Taxes:
Would a Paradigm Shift be Worth Considering?

February 17, 2014

A governments’ enabling power resides in its ability to raise revenue (tax). Taxes change habits and influence practices.  For example, offering tax breaks for buying a home encourages home ownership.  Recently we wrote that how much and how we tax significantly affects the economy and habits.  Each type of tax impacts how people conduct their business and their economic choices.  Taxing capital affects both present and future choices.  Sales tax affects what purchases  a consumers make. Recent studies have shown that when the income tax effective rates are greater than 30%, workers willingness to produce decreases. 

Our history is rich with government attempts to usurp freedom through taxation.  During the depression, FDR proposed a tax rate of 100% for wages greater than 25,000.  When Congress refused, he attempted to enforce it through an executive order capping certain salaries at 25,000. Before the War, individuals paid their income tax quarterly during the following year. Less than 4 million paid income tax.  Of our day, the Independent Institute wrote, “Beginning in 1940, however, the tax burden increased enormously. As the government began to mobilize for participation in a gigantic global war, its revenue demands grew apace. Federal spending burgeoned from $9 billion in fiscal year 1940 to more than $98 billion in fiscal year 1945. . . .In 1945, 50 million individual income-tax returns were filed, and the filers owed more than $19 billion, or almost 20 times the amount that Americans had coughed up for this tax just five years earlier.”

During this period of great change, Milton Freidman, later wrote, “It was clear to all of us at the Treasury, as we set out to multiply the amount of revenue to be collected from the personal income tax, that it would be impossible to do so unless we could develop a system to collect the taxes as the income was earned, not a year later.”  With the change came the Congressional debate about how to change the tax system from paying in the next year to paying in the current.  After a double tax year approach was rejected, the idea of withholding was proposed and eventually passed.  An interesting comment can be found on the IRS’s history webpage about instituting withholding, reading that its passage “greatly eased the collection of the tax,” but “also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e.[,] it reduced the transparency of the tax, which made it easier to raise taxes in the future.”

We question how effective a government can be at protecting freedom when its tax system is used to promote or enforce habits.  To the largest extent possible we think taxes should be habit neutral and non-intrusive of our freedoms.  We also believe the practices of “hiding” tax collection and deceptions such as withholding or auditing based on political preference will only result in higher taxes and a decrease in our freedom.  Stopping this tyranny can only be accomplished if we move away from an income tax.  Please don’t misunderstand; all three of us pay our taxes under our current laws.  But we believe there may be a better way and that a paradigm shift might be worth considering. 

Mark, Bill and John