxation questions currently under discussion in our nation. Although progressive taxes are currently favored by the political left as a means of wealth retribution, my preference, as a staunch conservative, is for fixed tax rates. Conversely, Hamilton offers a good argument for progressive taxation as a means of proportionally funding protection of their status and maintaining support for government by the lower and middle class citizenry.
Hopefully, this discussion of the proposed system of consumption, or sales taxes, which provides equity for families, stimulates consideration of alternatives to the current income tax codes and other alternatives.
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