(This item originally appeared at Forbes.com on October 16, 2024.)
Presidential Candidate Donald Trump recently floated the idea of getting rid of the Income Tax completely. I think this is a great idea — and so did the Founders themselves, who effectively barred Direct Taxes in the Constitution, including the Income Tax, until it was legalized in the Sixteenth Amendment of 1913. Before 1913, there was no Income Tax in the United States.
Now you know why it was called the “Land of Freedom and Opportunity.”
Trump mentioned that the Federal Government could raise revenue via tariffs instead, as it did before 1913. But, the Federal Government is much larger today, and also, we really don’t want to go back to the horribly contentious and overcomplicated system of individual item-by-item and country-by-country tariffs that people were eager to get rid of in 1913.
Trump’s recent proposals are along the lines of uniform flat-rate tariffs, perhaps 10% or 20%. But, I think that Trump is intentionally stirring the pot for a much more important discussion, which is to eliminate the Income Tax entirely in favor of a Value Added Tax, or VAT.
For decades, conservatives have avoided the VAT in the US because of the danger of ending up with both a VAT and Income Tax, the common situation in high-tax socialist Europe — the same high-tax socialist Europe that is now having a discussion about why their economy is so bad.
However, the idea of replacing the Income Tax with the VAT — including a full repeal of the Sixteenth Amendment, and probably a new Amendment overtly banning a Federal Income Tax and maybe State income taxes too — has been popular among conservative economic experts for some time. President George W. Bush’s economic advisor Lawrence Lindsey recommended it in 2013.
Since a uniform, across-the-board tariff is an inherent part of VAT systems worldwide (the VAT rate is charged on all imports), Trump’s stated notion of replacing the Income Tax with a flat-rate tariff is in the same ballpark, you could say, as a much more practical VAT replacement.
It starts the process of discussion, like this article you are reading now.
Over the past forty years, the two other major tax reform proposals have been the Flat Tax, championed by Jack Kemp and Steve Forbes, and the FairTax. The FairTax was basically a proposal to replace the Federal tax system with a Federal Retail Sales Tax. These two proposals might seem almost diametrically opposite, but I assert that they are also, both of them together, quite similar to a VAT.
The VAT is usually considered a variant of a retail sales tax, and an indirect tax where individuals have no additional tax liabilities. This is the idea behind the FairTax. But, the VAT is also very similar to the Flat Tax income tax proposals — so similar, that the inventors of the Flat Tax themselves, Alvin Rabushka and Robert Hall, explicitly called it a variant of a VAT.
Basically, you could consider a 10% VAT as almost identical to a 10% Flat Tax on both individual and corporate income.
But, there are a lot of additional advantages to a VAT, compared to a FairTax or a Flat Tax. Even though the Flat Tax is a very simple tax, it nevertheless remains an Income Tax; that is, a direct tax on individuals. Since individuals pay the tax, it is possible to alter the tax to fit individual circumstances — gross income, number of children, married status, and literally thousands of other conditions that today go into the 70,000-plus-page tax code. This has proliferated over the decades, because of the nature of the system itself. The original tax return of 1914 also probably wasn’t much bigger than a postcard.
The Payroll Tax looks similar to an Income Tax, but it is actually an Indirect Tax, paid by employers. Individuals are not responsible for paying the Payroll Tax (excluding for now the Self-Employment Tax, part of the regular Income Tax). Because employers do not have details about their employees, it is not easy to add various complications. As a result, the indirect Payroll tax is almost unchanged after over eighty years, and remains very simple, while hundreds of new pages of Income Tax changes are added every year.
Thus, the VAT would be much more complication-proof, like the Payroll Tax; or, the Retail Sales Tax.
Another problem with the Flat Tax is that, although it may begin with one rate, the political pressures to tax higher incomes at higher rates remains. We’ve seen this among the more than thirty governments that actually implemented Forbes-like Flat Taxes since 2000. Many have moved again to multiple, higher rates — with all the negative economic consequences that the Flat Tax was designed to solve. But, politics trumps economics.
The basic reason for this is Democracy — or, as it was put, “three wolves and a sheep deciding what’s for dinner.” Since the time of Ancient Greece, Plato and Aristotle said that democracies nearly always find that there is a majority that wants to take resources from the minority. Today, there will always be a democratic majority that wants to “tax the rich” and gain benefits of one sort or another; or even just out of simple envy (one of the Seven Deadly Sins).
This is why communist Karl Marx loved the “progressive” Income Tax. It is practically a machine for generating “class warfare.” Marx didn’t like the progressive income tax because he thought it would temper the excesses of capitalism and allow a kinder, gentler socialist state. No, he liked it because when Democracies implode, just as Plato and Aristotle described, the collapse of the existing order makes a country ripe for communist revolution.
The Founders understood this, and aimed to prevent it. That’s why the Income Tax was effectively banned for more than a century. But, the Founders — all of whom read Plato and Aristotle — had another principle to prevent “class warfare,” and it is also in the Constitution: the principle of Uniformity.
Everybody gets the same tax rate. This is inherent in the VAT.
In his 1845 book Taxation and the Funding System, just after Britain implemented a peacetime Income Tax for the first time (1842), the British writer J. R. McCullough explained:
The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their profits you are at a sea without a rudder or compass and there is no amount of injustice and folly you may not commit.
The Democratic Party introduced the United States’ first peacetime Income Tax in 1894. In 1895, the Supreme Court threw it out. In that case, Supreme Court Justice Stephen J. Field explained:
If the Court sanctions the power of discriminating taxation and nullifies the uniformity mandate of the Constitution … It will mark the hour when the sure decadence of our government will commence.
The VAT fixes this.
Governments can raise a lot of money with just a VAT and Payroll Tax. France today gets about 35% of GDP in tax revenue from VAT and Payroll taxes alone, compared to US Federal Tax revenue (from all sources) of about 18% of GDP.
In France, and also the US, the Payroll Tax is generally thought of as a direct financing mechanism for various social programs, including public pensions (Social Security) and medical care. This is not a bad idea, and I like keeping it.
The kind of dramatic tax reform that I am proposing here would probably take place in the midst of a general turmoil of government, and Federal spending policies. In this midst of this turmoil, it would be possible not only to throw out the Income Tax, but also, throw out all the various welfare programs that have proliferated through the twentieth century, particularly the Great Society era of the 1960s.
The Founders also explicitly banned this. The Constitution is for a Limited Government of Enumerated Powers, not a free-for-all of handouts and entitlements leading to uncontrollable deficits. We can see today what a good idea this was.
If Marx was a big fan of the “progressive income tax,” the idea of loading up a government with spending entitlements —as a means of demolishing the existing order and implementing a Communist Revolution — is attributed to two midcentury communists, Richard Cloward and Frances Fox Piven.
All means-tested welfare, healthcare, and education spending would be the devolved to the States, where they originally were and where they belong. This leaves Social Security at the Federal level; but that could probably also be reformed in favor of a provident fund system (mandatory private 401(k)-like account), with a means-tested backup system, as is used in Singapore and many other countries.
That would leave a slimmed-down Federal government, funded by a VAT of perhaps 10%; and a Payroll Tax exclusively at the State level, which can fund a variety of welfare programs if State legislatures decide to do so.
No more Income Tax, at the State or Federal level.
