Guest post by Laurence M. Vance
The congressional circus known as tax reform is getting ready to start again.
Republicans are eager to turn their attention to tax reform since they failed to repeal or repeal and replace Obamacare. Democrats are willing to play along as long as tax reform efforts don’t benefit “the rich.” Republicans are in favor of tax cuts, but are divided on how any tax cuts should be “paid for.” This is because Republicans (just like Democrats) are committed to the principle of revenue neutrality; that is, any revenue loss from tax cuts must be offset by revenue gains either from tax increases, broadening the tax base, closing loopholes, or eliminating deductions or from additional revenue that flows into the federal treasury from economic growth as a result of tax cuts.
Not in any particular order, here are some implications of revenue-neutral tax reform—none of them good.
Revenue-neutral tax reform implies that the problem with the tax code is its length or complexity. According to the Mercatus Center at George Mason University, 4,428 changes were made to the tax code from 2001 through 2010. But an income tax based on a shorter and simpler tax code is still an income tax. Tax reform should not simply result in making it easier for people to pay their taxes or feel better about paying their taxes.
Revenue-neutral tax reform implies that the government has a claim to a certain percentage of every American’s income. That is true even if tax reform actually includes the across-the-board lowering of tax rates. As Frank Chodorov explains in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens, “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide…. The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.”
Revenue-neutral tax reform implies that the tax code contains too many exemptions, credits, loopholes, shelters, exclusions, and deductions. What tax reformers mean is that the tax code contains too many ways for Americans to keep their money out of the hands of the government. Tax deductions are not subsidies that have to be “paid for.” Lowering or eliminating tax deductions has the same effect as raising tax rates: higher taxes. They should be retained as long as the tax code is in existence.
Revenue-neutral tax reform implies that government revenue should not be decreased. Advocates of tax reform—including conservative Republicans—consider it unthinkable that the government should have less money to spend than it did last year.
Revenue-neutral tax reform implies that taxation is not government theft. Try as tax reformers might to make the tax code simpler, shorter, fairer, less intrusive, flatter, or less progressive, the income tax is still legalized government theft. As the late Austrian economist Murray Rothbard explained, “It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.”
Revenue-neutral tax reform implies that there is such a thing as a fair amount of taxation. But that is like saying that there is a fair amount of stealing, robbery, burglary, theft, mugging, expropriation, embezzlement, and larceny.
Revenue-neutral tax reform implies that increased government revenue resulting from lower tax rates is a good thing. We always hear this from conservatives when they trot out the Laffer Curve while they are arguing for lower tax rates. A letter from the House Ways and Means Committee to Paul Ryan mentions this: “More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation’s economic and fiscal problems. While the Committee is committed to tax reform that strengthens the economy, the Committee will continue to oppose any and all efforts to increase tax revenues by any means other than through economic growth.”
Revenue-neutral tax reform implies that congressional spending is not the fundamental problem. But as former congressman Ron Paul said regarding the mirage of tax reform, “The real issue is total spending by government, not tax reform.” The vast majority of things the government spends money on are either immoral wealth-redistribution schemes and income-transfer programs or unconstitutional foreign wars and government programs.
Revenue-neutral tax reform implies that the income tax is necessary. There was no regular, permanent income tax in American history until 1913. If government spending were strictly limited to just what is constitutionally authorized, there would be no “need” for an income tax in the first place.
Revenue-neutral tax reform implies that it entails no tax increases. But any revenue-neutral tax-reform scheme can, by definition, only shift taxes, not lower them. If someone’s taxes are lowered, someone else’s taxes must be increased.
Revenue-neutral tax reform implies that the income tax is the most burdensome tax. For many Americans, it isn’t. According to data from the IRS, the top 50 percent of taxpayers (in terms of adjusted gross income) paid 97.64 percent of all federal income taxes. It is the 6.2 percent Social Security tax and 1.45 percent Medicare tax that are deducted from Americans’ paychecks that is the most burdensome tax for the other 50 percent of taxpayers.
Revenue-neutral tax reform implies that there is a difference between Democrats and Republicans when it comes to taxation. Although they may differ on the number of tax brackets, the tax rates, and the amount of tax credits and deductions, neither group has any philosophical objection to the government’s taxing Americans’ incomes. Liberals simply prefer that more tax money be spent on the welfare state than the warfare state while conservatives simply prefer the reverse.
All revenue-neutral tax-reform proposals are nothing more than the proverbial rearranging of the deck chairs on the Titanic.
The tax burden doesn’t need to be shifted, the tax base doesn’t need to be broadened, tax loopholes don’t need to be closed, the “rich” or the “poor” don’t need to pay their “fair share,” and the tax code doesn’t need to be reformed, revised, or replaced—it needs to be repealed and government spending slashed to the bone.
Laurence M. Vance is a columnist and policy adviser for the Future of Freedom Foundation and writes at.