Sunday, April 12, 2009

Simplifying Taxes

Although our ultimate goal must be to abolish the income tax and other forms of taxation, there would be significant benefit in just simplifying the tax code. Consider a few stats from a recent WSJ editorial:
- According to my office's analysis of IRS data, U.S. taxpayers and businesses spend about 7.6 billion hours a year complying with the filing requirements of the Internal Revenue Code.

- If tax compliance were an industry, it would be one of the largest in the United States. To consume 7.6 billion hours, such a "tax compliance industry" would require the equivalent of 3.8 million full-time workers.

- Compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics data on the hourly cost of an employee, my office estimates that the costs of complying with individual and corporate income tax requirements in 2006 amounted to $193 billion -- or a staggering 14% of aggregate income tax receipts.

- More than 80% of individual taxpayers find the process of filing tax returns so overwhelming that they pay for help. About 60% of taxpayers pay preparers to do the job, and another 22% purchase tax software to help them perform the calculations themselves.
Imagine if we had an extra 3.8 million workers doing productive activities like searching for cures for cancer, or advocating for a better philosophy, instead of complying with byzantine tax rules?

15 Comments:

Blogger Burgess Laughlin said...

Reforms of taxation -- such as simplification -- certainly should be welcome, but not if they result in any individual's tax burden going up.

All reforms to the process must also lower taxes as well.

7:37 PM  
Blogger Amit Ghate said...

I guess we disagree there. Why is the current tax distribution the perfect one for this level of total taxation? On what principle or standard do you want to freeze this distribution?

9:11 PM  
Blogger Burgess Laughlin said...

I welcome a chance to discuss this. The issue needs to be looked at by intellectual activists -- as preparation for reform. I welcome correction.

The "current tax distribution" isn't "the perfect one for this level of total level of taxation."

Taxation is immoral. Any change to it as a system must reduce the injustice to the individuals who suffer from it.

There is no moral way to tax individuals. A moral tax is a contradiction in terms. Taxation must be abolished. That is the goal. The question then becomes what is the best way to reduce the burden on all individuals as quickly as possible.

No "reform" should include raising taxes on any individual. That is increasing the injustice, at least on some individuals, not reducing it. Reducing injustice on some individuals by increasing the injustice on other individuals is wrong. Utilitarianism is not a valid guide for reducing injustice.

Maybe looking at an alternative will make the situation clearer -- or at least provide grist for the mill of discussion. (No one should debate a subject he hasn't mastered.)

In 1850, the USA tolerated chattel slavery. Slavery should have been abolished -- immediately and totally -- for all individual slaves. Conservatives would have objected that we shouldn't disrupt the economic system in the process, just as today conservatives and leftists would argue that we still need to keep financing government (at the current level, they imply).

Freeing some, e.g., women over the age of 50, but then seizing the few males who had been already been manumitted by their "masters" and placing them back into chains in order to make up for the loss of the labor of the former women slaves would not be a moral solution.

Instead all slavery should have been abolished. If for some fantasy "reason," slavery could not be abolished immediately, then at the least there should be reforms such as (1) allowing easier and more secure manumission by individual masters, (2) prohibiting the re-enslavement of any individual formerly manumitted, and (3) prohibiting the enslavement of any individual born after today, and so forth.

All those steps would increase the burden of slavery on no one, but would abolish the enslavement of some. That is progress.

It would not have been progress to, for example, "redistribute" the labor so that some house slaves had to rotate jobs with field slaves.

The point is that reform must not include increasing the injustice on any individual while trying to reduce it on others.

The quickest way to reduce the injustice of taxation is to begin lopping off whole classes of people as subject to taxation: e.g., no income tax on anyone making less than $40,000 per year (or more than $1,000,000 per year). And keep expanding that list. Meanwhile, cut the cost of the federal government by 90%.

5:19 AM  
Blogger Burgess Laughlin said...

ERROR CORRECTION

My statement . . .

The "current tax distribution" isn't "the perfect one for this level of total level of taxation."

should have been:

The "current tax distribution" isn't "the perfect one for this total level of taxation."

5:26 AM  
Blogger Galileo Blogs said...

I come out with Burgess on this one.

The same principle can be applied to government intervention. It can never be moral to impose new regulations, new restrictions on freedom, for the alleged purpose of saving or protecting us from other harm.

The "practical" argument is that sometimes this is a necessary transition measure to foster a change to capitalism. I challenge readers to come up with one example. (If they do, I will gladly stand corrected.)

In one case, a prominent supporter of Objectivism publicly advocated that the government purchase homes and lots as part of a "solution" to the financial crisis. That is improper in my view, and a dangerous precedent. Such concepts have very serious repercussions, which I have written about elsewhere.

A spade needs to be called a spade, respectfully, but it is necessary, so that we can stay centered on our goal, which is the advancement of freedom.

Incidentally, that idea came from John Allison in a public letter to Congress he wrote on the financial crisis.

In his speech sponsored by ARI he also called for measures to retard the decline in home prices, including using the Federal reserve to manipulate mortgage rates lower and to give tax credits to home buyers.

In a practical, economic sense, not just a philosophical sense, these are bad ideas. The fall in home prices is part of the solution to the economic meltdown. Stopping it or stalling it is *not* part of the solution, but the type of effort that turns recessions into Depressions. I am thinking about the Great Depression where Hoover exhorted and later forced businesses to maintain wages and prices, with the disastrous result that unemployment soared and economic activity shrunk even further than it would have otherwise.

If it is okay to impose fresh harm on new victims for some larger goal, then all else becomes possible.

(I am leaving aside emergency situations where it is necessary to, say, break into a home to rescue a victim inside. But that is not what we are talking about here. "Rescuing" home buyers who bought more home than they could properly afford is not cause to impose fresh harm on other homeowners who responsibly bought their homes.)

5:39 AM  
Blogger Burgess Laughlin said...

This issue -- how to move most justly from the statist here to the capitalist there -- is also part of what Ludwig von Mises discusses in his essay, "Monetary Reconstruction," in his early work, Theory of Money and Credit.

Mises presents a strategy for moving from today's fiat money system to a full gold standard. His particular strategy, he says, is the most just one.

Dr. Robert Garmong has agreed to lead a three-week study group for Mises's essay, which begins in early September on Study Groups for Objectivists -- http://www.studygroupsforobjectivists.com

5:55 AM  
Blogger Diana Hsieh said...

Burgess & Ray --

Right now, about half of Americans pay no taxes at all, while others ("the rich") pay exorbitant taxes. Based on your comments, you would be opposed to any kind of change to our tax code that would involve everyone paying, say, a 10% tax on sales or income? Or even just a $3000 head tax? In other words, you would preserve our current tax system -- which is incredibly perverse and destructive -- until taxes were abolished completely?

Note that our current tax system is very politically dangerous. The people who don't pay taxes still vote -- and they are more than happy to vote for more government programs and more taxation -- because they won't be paying for it, but they'll receive the benefits.

Yes, all taxation is immoral. However, our current system is far, far more unjust and destructive than some kind of uber-simple, totally-flat tax would be. So long as the ultimate goal is to abolish all taxation, to switch to a system that treated all people as equal under the tax law would be a major step in the right direction, I think.

6:38 AM  
Blogger Galileo Blogs said...

Diana,

Why is it that in our current intellectual environment, a 10% tax on sales would not become a substitute for the income tax? Rather, it would be viewed strictly as an added source of revenue for the government?

That is because the principle of individual rights is absent from the discussion of taxes. Instead, the discussion is what is "efficient" or "fair." Fact is, no code of taxation is fair. It is unfair for the poor to pay taxes if they are not, just as it is unfair for the rich to pay the level of taxes they are paying.

By keeping this in mind, the discussion can shift from a discussion of the alleged "fairness" of a particular taxation scheme to where it should properly be focused: on how to reduce government spending.

Government spending is the fundamental rights violation that necessitates the rights violation of taxation. Yes, it is difficult to pay for a bloated welfare state while imposing taxes on only half the population. The solution is not to impose a "fair" tax on the other half, but to cut the spending that is the underlying problem.

Oddly enough, a "fair" tax has the unfair result of making a welfare state easier to finance. If the tax base is larger, the government can have more revenue to spend.

That is the connection between the moral and the practical on this issue. It is immoral to violate rights by raising taxes, and it is impractical to do so, because it makes financing the welfare state easier.

Our goal should be to make it *harder* to finance the welfare state. The more tax exemptions, the better in that regard, all else being equal.

7:12 AM  
Blogger Galileo Blogs said...

This comment has been removed by the author.

7:14 AM  
Blogger Galileo Blogs said...

Typo: The last sentence of the first paragraph should be a declarative statement, not a question.

7:15 AM  
Blogger Burgess Laughlin said...

Again, I don't want to and am not qualified to debate this subject. But I do think that discussion is fruitful.

Stipulation: Presumably, for a certain tax such as the US federal income tax, there are now some individuals who do not directly pay it at all.

1. " . . . you would be opposed to any kind of change to our tax code that would involve everyone paying, say, a 10% tax on sales or income?"

Yes. I would oppose any extension of oppression (which is a systematic initiation of force by government).

In 1850, most blacks in the USA were slaves. I would not have supported "freeing" black slaves on weekends if part of the package deal was that Seminoles and Cherokees would be enslaved on those days to "fill the gap" (as the usual phrase goes).

Equality of oppression for a wider class is not a proper response to egregious oppression of a narrower class.

Equality of oppression for all does not trump injustice for some.

2. "In other words, you would preserve our current tax system -- which is incredibly perverse and destructive -- until taxes were abolished completely?"

No. As presented in this, so far, very brief discussion, that would be a false dichotomy.

As an intellectual activist -- i.e., as an advocate -- I would demand (1) total, long-term abolition; and (2) a plan of reform in which every step taken would reduce at least some individuals' victimization. That would mean either (1) decreasing the number of individuals victimized, or (2) decreasing the level of victimization of some or all victims, or (3) both.

P. S. -- I have an inkling that there is a principle involved in this discussion that has not yet been articulated.

7:16 AM  
Blogger Amit Ghate said...

I'll join this discussion, but it probably won't be till later this week as at the moment I'm wrapped up with preparing and filing my taxes(!)

7:25 AM  
Blogger Burgess Laughlin said...

> "P. S. -- I have an inkling that there is a principle involved in this discussion that has not yet been articulated."

More broadly, what is needed is a "philosophy of reform," perhaps presented in an essay identifying and integrating the principles that should guide intellectual and political activists in developing legislative plans for reform -- that is, for moving from statism to capitalism.

Such an essay could be a lot of work. It would require, I suspect, a fully inductive approach: working from reform of the utility industry, reform of the tax system, reform of the fiat money system, and so forth.

I have other projects to do. I have benefitted from this discussion. I probably have nothing further to contribute, unless I have said something that needs clarification.

Amit, thank you for hosting this discussion. I hope you can find ways to reduce your own tax burden.

7:55 AM  
Blogger Galileo Blogs said...

Amit,
I await your thoughts, after you have finished giving Caesar his due. Ugh!
GB

9:48 AM  
Anonymous TimC said...

"More than 80% of individual taxpayers...pay for help. About 60%...pay preparers...another 22% purchase tax software..."

And think of all the tax lawyers etc. It's just like drug laws; they aren't going away because there's FAR too big a vested interest/industry involved.

As far as Burgess L's first comment, since many don't pay any taxes, I agree with those that are arguing for flat tax, provided we have one at all. As far as all taxation being immoral, well, if you live in the US you should pay for, at minimum, your share of national defense, so there must be some kind of fair way of accomplishing that.

10:17 AM  

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