Reprise:  Liberty Issues Tax Plan

The plan starts over on a clean sheet.  It repeals five current progressive taxes and creates three new flat ones.

The structure also permits government programs to be easily consolidated at a single level of government -- along with the revenues to pay for them -- a necessary first step for accountability, privatizing or downsizing.

Copyright 1995 by Michael J. Hihn and Liberty Issues

The Liberty Issues Tax Plan, published in 1994, is still one of the most popular downloads from the Web site.  This is the first published update.

I concluded the original article with, "If you find a better plan, let me know."  Still no takers.

My tax plan is nobody's ideal, not even mine -- unless one considers the alternatives.  For the past several issues, I've reported (and documented) major fallacies in both the Flat Tax and the Sales Tax.  They do not work.  They cannot be made to work.  Here's a brief review:

• As proposed, both seek to reduce the tax base and the tax rate, simultaneously, with little or no spending cuts.

• Flat Tax:  Over $120 billion of individual income tax revenues now come from "progressive" tax rates (rates higher than 15%).  Roughly 70% of all taxpayers pay no more than the 15% tax rate.

• Sales Tax:  Taxpayers with incomes above $250,000 consume only 40% of their income.  As a group, middle-class voters consume more than they earn, as shown by personal debt levels.

• Economic Growth: After the Reagan tax cuts, during our strongest postwar economic boom, income tax revenues increased less than $5 billion per year in constant dollars -- and all of that came from the capital gains tax.

• Simple arithmetic says that any single-rate tax -- on income or on consumption -- will necessarily either explode deficits or increase taxes on the middle class. 

Last July, I attended the largest assemblage of anti-tax protesters in the country -- people who hate the income tax, and all taxes in general.  It was the Libertarian Party national convention.  I interviewed over 200 delegates.

There I was, in the belly of the beast (Washington, DC), surrounded by anti-tax radicals.  But I couldn't find anyone -- not a single person -- who supported tax cuts without equivalent spending cuts.  (I'm sure a few would support such a scheme; I just didn't find any.)

But it's Libertarians, not Republicans, who are considered kooks?

American politics now suffers from two pollutants:  pandering for votes, and pandering for dollars.  You need votes to govern, but you also need big bucks to play the game.  Middle-class tax relief gets the votes.  Tax cuts for the so-called rich attract wealthy donors to politicians -- and think tanks -- on the political right.  (The left gets its bucks by pandering to labor unions and other interest groups.)

Combine the two and we see a perverse new formula on the political right:  big tax cuts for everyone, but no offsetting spending cuts (which would reduce those middle-class votes).  This is the formula of the "growth and opportunity" (Kemp/Forbes) wing of the Republican Party.  Most elected Republicans ignore it as nonsense, but prominent movement libertarians have signed on.  The rhetoric is neat, and big donors love it.

Is that our future?  Bogus fantasies of tax simplification -- which can be debunked by any bright ninth grader with a Statistical Abstract and a $3 calculator?

Or ... with those alternatives, do libertarians even have a future?

What is our purpose?

Our purpose is to enhance individual liberties, and eliminate intrusive government and .  If we can't sell that in the next election, then what?

How about significantly reducing the intrusions of current government?  In the tax code, how about repealing the economic distortions caused by punishing investment -- without merely shifting the punishment to consumption? 

Elections turn on economic factors, not philosophic factors.  What would happen to a political party, or a movement, which ignited rapid, non-inflationary, economic growth -- and significantly reduced government intrusiveness -- even if there was no reduction in the size of government?

That party would then earn a mandate to do darn near anything it wanted.  I'm not saying government can't be greatly reduced, even in the short run.  I am arguing that taxes and spending are best treated as two separate (but related) issues.

That's why Republicans keep failing.  Their tax cuts are never attacked directly.  Instead, corresponding spending cuts are savaged as "mean-spirited."  Thus backed into a corner, the Kemp/Forbes wing fabricates the illusion of painless tax cuts.

That's where we stand today.  At an impasse.

My plan closes one trillion dollars in tax loopholes to slash marginal tax rates, eliminate tax returns for most individuals, and deliver the simplification Americans already want.

It also repeals the corporate income tax, which would increase net profits by 50%.  The corresponding 50% increase in the stock market -- based on real earnings, not a bubble -- would restore over $3 trillion of investment capital.  (Ponder for yourself how that will benefit private pension savings and Social Security privatization.)

The highest single tax rate is only 9%, if revenue-neutral.  That alone slashes the perceived need for an intrusive tax collector.  Tax compliance is always highest when tax rates are lowest. 

Libertarians aren't known for supporting high levels of voluntary tax compliance.  But let's get real:  as long as there are taxes, low rates are the only way to avoid an intrusive tax collector.  You and I may believe all taxation is theft, but ask your neighbors what they thought of Harry Browne's plan to pardon convicted tax offenders.

The simplicity of this proposal,  by contrast, also shows how corrupt the current system is.  As Hugh Butler argues elsewhere, even today's bloated government does not require so complex a tax code.

My plan replaces four taxes (five, if you count capital gains separately) with three.

Repealed would be the corporate and individual income taxes (each of which has a capital gains component), plus estate and gift taxes. 

There would be three new taxes, each at a single rate:

• 9% withholding tax on wages and benefits above $15,000 per worker, and on interest and dividends.
  
  9% sales tax on "nonessential" goods and services (excluding food, rent, clothing, health care, utilities, transit and tuition).
  
  0.9% capital transaction tax on mostly real estate and corporate stock

Bureaucracy and compliance costs would be slashed.  States would collect and forward the national sales tax, as piggyback to their own sales tax.  Technically, I'd allow states to opt out, but the benefits to their citizens at the federal level would be hard to deny -- even to states with no current sales or income tax.

The feds would collect and forward state withholding taxes -- on a single form for employers and interest/dividend payers.  State income-tax bureaucracies would be eliminated. 

The IRS would shrink to a fraction of its current size.  Virtually all tax returns would be eliminated.  (Those holding two jobs and earning over $15,000 would still need to file, along with unincorporated businesses - but to a greatly simplified system.)

Except for workers earning less than $15,000, the tax collector would never see anyone's individual income.  (Employers would forward 9% of gross payroll, listing only the exemptions up to $15,000 per worker).  Not perfect, but still preferable to a jobs-destroying national sales tax of 20-22%.

Just to clarify, there are no loopholes.  Pension funds would pay 9% on dividends and 0.9% on stock purchases.  There would be no "charitable" exemptions on interest and dividend withholding.  (Current "tax-exempt" charities, foundations and pension funds now pay, indirectly, the corporate income tax.) 

There would be no sales-tax exemption for non-profits or governments, thus neutralizing future privatization.

Employee benefits would be taxable to the worker. Homebuyers would pay the 0.9% capital transaction tax.

The structure also permits government programs to be easily consolidated at a single level of government -- along with the revenues to pay for them -- a necessary first step for accountability, privatizing or downsizing.  (See "Reinventing Federalism" on the Web site.)

The critics

My own national sales tax would replace only part of the current income tax.  Some Libertarians say no government has ever instituted a "replacement" tax and cut or repealed the old tax.  Nonsense.  Michigan just did it.  So have many other state and local governments.  The feds did it in the mid-60s, with the Federal Excise Tax (which would have applied to your computer, as a visible sales tax).

Other critics insist that politicians will just keep increasing taxes.  Well, yeah.  They'll keep trying, no matter what we do.

That's why God invented libertarians.