Thursday, May 03, 2012

Political Parties and Taxes

It is curious but understandable why none of the American political parties on the ballot are proposing the sound tax policies that would spur the U.S. economy to grow faster than China.

The mantra of the Democratic Party is “tax the rich.” They want to increase the marginal tax rates, the rate on extra income, of the wealthy. They say the rich can pay more without being affected. That flies against both economic theory and the evidence of history. Theory and experience say that the higher the tax rate, the greater the reaction of less production and less investment, and the reduction is proportionally greater than the tax increase. Theory says the ideal tax is on things that do not get reduced when taxed, the prime example being land. But the Democratic Party ignores economics, exploiting the ignorance of the masses to cater to the landed interests.

The chiefs of the Republican Party understand the concept of marginal tax rates, and seek to reduce them to spur growth, but to pay for this, they reject a tax shift to land value, and instead seek to cut government welfare to lower-income folks. If the Republican policy is implemented, we will see mass protests, violent occupy movements, general strikes, and an increase in crime. The Republicans don’t understand that before we remove the roof from a poor man’s house, we should first lay the foundation for a new house.

The Green Party seeks to stop the destruction of the environment, yet instead of a pollution tax, its members seek a wasteful welfare state financed by a graduated income tax high enough to prevent “excessive” wealth. They don’t seem to understand that the deadweight loss from high tax rates results in a waste of resources. They reject the free-market environmental policies that would protect nature with incentives and property rights.

The Constitution Party wants to abolish the income tax and levy excise and import taxes. In addition, that party would enact a "state-rate tax," with revenues apportioned among the states in accordance with their proportion of population. With the abolition of the income tax, and the shift of government spending more towards the states, it would be more difficult for the states to have their own income taxes, so tax competition would move them towards property taxes. The party also approves of taxing corporations, which legally taxes the privilege of incorporation. This is a much better tax proposal than that of the Democrats, Republicans, and Greens.

The most ridiculous tax proposal is that of the National Sales Tax Party. They seek what they call a “fair tax” on goods bought by households and governments. Used goods would not be taxed. The federal tax rate would be 30 percent. State sales tax rates have a national average of 6 percent, thus the combined rate would be 36 percent, leaving out higher rates caused by the conversion of state income taxes to sales taxes, and the added tax due to tax evasion.

The exemptions for used goods and businesses would cause huge distortions. For example, a new coin or bar with $1000 worth of gold would sell for $1360, so nobody would buy it at that price, since one could buy gold bought prior to the adoption of the national sales tax for $1000 as a used good. There would be massive tax evasion for new coins sold as used goods, as well as smuggling gold and silver from foreign sources. As for real estate, a new building that has a cost of production of $100,000 would be a new good, and sell for $136,000, while a similar building built prior to the enactment would have no tax. Real estate construction would come to a halt. In practice, Congress will not levy a ridiculous sales tax on buildings.

The “far tax” movement recognizes that there would be a big incentive for tax evasion by starting a business and buying good as a business expense. They acknowledge that there would be audits and registration requirements. There would be massive intrusion into both business and households to prevent tax evasion, but as with illegal drugs, much underground activity would happen anyway.

It is unrealistic to suppose that the federal government would let private enterprise be exempt from taxes, while imposing a tax on government. Under the “fair tax,” a private school’s purchases would be tax free, but a government school would have to pay the sales tax. This tax punishment of governmental schools would be politically impossible. In practice, government spending would be exempt from taxation, resulting in a sales tax rate higher than 30 percent.

Land is, of course, always a used good, and the sale of land would be exempt from taxes. As with the income tax, the tax policy of the National Sales Tax Party would provide public goods that subsidize land value. With the income tax, a business that makes no profit pays no tax. With a national sales tax, if a zero or low-profit firm cannot pass on the tax to customers in the global economy, it would shut down. Professor Mason Gaffney calls this a “quantum leap effect,” as high taxes on gross receipts would result in a massive shift of land use to firms that can pass the tax on, resulting in a massive destruction of production and employment.

The National Sales Tax Party was previously called the Libertarian Party. The party is holding its convention on May 2-6 2012 in Nevada. The party will elect Gary Johnson as its presidential candidate. He is popular as the former government of New Mexico and advocate of legalizing marijuana. Johnson also promotes a national sales tax to replace the income tax.

The federal budget and tax reform are the major issues of the 2012 presidential campaigns. By electing a sales-tax advocate as its presidential candidate, the “Libertarian” party will have transformed itself into a sales-tax party. It was to a large extent that already, as its previous candidates favored tariffs and excise taxes instead of free trade.

Now the transition will be complete, and if they still label themselves the “party of principle,” since the principle in 2012 is to tax goods and subsidize land value, the party should honestly call itself the National Sales Tax (and land subsidy) Party. I’m now confident that Gary Johnson will get millions of votes, but these will be sales tax votes by those fooled by the “fair tax” propaganda, not votes for liberty. Genuine libertarians and free-marketeers will either refuse to vote or else turn in a blank ballot.

In 1913, Americans rejected the high taxation of consumption when they adopted the federal income tax, and as Hegel remarked, we don’t learn from history. Sales taxes are for losers, and regardless of the vote, the unfair National Sales Tax is a big loser issue that fortunately has no chance at all of being implemented.


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