Guest Post - A proposal for a flat income tax and other changes

I note on my blog that I will consider guest posts of realistic ideas for modernizing and improving our tax system.  Stephen Kruger, a lawyer based in Hong Kong, took me up on that and.provided a federal tax reform proposal that also calls for limitations on state borrowing. I hope to have a few more guest posts from folks who have devoted time to thinking about alternatives to our current system. I applaud their efforts to devote time to seriously thinking about possible improvements to our broken tax system and writing and promoting their ideas. My goal in presenting the guest posts is to help broaden the discussion and debate on tax reform.

Governmental Fiscal Prudence, Writ Constitutionally

by Stephen Kruger*

Abstract

This article offers four principles for taxation by the United States. Taken together: only an income tax, expressed as a whole-number percentage, not to exceed 8%, may be imposed, and there is not to be any exception (e.g., exemption or exclusion or deduction or credit) to the income-tax rate. In short: a flat rate tax, with no gimmicks. A model amendment to the United States Constitution is presented.

For state governments, prohibition of borrowing is the offered principle. The Anti-Federalists were right to oppose the open-ended borrowing authority of the United States. Applied to states, the consequences of open-ended borrowings are evident. Every state is excessively in debt. The way back from the excesses of borrowings is to prohibit all borrowing by states, and by their subdivisions and instrumentalities. A model state constitutional amendment is presented.

Article

Introduction

No one really knows why Mr. Cain’s taxation plan was based on 9-9-9. The three digits could as easily have been 8-8-8.

Not all three-digit bases for taxation plans are equally acceptable. A large minority of the population of the United States would object to 6-6-6.

Some three-digit bases for taxation plans find ready constituencies. Gamblers would be attracted by 11-11-11. Boxcars for Cain.

Taxation policy is not a lottery, so tax rates should not be based on randomly-picked digits. Principles are needed. Even by (gasp!) politicians.

In this article, four principles are recommended for the taxation policy of the United States government. Also, one principle recommends prohibition of borrowings by state governments, subdivisions, and instrumentalities.

Taxation principles - United States

Principle 1. Only one type of tax, an income tax, is to be imposed.

Aside from income tax, the United States government imposes all sorts of taxes: gift tax, inheritance tax, and numerous excise taxes. But net income after the payment of income tax belongs to the person who earned it, not to the United States government, which covets it.

With an income tax in place, all other taxes, including a consumption tax, are precluded.

A tariff is not a tax. This principle does not preclude imposition of tariffs.

Principle 2. The income-tax rate is to be a whole-number percentage.

The advantage is avoidance of unnecessary arithmetic.

Principle 3. The income-tax rate is not to exceed 8%.

Rounded off, 8% is 1/12. A month is 1/12 of a year. The income-tax rate of 8% is tantamount to a taxpayer working one month a year for the United States government. When a taxpayer pays an income tax at a rate in excess of 8%, he or she or it works for the United States government for more than one month a year.

Serfs and villeins of an English manor were required to work on the land of a lord of the manor: hedging, ditching, felling, ploughing, sowing, and reaping, and week-work and boon-work besides. All that work took up to two weeks a month, so serfs and villeins worked, in effect, for up to six months a year for the lord of the manor. A so-called citizen who works more than one month a year for a government is, pro tanto, a serf or villein of that government.

Asking how much money is needed by the United States government puts the cart before the horse. The question is how much the United States government may legitimately collect.

Suppose that the income-tax rate set by the Congress is 7%. Whatever amount of money is raised thereby, the United States government will just have to live within its means. Wilkins Micawber said:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. CHARLES DICKENS, DAVID COPPERFIELD (1850).

Principle 4. There is to be no exception to the income-tax rate.

When one group is protected from payment of income tax, in whole or in part, then all groups clamor for protection. That’s why there are a plethora of exemptions, exclusions, deductions, credits, and like gimmicks in the Internal Revenue Code.

All proposed “flat” taxes have exceptions. The problem with the proposals is that any exception to an income tax is a proven catalyst of more exceptions.

A true flat tax is needed. Not an undulating flat tax. Besides, the purpose of an income tax is raising revenue. Full stop. Not favoring political friends. Not social engineering. Not voter welfare and not corporate welfare.

A constitutional amendment should look like this:

Amendment [XXVIII]

Section 1. The phrase “and direct Taxes” in article I, section 2, clause 3 is repealed.

Section 2. The phrase “Duties, Imposts and Excises,” in article I, section 8, clause 1 is repealed.

Section 3. The phrase “; but all Duties, Imposts and Excises shall be uniform throughout the United States” in article I, section 8, clause 1 is repealed.

Section 4. Article I, section 9, clause 4 [“No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”] is repealed.

Section 5. The Sixteenth Amendment [“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”] is repealed.

Section 6. The only tax which the United States may levy and collect is a tax on income, whether of a natural person or of a legal person. The income-tax rate shall be a whole-number percentage, not to exceed 8%, which is to be levied without variation of the income-tax rate. The income tax shall be uniform geographically.

Section 7. The United States may impose tariffs. All tariffs shall be uniform throughout the United States.

Borrowing principle - states

State governments, subdivisions, and instrumentalities should not be allowed to borrow money.

Trouble flows from unrestricted governmental authority to borrow money. All state governments, all subdivisions of states (counties and cities), and all instrumentalities of states (authorities and districts) are in serious financial trouble because of their borrowings.

In every state, governmental units are swarming locusts. California has, aside from 58 counties and more than 450 cities, over 3,300 instrumentalities, called districts. New York has, in addition to 62 counties, around 900 towns, over 600 cities, nearly 700 school districts, and more than 1,100 special districts. Instrumentalities formed pursuant to interstate compact are additional. Each of California and New York is a party to more than 25 interstate compacts.

All borrow money, and all are up to their necks in debt.

The 10th of the “Facts . . . submitted to a candid world” in The unanimous Declaration of the thirteen United States of America (1776) comes to mind:

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.

In this 236th year of the independence of these United States, substitution of “Politicians have” for “He has” is necessary. The contemporary enemy of liberty is domestic, not foreign.

The way back from fiscal excesses of state governments, subdivisions, and instrumentalities is to put an end to their pernicious practice of eternal indebtedness. Without the capacity to borrow, the budget of each state, each subdivision, and each instrumentality will always, and automatically, be balanced.

One of the many prescient criticisms by the Anti-Federalists of the then-proposed United States Constitution was directed against the authority of the United States government to borrow money. Brutus (probably Robert Yates, a New York judge) observed (BRUTUS VIII (January 10, 1788), available at http://www.constitution.org/afp/brutus08.htm) that the constitutional authority of the United States government to borrow money (article I, section 8, clause 2) is unlimited, and that the Necessary and Proper Clause (article I, section 8, clause 18) underscores the lack of limits. The United States government could borrow much money, and could cause itself to be mortgaged beyond its capacity to repay. That would be a “calamity,” magnified by owing money to foreign countries.

A connection was made by Brutus between the open-ended authority to borrow money, on the one hand, and, on the other hand, the open-ended authority to impose taxes (article I, section 8, clause 1) and the open-ended authority to maintain an army (article I, section 8, clause 12). By way of those constitutional clauses, boundless money could be borrowed, excessive taxes could be imposed, and a standing military could be maintained.

The power to borrow money should be restricted, he suggested. Thereby, the power would be exercised only when needed, “on the most urgent occasions, and then we should not borrow of foreigners if we could possibly avoid it.”

Under the Constitution, Brutus foresaw, the United States government “would have unlimited authority and control over all the wealth and all the force of the union.” There would be no “freedom or independency . . . left to the state governments, when they cannot command any part of the property or the force of the country, but at the will of the Congress.”

That is the present circumstance. The theory is that article I, section 8 of the Constitution grants enumerated powers to the United States government. In practice, the powers of the United States government are unlimited (compare article I, section 8 and all which the United States government does). Borrowing is boundless ($15 trillion). Taxes are excessive. There is a standing military. The requirement of a congressional declaration of war, set forth in article I, section 8, clause 11 (“To declare War”) was displaced by adventurism: Korea (1950-1953, and continuing military presence), Lebanon (1958), Viet Nam (1963-1975), Grenada (1983), Panama (1989), Iraq (1990- 1991 (Gulf War)), Somalia (1993), Haiti (1994), Bosnia (1995), Afghanistan (2001-present), Iraq (2003-2011 (Iraq War)), Libya (2011). Nothing is done, and nothing may be done, by states or by corporations or by partnerships or by groups or by so-called citizens, without a review by and an approval of a D.C. bureaucrat.

The socialist authority and control of the United States government over the economy, and the regulatory stranglehold on ordinary people, and the imperial projection of diplomatic presences and military presences abroad, rest on $15 trillion borrowed by the United States government, most of it from foreign governments and foreign nationals, and on uncountable billions of unfunded liabilities. The United States government is in the deepest hole in the world, the deepest hole ever. Huge annual governmental expenditures in excess of governmental income make payment of interest a strain.

It is likely that foreign governments and foreign nationals will stop lending to the United States government. Foreign creditors will demand repayment of the principal of the indebtedness. All that potential economic energy constrains formulation and implementation of a foreign policy by the State Department, and of a military policy by the Defense Department, and of a tariffs policy by the Commerce Department, which are beneficial to the United States.

Constitutional curtailment of the borrowing authority of the United States government is merely theoretical. In the real world, the best step is wise budgeting, and, so, wise borrowing. That would be a significant, and welcome, step on the long road to the subjection, once again, of the scope of the United States government to the strictures of article I, section 8, set by the Framers.

Nothing of the sort will happen on the watch of Saint Barack of Hope and Change, who wants to multiply spending. He has no qualm about adding $1.5 trillion a year to the national debt. His “plan” is to borrow beyond boundless borrowing, and to tax beyond excessive taxation. His idea of governance is to use taxation, the purpose of which is raising revenue, to advantage political friends and to engage in social engineering; to aid favored groups and to target disfavored groups. Like Leftists and Extreme Leftists, President Obama lives to spend massively and to regulate minutely.

“[N]o government,” Brutus warned, “should be empowered to do that which if done, would tend to destroy public liberty.”

Although constitutional curtailment of the borrowing authority of the United States government is impossible, constitutional curtailment of the borrowing authority of a state, a subdivision, or an instrumentality is possible.

That must be done, because taxes imposed by state governments and subdivisions, and “fees” imposed by instrumentalities, are excessive. Socialism is the economic attitude-problem of state governments, subdivisions, and instrumentalities, as it is of the United States government. The regulatory strangleholds on ordinary people are comparable. Authoritarian busybodies can be found as readily in state capitals, such as Sacramento, as on Capitol Hill.

The profligacy is staggering. State governments, subdivisions, and instrumentalities spend every dime of income, hundreds of billions of dollars annually, and borrow hundreds of billions of dollars annually. Piled-up long-term debts and unfunded obligations are north of two trillion dollars.

Elected officers of all stripes are addicted to taking in and expending public monies, and would lie through their capped teeth to get more and more money. Incomprehensible profligacy includes not only borrowing to add to available public money, but also loans of public money, and, further, guarantees backed by public money. Borrowing, lending, and guaranteeing are for the benefit of privileged persons and preferred groups. One baleful consequence of public-money borrowings, loans, and guarantees is distortion of supply and demand, and another is short-circuiting of free-market pricing.

No state government, subdivision, or instrumentality should be trusted with borrowing, lending, or guaranteeing. The way to negate the trust vested presently in state governments and in subdivisions and in instrumentalities is through the initiative procedure. Legislators and governors will never act against their self-interest, and, so, will never rescind the constitutional authority which they misuse.

An effective initiative would call for a state constitutional amendment, under which all borrowing and all lending and all guarantees would be prohibited. Contractual obligations for business reasons, for periods not longer than five years, would be permitted. That would allow the leasing of real property for governmental purposes, and issuance of purchase orders for governmental purposes.

A constitutional amendment should look like this:

Article __

Prohibition of Borrowing, Lending, or Guaranteeing

Section 1. No money may be borrowed, directly or indirectly, by or on behalf of the State, or any subdivision or instrumentality thereof.

Section 2. No money may be lent, directly or indirectly, by or on behalf of the State, or any subdivision or instrumentality thereof.

Section 3. No financial guarantee may be extended, directly or indirectly, by or on behalf of the State, or any subdivision or instrumentality thereof.

Section 4. A contractual obligation to make or to receive payments, for a business reason, for a period not in excess of five years, may be entered into by or on behalf of the State, or any subdivision or instrumentality thereof.

Section 5. The present article __ [which provides for borrowing authority] is repealed.

All other authority of the State, or of any subdivision or instrumentality thereof, to borrow money, to lend money, or to extend a financial guarantee, is rescinded.

Going cold turkey will be difficult for any state, subdivision, and instrumentality, as going cold turkey was for Frankie Machine (played by Frank Sinatra) in The Man with the Golden Arm (1955).

But there is no other cure for the fiscal irresponsibility of state governments, subdivisions, and instrumentalities.

Conclusion

Will the five principles find favor? Yes, if the economic pain and political pain felt by Americans will be severe enough to motivate their rededication to constitutional government, and thence to principled taxation, wise budgeting, and limited borrowing.

* Copyright 2012 Stephen Kruger.