Taxes: What Should they Buy?

Fourth in a four-part series on taxes.

“Taxes are theft!” judges one reader of this humble blog, and more than a few libertarians would agree with him. As near as I can tell, this judgment is based on a view of man as a completely autonomous individual, dependent on no one but himself, answerable to no one, and subject to compulsion by no one. Under this view, to the degree that taxes are compelled they cannot be just.

My problem with this view is that it does not describe any man or woman I have actually met. Every person of my acquaintance emerges not from autonomy, but from dependence. We are all called into being by the ready-made community of the family. Most of what we are comes not by an individual “consumer” choice but by gift. Along with the gift of family, there are the gifts of language, nationality, religion, community, city, state, and nation. Our values are socially formed by these gifts of social context and only after that formation do we find ourselves in a position to accept or reject these received values. What “freedom” we have consists mostly in decisions about how to use the gifts we are given; how to re-arrange them and pass them on. Our very being itself turns out to be already a “being-in-community” which mirrors in some fashion that ultimate community of persons that is at the root of all being, namely the Trinity. At their most basic level, humans are social beings, already formed by institutions “outside” themselves.

And since man is a social being he has social obligations; the gift demands a return if it is to survive to the next generation. Hence, each man has obligations which may, in certain circumstances, be compelled of him. Individual goods are themselves the product of social goods and are dependent upon such social goods; if there is a break-down in the social goods, no individual goods will survive. We are all dependent upon each other; the common good precedes any individual good. A philosophy of pure individualism contradicts the social nature of man. Clearly, there are common goods which no individual (or very few) could provide by themselves. The obvious example is the common defense, but there are others, and they are normally supported by taxation.

But if this rule of the common good gives us the ground for legitimate taxation, it also gives us the ground for judging when taxes are illegitimate. For if the legitimate purpose of taxes are to pay for those things necessary for the common good, then taxes are illegitimate when they purchase not the common good, but individual and particular goods. That is, when good money is taken from all to provide goodies for a few, goodies not connected with the common good, then they are illegitimate.

When we examine the actual expenditures of the modern state, we have ample grounds for questioning whether all of this money, or even most of it, goes to the common good, or are just private goods paid for by the commons. And while we should never (in my opinion) proclaim that “All taxes are theft!” we have more than ample grounds for shouting, “Most taxes are theft!” The one-word difference is crucial.

Of course, there can be different judgments on what constitutes the common good. But there can be no doubt that the system of special bills for special friends (“earmarks”) which burden every budget bill are nothing but theft. And even things that fall in the common good can be used in such a way that much of the money goes for other purposes. For example, we certainly do need an army for defense, but does our defense really require troops stationed in more than 130 countries? Certainly there are private contractors on whom the military is dependent, but do we really need the army of parasites and mercenaries provided by Halliburton and Blackwater? I tend to doubt it.

To take another random example, we can note farm subsidies. Now, a secure food supply is in the common good. As someone who likes to eat three or more times a day, I want to see secure and prosperous farmers, as my own security depends on them. Further, I have no objection (and much praise) for a fund which insures the farmer against the vicissitudes of the weather and the market, since the farmer himself cannot control these things. This fund ought to be largely supported and controlled by the farmers themselves, and it is not unjust if this fund receives a contribution from the general taxes, or at least, from those tax-payers who actually eat. But the current system is not an insurance program at all, but a subsidy, and one not so much to the “farmer” as to the giant “agri-businesses” such as Archer-Daniels-Midland and the like.

Further, we can note that not every common good needs to be paid for by general taxes. Take transportation, for example. Certainly it is a common good, and a prosperous people need a good transportation system. However, it turns out that most expenditures for particular forms of transportation constitute a subsidy for private persons. We build highways, but the only ones who can use them are those who can afford the high capital costs and operating expenses of an automobile. And when we invest so much public money in highways, we privilege one group of users over another, and force people to buy a car whether or not they want to, or whether or not it makes economic sense for them to do so. Now, its not that I think the government should get out of the transportation business; there are good arguments for public roads, since every particular route would have to be a monopoly anyway; you could not efficiently have two competing roads operating on the same route. However, these roads should be paid for by user fees (tolls) and not by general taxation. Indeed, subsidizing the roadways turns out to be both contradictory and self-defeating (see Free Markets, Free-ways, and Falling Bridges.)

We can also note areas where the free market has proven itself incompetent. Modern medicine is one of these areas. Indeed, so long as we are talking about a market that is so dependent on licenses and patents, there cannot be, even in principle, a free market at all (see Sicko-phancy!) We did have a free market in medicine, in the 19^th and early 20^th centuries, and it was a disaster. Hence, there is ample justification for a public system of health care. The specific taxes applied to this can certainly be debated. I will not here enter into that debate, but I will merely note that such a system ought to be supported by taxes dedicated to that purpose, such that if the costs rise, the public will have instant feedback via an increase in those specific taxes.

Our other big problem is retirement funds. Now, in days gone by, there were two sources of social security: have a lot of money or have a lot of children. We have made the latter unfashionable and the former damned near impossible (median wages haven't risen in 30 years). As a practical matter, we cannot do away with the system in any near term without causing social chaos (besides, the old folks vote.) Nevertheless, the system itself is not sustainable and in reality constitutes a surtax on labor incomes that is now used to support the general fund. In other words, it is just an additional income tax on one class of workers but not on others (see Social Insecurity.)

Looking over the budget as a whole, it is my unscientific judgment that at least one-third to one-half of the expenditures are for things that are mere subsidies, or that could be moved from the general taxes to special funds and user-fees. Hence taxes could be cut, conservatively speaking, by one-third to one-half, and could be done without harming, and indeed improving, things that really contribute to the common good. However, cutting taxes depends entirely on cutting expenditures. Candidates don't like to talk about cutting expenditures because each cut cuts into a constituency, either one that contributes a lot money or a lot of votes. We are left with vague promises of cutting “waste, fraud, and abuse” only to see all three increase. Or we get nonsense like Huckabee's “revenue neutral” plan, which on inspection turns out to be “all taxes on the rich are theft; everybody else pays 30%.” And all will end up continuing the program of borrowing to pay for “tax cuts” while spending like drunken sailors. Such “cuts” are not cuts at all, since borrowing is not tax-cutting but tax-shifting; taxes are shifted from the current generation to the next one. We are, quite literally, spending our children's money.

It is unfortunate that Ron Paul, the only actual Republican in the race, has taken the “all taxes are theft line.” It is not merely that it prevents him from getting elected (since most sensible people don't believe that), but more importantly it prevents him from speaking about the more important issue, namely, insisting one fiscal discipline. Spending only as much as you take in, and spending it only for the common good. That platform might actually win, if backed with sufficient funds for a credible campaign. But win or lose, it would certainly be a great moment of political education.

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Taxes: Advice from Adam Smith

Third in a four-part series

When considering any subject relevant to government and economics, I always like to consult Adam Smith. Now, there are many who would disagree with this. Smith gets attacked from both the right and the left, usually for all the wrong reasons. Worse, he gets “defended” for all the wrong reasons; his “supporters” often attribute to him opinions he never held and against which he used his strongest arguments. For example, Smith was not a mindless supporter of “big business,” but in fact fulminated against it. For more on this theme, see my The Forgotten Agrarian: On Rereading Adam Smith. It may be Smith's fate to be among the most often quoted but least actually read of the modern philosophers.

It is not that I consider Smith infallible, but I usually find him sensible, and even when he is wrong or incomplete, he usually highlights the correct issues. In Book V of the Wealth of Nations, Smith has an extensive discussion of taxation, one that still serves us well today. Smith begins his discussion by laying out four maxims by which any particular tax can be judged.

The Four Maxims

• Taxation should be proportional to income. Smith seems to mean this in a negative sense, namely that taxes should not be regressive, because he praises taxes that fall disproportionately on the rich.

• A tax ought to be certain and not arbitrary. That is, “The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person.”

• A tax ought to be levied at the time and manner in which it is most convenient for the contributor to pay it. For example, a tax on rents ought to be paid when the rent is paid and not before.

• The cost of collection should be as low as possible. Under this heading, Smith includes four points:

1. The tax should require as few “officers” as possible to collect it.

2. It should as low an impact on industry as is possible.

3. It should create as few temptations to evasion as is possible. Where temptations to cheat are high, the law should be lenient.

4. A tax should not be such as to subject the people to “odious investigation” of their affairs.

Using these four maxims, Smith examines a wide variety of taxes. We shall confine the discussion to those taxes most relevant to our situation, income, sales, and land taxes. One note about Smith's methodology: he discusses issues based not only on theoretical considerations alone, but examines, in great detail, actual examples of taxes as they function both in England and other countries. His method, therefore, is a combination of theory and practice, which saves it from the dry abstractions of the Austrians as well as the pointless empiricism of Chicago School Friedmanites.

Taxes on Labor and Incomes

Taxes on lower wage workers can only have the effect of raising wages sufficiently to accommodate the tax. This is because a worker needs a certain amount to live, and will not work for less than that. Hence, a tax on low-wage labor is, in effect, an increase in the cost of production and is passed on to the consumer.

When a tax is levied on profits fall, for Smith, into two parts, a tax on interest and a tax on the labor of the entrepreneur. The entrepreneur must earn enough above the interest to make his living, or he will simply cease operations. Thus a tax on his profit about interest is equivalent to a tax on labor. A tax on interest payments, however, cannot have any effect on the rate of interest, since that will be set by the market. However, a tax on interest has two problems: one, the amount is difficult to ascertain (this was before the extensive reporting requirements of the modern era), and; two, capital is mobile, and high taxes will cause it to seek other climes.

In all cases, a tax on incomes must involve a severe inquisition into the circumstances of private persons. We all understand what that means. For myself, I do not object so much to the paying of the tax (which Smith regards as the duty of a citizen and the badge of a free man), but to the “severe inquisition” of the tax filings.

Consumption (Sales) Taxes

Smith divides consumption taxes into two parts: that on necessities and that on luxuries. By necessities, he does not mean “the poverty line” or what is merely necessary to sustain a man in subsistence, but that which is necessary for him to participate in a meaningful society. Smith uses the example of shoes. In some societies, it is perfectly acceptable to go barefoot, but not in England. A man who goes barefoot to a job interview in England (or America) is not likely to get the job, is not likely to be counted as a full participant in his society. Therefore, necessities for Smith means a lot more than subsistence.

A tax on necessities works in exactly the same way as a tax on labor. By raising the cost of necessities, one must necessarily raise the cost of labor by the same amount, with the difference passed on to the consumer. The consumer therefore gets a double whammy: an increase in the price via the taxes and an increase in the cost by the necessary rise in wages.

As for a tax on luxuries, Smith has little objection. It will discourage useless consumption by the poor and derive revenue from the rich. But all such taxes are difficult to enforce and the higher they are, they more they encourage what we would call “black markets”. Sales taxes, when they are high, often lead to lower revenues for the government, since the cost of collection is high and the inducement to fraud even higher. Smith's intuitive division of sales taxes into necessities and luxuries is recognized by most taxing authorities, which exclude things like food, housing, medicine, etc. And the taxes are kept relatively low so that the cost of avoiding them will not exceed the cost of paying them.

Taxes on Land

Smith distinguishes between agricultural land and land used for buildings or houses. I will not here take up his discussion of agricultural land. As for developed land, Smith divides the rent into two portions: ground rent and rent paid for the improvements. Any amounts above what gives a reasonable profit on the improvements goes to ground rent.

Ground rent is likely a new concept to many people, but it was of extreme importance in the economic debates of the 19^th and early 20^th centuries. Smith, Ricardo, Mill, Marx, Marshall, Walras, Clark, Senior, Henry George, and many other luminaries debated the issue at great length. Unfortunately (from the standpoint of a complete economic theory) the subject died after J. B. Clark subsumed land into the general “capital fund” theory. Ground rent is the price or rent of land that underlies any improvement on it. It rises with the population of the surrounding area. That is, a parcel of ground in a densely populated city will cost more than than an equally good parcel in a smaller city, which will cost more than a similar parcel in the country. In other words, it is not anything the landlord adds to the land, but what others add to it that raises the ground rent. Peace, prosperity, and population increase raises the price of land without the landlord actually having to do anything. Such increases in the rent or price of land are unearned increments, involving no effort whatsoever on the part of the owner.

For this reason, Smith found that ground rent was the most appropriate subject of taxation.

Ground-rents...are altogether owing to the good government of the sovereign....Nothing can be more reasonable than that a fund which owes its existence to the good government of the state, should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.

Taxes on house rents, Smith held, would fall most heavily on the rich, but he held that to be an advantage. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

To sum up, we can arrange Smith's taxes in order from most appropriate to the least in this way: taxes on ground rent, house rent, luxuries, incomes, and necessities.

From Smith's principles we can evaluate the tax proposals before us. Of course, the present system of reliance on income taxes violates most of Smith's principles. However, the most touted alternatives are generally worse. The Flat-tax involves all the inconveniences of the current system, plus makes the system highly regressive. This is because it maintains, on top of the flat tax, the FICA taxes, which will give most people a much higher marginal rate than they currently have. However, FICA stops at about $90,000, which means the marginal rate for the highest incomes will be cut in half. The middle class will pay the marginal rates of the rich, while the rich will pay the marginal rates now paid by the middle class. It is hard to think of a tax plan more poorly planned or more unfair.

Unless it is the “Fair” tax. For the majority of people, who must convert all or most of their incomes to consumption, it will function as an income tax with high marginal rates. For the rich, who convert less of their income to consumption, it will be a tax reduction, while for the very rich it will come near to tax elimination. In addition, it will require massive collection and enforcement bureaucracies and encourage cheating on a massive scale. Of all the proposals, it violates just about every one of Smith's maxims.

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MERRY CHRISTMAS TO ALL!

We here at The Distributist Review wish all our readers in America and everywhere else throughout the world a Blessed Christmas.

May the birth of Our Savior, the Babe of Bethlehem, bring you joy, peace, forgiveness of sins and light within your hearts.

And please pray for the repose of the souls of Distributism's co-founders, G. K. Chesterton and Hilaire Belloc, as well as their dear wives, Frances and Elodie. May they rest in peace.

GAUDETE! CHRISTUS EST NATUS EX MARIA VIRGINE! GAUDETE!
(Rejoice! Christ is born of the Virgin Mary! Rejoice!)

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Ron Paul and Hilaire Belloc

The Democratic Party is jubilant just now because, among other things, they are awash in cash. The millions of dollars in corporate cash that flowed to the Republican Party during the heyday of Karl Rove is now flowing to the Democrats. Now, it is just possible that Corporate America has experienced a mass conversion, a change of heart than has resulted a change of contributions.

This is possible, but I doubt it. Rather, the money flows on what might be called the “Vicar of Bray” principle, namely that “whatsoever king shall reign,” the corporations will still retain their power and influence. It is power, and not principle, the directs the flow of cash. The corporations treat these lobbying and political expenses like any other investment; they expect (and get) a high return on their dollars. These returns come in the form of favorable tax treatment, friendly “regulations,” subsidies, and an endless stream of the kinds of “goodies” that only a beneficent government can provide. Government becomes a contest of competing oligarchs and the will of the people—the foundation of a democracy—becomes the will of those with lots of cash.

The great enabler of this form of oligarchic government is the Party System and especially the two-party system. This system is not constitutional, but it might as well be, since it is written into the laws of every state and of the federal government as well. The two parties enjoy a position in government that is sanctioned by positive law, and in practice no candidate can run—or even get on the ballot—without their sanction. But the parties themselves stand as mere proxies, not for real principles, but for principalities and powers.

None of this is news, of course. Hilaire Belloc and Cecil Chesterton noted all these problems as far back as 1911 in their book, The Party System. Belloc was, of course, a member of Parliament who resigned, calling Parliament noting more than “secret government by the rich.” Well, the secrets out, and has been out for a long time. But with power vested in the parties, the people seem to have little power to change things.

IHS Press will issue a new edition of The Party System with a foreword by Ron Paul. This is appropriate, since Congressman Paul does not quite fit into the standard political categories dictated by the two-party system. Actually, few of us do, but all of us find ourselves forced to hold our noses and vote, usually for the best of a bad lot. But Ron Paul has chosen the deliberate path of the rebel, much as Belloc and Chesterton did.

Now, I am not a libertarian, for reasons I have outlined previously (“Why I am not a Libertarian”). I do not think it is a complete theory. Nevertheless, I believe that a distributist state would more resemble the libertarian ideal than it would resemble anything else. Hence, I have a certain sympathy for certain forms of libertarianism. And I have a certain sympathy for a candidate who has read at least one book of Belloc's. And mostly, I have a great deal of sympathy for a candidate who stands on principle. So I will likely vote for Ron Paul, even though I am not in complete agreement with him.

Paul does understand that the solution is in our power, and more to the point, in our constitution. As he notes:

the United States Constitution gives Congress the authority to regulate the time, place, and manner of federal elections. Ballot access is one of the few areas where Congress has explicit constitutional authority to establish national standards. So we have no excuse for not having taken care of this problem.

Further, he understands the major effect of this problem:

The sad fact is that if we today have allowed a decline in our vigilance and watchfulness over our precious freedom, our independence, and our right to manage our affairs for ourselves – such that we feel today that government is simply not responsive to the wishes of the average man and woman – the reality is that this divorce between the will of the people and the workings of the “democratic machine” happened a long time ago, and it did so in a country that we can rightly call the nursery of our own democracy: England.

Finally, Ron Paul takes his goal directly from Hilaire and Cecil:

An “Executive responsible to the representative assembly” is what Belloc and Chesterton have set forward as the ideal, and yet how many unconstitutional wars, unauthorized wiretaps, signing statements, and foreign renditions do we have to have before this representative body – the Congress – flexes its muscle and takes a stand upon matters of law and our Constitution?

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Taxes: Fair or Foul?

The second in a series on the principles of taxation.

Somewhere in the Analects of Confucius, the Master says that the first step in solving a problem is to call things by their right name. When things are mislabeled, it is very difficult to think about them correctly. On the other hand, if you do not wish people to think correctly about an issue, the first step is to mislabel things. If you deliberately wish to confuse people, you can start in no better place than to give things the wrong name. A name describes what a thing is, and if you wish to conceal from people what that thing is, then call it something it is not.

However, mislabeling things does give a clue to the fact that someone is trying to mislead you. If someone is afraid to call something by its right name, then they are afraid that people will find that thing fearful. Which brings us to the 30% National Sales Tax. I use this name because it describes what the thing is. But if you have not heard of it before, it is because the supporters of this idea do not call it by this name. They are afraid that any name which accurately describes it would certainly cause people to fear it. And I am afraid that they are right. The name they have chosen is one that gives an opinion about the tax, rather than describe what it is. One is certainly entitled to one's opinions; one is not entitled (this side of Karl Rove and George Bush) to misuse the language. And the opinion they have rendered on their own plan, the mislabel they have chosen for it, is the “Fair” Tax. I am not concerned, for the moment, with whether this opinion, rendered as a “name,” is accurate. My concern for the present moment is why they chose this particular bit of propaganda for their moniker.

The reason is simple: they have perceived, quite correctly, that fairness is a basic principle of a just tax system. Now, I do not know what standards the backers of this tax use to render the judgment of fairness on their plan. I have searched their web site (www.FairTax.org) in vain for a definition of “fairness.” So I will have to supply my own. And I believe that we can define fairness as justice.

But what is justice? Obviously, there are many different notions of what constitutes justice, but I believe that they all have one thing in common, namely the idea that what one gets should be proportional to what one gives, that one's rewards should be commensurate with one's contributions. There is not much dispute, I believe, about this principle. However, the devil is in the details. No one will quarrel with the proposition that if you spend a dollar, you should get a dollar's worth of goods; if you pay for a pound of ground beef, you should get a pound, and it wouldn't be just if the butcher had his thumb on the scales. This is justice in exchange, or what Aristotle called commutative or corrective justice. This kind of justice deals with exchanges between individuals or between firms acting like individuals.

But there is another kind of justice called distributive justice, which deals which how collective entities (a family, a company, or a state) distribute their corporate products to the individuals that make up that collective entity and contribute to it. And it is a fairly well established principle that rewards from the corporate entity (the state, in this case) should be distributed in proportion to the contributions each individual makes. Now, there are many different kinds of contributions to the common good (which is, or should be, the “product” of the state). There are soldiers to protect us, nurses and doctors to heal us, mothers to give us life and serve as our first teacher, entrepreneurs to create new wealth, and so forth. It is difficult to judge the relative merits of each of these contributions, but we know that life would be more precarious, or even impossible, without the contribution of each of these people. Hence we know that it is in our best interests to see that each person is properly rewarded for their contribution to our comfort and well-being.

There is another kind of contribution to the common good that we all make, one way or the other, and that is the contribution of money to pay for the whole thing. This brings us (at last) to the question of taxes. Who should pay, and how much? I think the answers are: “Everyone,” and “In proportion to the benefits they receive.” Now, we don't have to worry too much about the first point, since many taxes will be passed on, one way or another, in the prices we pay for things. Hence, everyone will pay, even if taxes are not directly collected from everyone. It is the second point that is the interesting one, since we receive different levels of rewards from society and from government. For example, the police are there to protect us in our persons and our property. Now, we all have the same “property” in ourselves and receive the same benefit (in theory) from police protection. But we have differing amounts of property in “things.” Some have very little, but others have a great pile of things, and derive greater benefit from the protection of those things. Clearly, they receive a greater benefit and should pay a larger proportion of the costs of police protection.

Now, even with a flat-tax, the rich will pay a greater amount, but should they also pay a greater proportion of their income? This brings us to the great debate about taxes: Should they be regressive (the poor pay a larger proportion of their incomes), flat (everybody pays the same percentage), or progressive (the rich pay a larger proportion of their income)? Each of these answers embodies a different ideal of justice. Here we cannot reduce things to a rule (as we could in the case of simplicity) but must make a judgment about what constitutes justice.

A regressive tax embodies the ideal of the ruling class as the leaders of society who should receive the bulk of the rewards. At its most extreme, regressive taxes express the ideals of a slave society, since you can regard the slave as someone who is taxed at a 100% rate, minus some “prebate” equal to the level of subsistence the that the master is willing to give to the slave. One would think that regressive taxes are excluded from a democratic society, but in fact many of our tax structures are regressive. Sales taxes are one example. Another is the differential rates of taxation for income from capital and labor. Labor is taxed at a higher rate than capital gains, which is regressive because the rich tend to make a higher percentage of their income from their capital rather than their labor.

A flat tax embodies abstract ideals of economic and political equality; each person is deemed to be rewarded by the economic system in a manner proportional to his or her efforts. As such, the flat-tax has some appeal from the standpoint of the ideals of equality. However, the evidence that people are rewarded in exact proportion to their contributions and productivity is weak at best, and flat contradicted at worst. Look at the following chart (click on the chart to get a clearer view).

What it shows us is that median wages (adjusted for inflation) have been flat since 1973. Yet in that same time-frame, productivity for all classes of workers has increased dramatically. What has happened is that one relatively small group has appropriated to itself all the gains arising from increased productivity; the connection between contributions and rewards has been broken. Now, while there may be good arguments for a flat tax in the case of taxes on wealth (land taxes, for example), these arguments are weak when applied to incomes, at least in the concrete situation in which we find our society. This is not only a violation of basic justice, but has deleterious practical consequences as well (see The Investor's Dilemma and The Investor's Dilemma II).

This would seem to leave progressive as the only system that would meet the standards of fairness and justice, at least, in our current situation. Those who receive a disproportionate share of the rewards should contribute a disproportionate share to the upkeep of the commonweal.

Both the 30% National Sales Tax and the Flat-Tax proposals make a nod in the direction of progressive taxation, the former by establishing a universal welfare program that prebates the sales taxes up to the poverty level, and the latter by a standard deduction equal to the poverty level. In the case of the Flat tax, the degree of progression is trivial. Further, since the tax only replaces the income tax and leaves the FICA taxes in place, it ends up being regressive. A worker will pay the 17% flat tax, plus the 7.65% payroll taxes. A self-employed person (like myself) will get a flat tax of 32.65%, which is close to the marginal rate for the richest Americans, and I am by no means rich. Further, since the FICA taxes stop at about $90,000, the resulting structure is regressive.

In the case of the National Sales Tax, "progression" is an outright lie. The “progression” comes only if you assume that the rich convert all of their income to consumption, which is patently untrue. At the extreme, a man like Warren Buffet has difficulty converting even 1% of his income into consumption; therefore his tax rate will equal 23% of 1%, or 0.0023% of his income. This is a rate more compatible with a class-based or even a slave society than with a democratic nation.

Obviously, there can be different judgments about justice; it is not something that can be calculated, but must resolve itself back to some basic, but “unprovable” notions about the kind of society we want. But I do believe that any discussion will have to take into account the factors that I have mentioned here, namely the proportion between the benefits one receives and the contributions one makes.

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Taxes: The Simple Life?

This is the first of a four-part series on the principles of taxation. In the next year, the public will be besieged by various claims about taxes. These claims cannot be evaluated without enunciating principles that apply to all taxes of any type. Without foundational principles, we can get no further than ideology and propaganda, and shrillness rather than reason must dominate the discussion. This first post deals with the question of Simplicity in taxation. Reader comments are welcome.

In spring a young man's fancy may turn to thoughts of love, but in winter they turn to darker thoughts indeed, and none darker than the thought of filling out his income-tax returns. That season is hard upon us, and the joy of the Christmas is inevitably followed by the gloom of the tax season, as Santa Claus is replaced in our imaginations by Uncle Sam. The former giveth, the latter taketh away. And while one is awash in receipts and W-2s and 1099s and forms of every sort, it is natural to cry out, Why can't we have a simpler tax code? And even more damaging to our perception of the tax system is the knowledge that the tax-code is laden with “gifts” for special-interest groups large and powerful enough to purchase a legislator or two; the corporations expect a return on the 100's of millions they pour into politics, and special tax treatment is part of that return. So along with a desire for a simpler tax comes a cry for a fairer tax.

Such a cri de coeur creates a demand for schemes which are “simpler” and “fairer.” And with such a great demand, there comes any number of plans from both reformers and charlatans alike willing to supply the demand. And, of course, it gets harder and harder to tell the reformers from the charlatans. Indeed, there may not be much of a difference between them on this issue; every attempt to simplify the tax code has made it more complex; every attempt to make it fairer has made it more unfair.

To be sure, the tax-code is laden with bounties for special interest groups which could easily be removed and so greatly improve the tax code. But even removing these would not greatly simplify the code. The plain fact is that the complexity of any tax code arises from the complexity of the thing being taxed; no code can be simpler than the thing to which it applies. And in the case of an income tax, the tax code cannot be simpler than the concept of income. In truth, there is no single or simple definition of the concept of income either in economics or in accounting. Or rather, there are any number of contending definitions, each of which has some validity in a given situation or for a given purpose. In the accounting trade, the rules for defining income (or profit) are given by the Generally Accepted Accounting Procedures (GAAP) which is governed by the Financial Accounting Standards Board (FASB). The GAAP manuals currently run to five volumes. Thus, no tax-code that deals with income can be shorter than these five volumes.

But in reality, the code must be very much longer than the five volumes of GAAP. Why? Because GAAP allows a wide variety of methods for calculating income since it covers, in theory, every possible situation. Using GAAP, a business firm could simply select its level of income by combining the most advantageous methods. This is not really a problem when it comes to most uses of financial statements. For each type of business, the users expect a certain type of accounting, and a business that violates these expectations will likely be punished by investors, bankers, and financial analysts. But the opposite is the case with the tax code; selecting the method that most understates income will result in rewards for the firm and an intrinsic unfairness in the tax-code. Therefore the simplest possible code will not only be as long as GAAP, but must be some multiple of the five volumes, since it must state the allowable accounting methods in each situation. We can know state an absolute principle for any income tax-code: An income tax-code cannot be, even in theory, any shorter than the Generally Accepted Accounting Principles that define income and must be, in fact, some multiple of these procedures.

We can apply this principle to a specific “tax simplification” proposal, the Flat Tax. Former congressman Dick Armey has proposed this tax with a simplified business tax return that fits on a post-card. Basically, there is one line to state the firm's “income,” another to state its cost of goods sold, which is then subtracted from the income, and a 17% tax rate is then applied. That's it. Pretty simple, no? Well, no, it is very complex. Each of the lines, “income” and “cost of goods sold,” would have to be backed up by forms which are in fact every bit as complex (if not identical to) the current forms. For example, when is “income” recognized? At the time the order is booked? At the time delivery is made? At the moment payment is received? At each stage of completion for works-in-progress? For different kinds of businesses, each one of these methods has a certain validity and is used in different situations but not in others.

The complexities that apply to “cost of goods sold” are even greater. Should inventories be charged when they are purchased or when they are consumed? Should capital equipment be charged off in the first year or over the life of the asset? These, and literally thousands of other issues are covered in the GAAP manuals and must be specified in the law and detailed on the tax return. Armey may be able to summarize the forms on half a page, but the supporting forms would be just as lengthy as they are today. They cannot, even in principle, be any shorter.

At this point, the alert reader might interject, “yes, that might be true for business taxes, but certainly personal taxes can be just as short as Dick Armey says: state your income from the W-2, apply the flat rate, and that's that!” The problem with this is that the amount on the W-2 is already the result of complex calculations covering several volumes of the tax-code. Certain amounts one does not actually receive (like the FICA tax) are counted as income, while certain amounts one does receive (like health benefits) are not counted. The return that Dick Armey is proposing already exists; it is the 1040EZ. This form is “simple” only because the complex accounting has already been done by somebody else and because all other possible deductions are denied in advance. The flat tax “simplifies” only a few pages of the tax code: those pages which deal with the varying rates of taxation. Of the thousands of pages, it addresses only a few; everything else would have to remain in place.

This brings us to our second principle of taxation: Whatever the government taxes, it must also measure, regulate, and control. If the government taxes income, it must be able to define, measure, track, and audit income. There must be a bureaucracy and a both a legislative and judicial process to accomplish this task. If it taxes consumption, it must be able to define consumption, and track every transaction that fits that definition. The oft-advanced claims of “reducing bureaucracy” ring hollow because the bureaucracy must be co-extensive with the thing taxed. One can “abolish” an income-tax bureaucracy like the IRS only by replacing it with a bureaucracy as large and complex as the thing you choose to tax; if that thing is simpler, the bureaucracy can be simpler; if it is more complex, the bureaucracy will be more complex. There is simply no way around this principle. By selecting the thing taxed, one must, at the same moment, select the size and scope of government. A simpler government can be obtained only by taxing something simpler.

Next Post: Fairness.

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The Church and the Environment

Traditional Catholics often have a negative reaction to the environmental movement. This is understandable in light of the fact that the movement is frequently dominated by anti-life liberals and that it frequently tends towards an anti-human rhetoric. That is, it identifies "people" as the problem and the threat to the natural order. Their conclusion often tends to be, "get rid of humans and save the environment." Hence they often manifest great support for the imposition of birth control on indigenous peoples and for abortion: "the fewer humans, the better"is their "solution" to all things having to do with the environment.

But the human person is not the problem; rather, the human person viewed as pure consumer is. When our self-worth is defined in terms of what we buy and how much we consume, then avarice becomes a standard of "virtue." With such an unnatural view, the natural environment must suffer. When we routinely drive a Hummer half a block to pick up a gallon of milk, we leave a pretty big "carbon footprint." It is not people per se, but certain people who cannot restrain their consumption that is the problem. But man is the master of the natural order; God gives us "dominion" over the world. This is not the dominion of a tyrant, but of a father who wishes to bring out the best in those in his care, or of a craftsman, who wishes to make of natural objects something even more beautiful and useful. What everyone should oppose is a view of nature that turns her into a mere resource for the most wanton of desires and a mere garbage heap for the most toxic of unnatural chemicals.

Therefore, Christianity is inherently environmentalist, with a responsibility for the natural order that goes back to Genesis. By running away from this responsibility, we leave the field clear for the capitalists for whom nature is nothing more than another opportunity for exploitation. We cannot in conscience avoid our responsibilities, and we should not have to choose between the abortionists and the capitalists. Rather, we must become the "yeast" that leavens the whole conversation. We must return the conversation to its Biblical and traditional roots, which places responsibility for the created order on man, to whom dominion has been given.

One hopeful sign of this task is the establishment of the John Paul II Institute for Theology and Environmental Studies at Thomas More College. The mission statement of the institute reads:

The John Paul II Institute for Theology & Environmental Studies is dedicated to studying, communicating, promoting, and developing Pope John Paul II’s legacy concerning ecological responsibility and environmental awareness. Finding its warrant in John Paul II’s Christian humanism—the “heart” of the new evangelization—the Institute seeks to:

• Facilitate Catholic theology’s interface with the multidisciplinary field of environmental studies, i.e., the environmental arts, humanities, and sciences;
• Advance theological research and foster theological literacy, toward the development of a comprehensive Catholic theology of ecological identity;
• Provide a forum for dialogue and interaction with the diverse theories and cultural expressions of contemporary environmentalism and environmental concern;
• Establish a theologically-grounded approach to environmental education, outdoor/experiential education, and formation in the natural sciences/science education; and
• Promote interdisciplinary studies, the integration of knowledge, and the dialogue between Catholic thought and the natural sciences on the question of the environment, according to the tenets of Ex Corde Ecclesiae, in service to the Church, academy, and society.

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ABC News "Spikes" Ron Paul Interview

ABC News has apparently decided that Ron Paul is not quite ready for prime time. His interview with John Stossel will not be aired, and has been relegated to the Web. See the story here.

Who's "up" and who's "down" has a lot to do with media decisions about who they will cover. With control of the media shrinking, (see Roy Moore's article on this) so does the range of "valid" opinion. Control of the public space passes to a few private hands, who then control what the rest of us can know.

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The Huckabee Bureaucracy

Perhaps nothing government does causes more resentment than the income tax; it is the visible sign of government intrusion into our economic lives. There are many reasons for this resentment, most of them legitimate. When the tax first began, it affected, at most, the upper 2% of the population, and was, therefore, a wealth tax. But over the years, it became largely a tax on (and an attack on) labor. Why labor is something that should be taxed—that is to say, discouraged—is a bit mysterious. But each payday, the worker sees his pay stub filled with deductions to his hard-earned wages. And he suspects, correctly as it turns out, that the rich do not pay anywhere near the same proportion of their disposable income in taxes. Therefore the primary emotion is one of basic unfairness.

It is therefore not surprising that a scheme, no matter how hare-brained, that is labeled a fairtax would hold some initial appeal. The prospect of closing down the hated bureaucracy of the IRS can only fill one with glee; I certainly look forward to that happy day. That appeal will wear thin, I believe, when the new tax replaces the pay-day resentment of deductions with the everyday resentment of a 30% tax each and every time the worker buys something. The “FairTax” folk promise him—today—that his wages will rise by roughly the same amount. However, their assumptions are dubious at best; since there is no precedent for such a massive intervention in the market, no one can say what the effect on wages or prices will be, and hence no one can say what the effect on the market will be. The plain truth of the matter is that the 30% national sales tax represents the largest single government intervention into the free market since the Russian Revolution. And like all such interventions it will require a bureaucracy to administer it. And the bigger the intervention, the bigger the bureaucracy; and since the Huckabee tax is the biggest of interventions, it will require that the Huckabee Bureaucracy be the mother of all bureaucracies. Moreover, the Huckabee bureaucracy will be primarily a police force, just like the IRS, because the system he envisions will be prone to fraud on a massive scale, and will therefore require a massive police force.

The sources of massive fraud in the administration of the National Sales Tax are three. The first concerns the fact that it sets up the largest welfare program ever (the so-called prebate), a program that will require the issuance of a national identity card. How else will they know to whom and where to mail all those monthly checks? Since each identity card entitles it's bearer to “free” money from the government (you and me) in the amount of about $200/month, many people will want more than one. Why not a dozen or so? Why not two dozen? Identity theft is already big business, as is the business of “manufacturing” identities. But with a $2,300/year “prebate” with each phony and stolen identity, there will be millions upon millions of them. The Huckabee National Identity Bureau will have its hands full trying to root out the false ID's. I can't imagine them being able to do that without broad and extensive police powers, and even then the mafia is likely to stay well ahead of the Huckabee Identity Police.

But as bad as the identity fraud will be, there is a bigger source of fraud in the fact that the National Sales Tax sets up a two-tiered pricing system. The same items will be taxed or untaxed depending on who the buyer is. If a businessman or woman is buying the item for ostensibly business purposes, then there is no tax. So, since I am a businessman, when I buy my car, I pay no tax. You, buying the same model car at the same time, will pay 30% more for it. Now the resentment really begins. However, how is the sales clerk to know which one of us is really a businessman? In the bad old days of the IRS, the businessman was the one who filed a schedule C and paid taxes on the profits. But now there is no such thing as the IRS (hooray!), so there will have to be a way to distinguish between the business and non-business buyers. This will require that each businessman get a certificate from the Huckabee Business Certification Bureau. But an immediate problem arises: how do you define a business? There is a sense in which a firm or person is currently defined as a business by paying business taxes. But under the National Sales Tax, it will be the opposite: a businessman is the one who doesn't pay the taxes. Hence, everybody will want to be a businessperson, at least when they are shopping. We can reasonably expect there to be millions and millions of applications for the business certificate. And since one doesn't have to show a profit, or indeed, show anything, there will be lots of people who are businessman only when they shop. Since this alone is enough to wreck the entire revenue system, there will have to be established the Huckabee Business Auditing Bureau to ensure that the businesses are legitimate. Even though this bureau will collect no taxes, it will have, in every other respect, the same task in relation to business as does the dreaded IRS.

Now, each seller will have certain sales that are taxed, and others that are untaxed. There will undoubtedly be any number of dishonest businessmen who will simply lie; they will report as “untaxed” a certain percentage of transactions for which the customers actually did pay the tax, thereby increasing their margins on those sales by an instant 30%. This kind of thing happens already with sales taxes, with some business reporting lower sales than they actually had, and hence pocketing the sales taxes that they collected. However, it is somewhat rare, because both the retailer and his supplier have such extensive reporting requirements for the IRS that the fraud becomes trickier, because one serves as a check on the other. But with no reporting requirements, there is also no check. Hence, to prevent massive fraud, there will have to be extensive reporting of each and every transaction to the Huckabee Sales Auditing Bureau. They will have the immense task of auditing each and every sale to make sure that the taxes are accurately reported and paid.

But the two-tiered pricing system has another distinction, that between “new” and “used” items, since “used” items are not taxed. We pass over the fact that this guarantees the death of the new housing industry, where the tax rate is prohibitive, and go on the difficulty of this distinction generally. Is a re-manufactured toner cartridge new or used? Is a demo car new or used? Normally, buyers and sellers work these things out for themselves without the help of the Federal Government, but now the Huckabee government will have to intervene to protect its tax base. I don't even know what to call this bureau or how it will fulfill its duties; reader suggestions are welcome. But it does suggest an excellent business opportunity. Since I am a businessman, I can buy a new car tax-free. I can drive it for a week and sell it to you at a 10% markup. You will save 20%, I will make 10%, and everyone will be happy. And I will get to drive a new car each week. Since there is no reporting of business expenses, no one will know that my business is buying an awful lot of cars, more than the normal real estate agent might require in the discharge of his duties. To prevent this sort of thing, there will have to be established the Huckabee How-Many-Cars-are-You-Buying Bureau, (yes, I am running out of names for these things).

Of course, the term “used” will acquire a new meaning. Now, something like “Used Appliance Store” means one thing, but under the Huckabee administration, it will mean “30% off Appliance Store.” Such stores will claim that there stock is entirely used, and they will wear out quite a few ball-peen hammers putting dents in their “used” stock. To prevent this rather obvious fraud, there will have to be a Huckabee Product Origins Bureau.

But the simplest way around the taxes is simply not to report the sales, which will be easy since there is no messy income tax to deal with. People will buy goods in Canada and Mexico by the truckload, and sell them off the back of their truck or out of their trunks or living rooms. Drugs, appliances, jewelry—any sufficiently high value item will have an underground and non-taxed market. To deal with this, there will have to be a Huckabee Market Police.

I could go on, and many of you I'm sure will report other problems require other bureaus. The plain truth is that when you intervene in the market to this extent, the police powers of the state expand at the same rate or greater. The Huckabee National Sales Tax is anti-person, anti-family, and anti-business. People, even the most honest person, will be forced to cheat just to make ends meet. The plan encourages criminality and proliferates bureaucracies. The only beneficiaries will be the rich who spend only a small portion of their incomes on consumption, and hence escape most taxes. And the Mafia of course; they will rejoice at the new "business" opportunities. The rest of us will be forced to protect our incomes and families in other ways. Those who cheered to see the IRS closed down, will weep when they see the expansion of government power beyond their worst nightmares.

P.S. If you know someone in Iowa, pass this on.

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More on the Huckabee Hoax

Its getting harder to heart Huckabee these days, what with his befuddlement on the NIE and the revelation that he intervened to get a serial rapist released from prison, who then promptly went out and raped and murdered a woman. But some who do take Huckabee to heart have taken me to task for criticizing his call for a 30% National Sales Tax. This should be called the “Starship Enterprise Tax” because it will go where no sales tax has gone before: homes, medical services, legal services, food, government purchases—in short, everything. Democrats, in the meantime, have got religion, praying to whatever gods may be that the Republicans will endorse such a whack-o tax plan; they plan a leisurely campaign while every voter mentally adds 30% to each purchase during the election season, each time figuring out just what a Republican victory will cost him at the check-out counter.

Ian, a Fair Tax reporter, posts a long response. Well, actually, it is not a response at all, at least not a response to me; it is the same canned post that he sends to every blogger who dares to question the space cadets at FairTax.org. Nevertheless, let us try to address his major claim. Yes, he concedes that there will be a 30% tax (he calls is 23%, but we agree that whatever you call it, it will still be 30 cents added to every dollar of purchase), but prices will magically go down by 22%. Thus there is hardly any tax at all! And its revenue-neutral! And Progressive! Wow! I'm impressed. But also a bit suspicious. So let's look at these claims, one by one.

The Effect on Prices

Ian tells us Prices after FairTax would look similar to prices before FairTax - not 30% higher. This is because FairTax removes the cost of business income and payroll taxes currently embedded in prices. Ian calculates this cost at 22%, and presumes that it would immediately come off of current prices. I can only assume that Ian does not now reside in a capitalist country, and therefore does not know how prices are set. They are not set by the cost of production, but by the market using supply and demand. The cost of production provides the floor beneath which prices cannot, for any long period of time, fall, but it does not provide the ceiling, or even the average price. The fact that you can make a shirt in Bangladesh for 30 cents direct labor doesn't mean it sells here at some small multiple of 30 cents. Nor would doubling the labor cost to 60 cents double the price, nor would halving the labor cost to 15 cents halve the price. If its market price at Macy's is $30, there won't be any change because they have eliminated payroll taxes. The labor cost has very little to do with the price in such a case, and since we import so many of our goods, this will be the case most of the time. The Arabs will not reduce the price of oil because we have a consumption tax. The cost of housing bears very little relationship to the cost of building the house, and a lot of relationship to the location of that house. A house that in the country might sell for $100,000 will sell for $500,000 dollars in the city center, even if they are the exact same house. This will not change because the company has skipped a few tax accounting steps.

There are some highly elastic goods, in highly competitive markets in which a vast number of firms compete, where prices are very sensitive to costs, so much so that a change in costs leads to a near immediate change in price. But such markets are the exception rather than the rule. Don't look for prices to change much with the national sales tax, other than the fact that they will go up by 30%.

Revenue Neutral​?

No one outside of Planet FairTax believes that 30% will be “revenue neutral.” (Independent analysts place the revenue neutral rate at between 34% and 39.9%, and some even place it at 57%.) The space cadets get their number by ignoring fraud and by taxing government services. Everything that the national, state, and local governments buy will be taxed. But this can only mean that your state and local taxes go up by enough to finance the 30% additional for all government purchases. In other words, they make it “revenue neutral” by building in state and local tax increases—voodoo economics at its best!

Furthermore, they totally ignore the effects of fraud. With the prospect of undercutting all competition by 30%, the opportunities for fraud will be immense; people will find all sorts of ways to sell you things outside of the system, and with a 30% price advantage, there will be no shortage of customers. Indeed, the FairTax people themselves build in an exception that is sure to lead to fraud: used items won't be taxed at all. Used homes, cars, clothing, washing machines, etc., all escape the tax. I can pretty much guarantee that there will be whole new industries manufacturing “used” goods. You can never underestimate the creativity of the American entrepreneur to find a way to get around such a high tax. Indeed, there will have to be a huge new government bureaucracy to play “whack-a-mole” with these schemes, knocking down one only to see it pop up in a dozen other places. All sales taxes presume that the amount of the tax is less then the cost of avoiding the tax, for the most part. People and businesses would rather, for the most part, pay a 6% sales tax then take the trouble to devise schemes to avoid it. But even at the low rates, it happens fairly frequently. When the tax rate rises to 30%, the rewards of tax avoidance go up dramatically, and with it come new and creative ways to avoid the tax. The more likely result of such a tax is not “revenue neutrality,” but wide-spread criminality. Breaking the law will be commonplace, but people will feel it is justified to avoid such an oppressive tax.

In addition to the new whack-a-mole bureaucracy, there will have to be a new wing on the Homeland Security building to track the location of each and every American citizen so that they can receive their prebate check. This bureaucracy will be particularly intrusive, since it will have to verify each citizen and his/her whereabouts, since fraud will be massive. The printing of phony birth certificates and the planting of new new names in public databases will be big business. The Mafia can hardly wait for this law to be passed.

Extremely Regressive

The effect on the rich will be to avoid a lot of taxes that they now must pay. But the FairTax people claim that this will free the poor from taxes. Now, this is actually true, but only for the non-working poor, for whom the prebate will be just another welfare program. But the effects on the working poor will be devastating, because the EITC (Earned Income Tax Credit) will disappear. B. Y. Young at the B-Crat blog computes the effect thusly:

I did some back of the envelope calculations on how this change could impact the poor and for people at the poverty line, people at 2 times the poverty line, and people at 3 times the poverty line, all seemed to better with our current system...even with the prebate. This is based on a family of four without anything but the exemptions for their kids. The EITC helps out the poorest, giving them a $860 advantage with the current system. At 2 times poverty the current system puts $475 more dollars in your pocket at the end of the day. And at 3 times poverty you'd have $940 more in your pocket.

Mike Huckabee might make a great candidate for president—of the Southern Baptist Convention. But alas, as a president of the United States, he seems to be out of his depth. If he cannot do the analysis on such a transparent bit of nonsense, one hesitates to ask what his other intellectual shortcomings might be. We have suffered for seven years with a president who does not seem to understand the world, and particularly the world of business and economics. The results have been disastrous, and we can hardly afford four more years of the same.

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The "Fair-Tax" Fraud

The “I-heart-Huckabee” folks have indeed taken heart in recent weeks, with their hero’s recent rise in the polls. It seems as if Huckabee now has a realistic chance of becoming the nominee of the party. Part of this is due to the failure of the “major” candidates to catch on with the Republican base. Another part must be due to revelations about Rudy’s love affairs and doubts about Romney’s religion. But a big part has to do with Huckabee’s support of the so-called “Fair Tax.” FairTax.org has organized in Iowa in behalf of Huckabee, and their message has great appeal: repealing the “unfair” income tax and replacing it with a “fair” tax. Now, who can object to replacing the unfair with the fair? It certainly is a winning message. The problem is, it wins only as long as people do not understand the tax. The fair tax propaganda is a network of lies, and lies that are easily exposed. The fair tax people have had a free run up until now, because little public attention has been paid to their proposal. But once this becomes a major issue, a spotlight will be turned on this, one that will send the roaches scurrying for cover. And there are lots of bugs in this proposal. I outline just a few of the major problems.

The Name

The fair tax is not a tax on fairs, or even a tax on affairs (which would at least be interesting, especially for Rudy Guilliani), but a national sales tax. When people give you a “marketing name” for something, rather than a simple descriptive name, you know they are trying to put a sales job on you.

The Tax Rate

The fair tax folk advertise this as a 23% tax; the actual tax is 30%. They get the 23% rate by stating the “tax-inclusive” price. For example, under this proposal, an item that costs $100 would have a $30 tax on it, for a total price of $130. Since 30/130=0.23, they state the rate at 23%. But most people would regard it as a 30% rate, because that’s what it is. Why this rather obvious fraud in stating the rate? Because their own polling data shows that support for the proposal drops dramatically as the rate goes over 23%. As people understand the true tax rate, support for the tax will evaporate.

Everything is Taxed

People are familiar with sales taxes already, but not with a sales tax that covers every single purchase: food, medicine, doctor’s, home sales, car sales, interest on credit card payments—everything. Just think about buying a house, say a $200,000 home, and paying a $60,000 sales tax on it. Do you think that might impact the market somewhat? Or think about needing a medical procedure that costs $10,000 only to get a bill for $13,000. Who is going to pay the extra $3,000? If the patient, he may not be able to afford the operation; if the insurance company, rates will skyrocket. You can apply this to each and every market affected by this tax.

Revenue Neutral?

The 30% rate is supposed to be revenue-neutral. However, The President’s Tax Advisory Council—and every other neutral observer—disagrees. They calculate the revenue neutral rate at 34%, while the Brookings Institute calculates it at 39%. Part of the problem is that the fair tax people do not allow for the possibility of cheating. But a more likely result is that fraud will be massive. With such a high rate—whether 30% or 39%—the incentives to cheat will be irresistible. From people selling from the back of their cars, to off-shore web sites, the average citizen will be given a lot of help in avoiding the tax.

Further, to include the revenue neutral calculation, they include government purchases. Therefore, a tank costing $1 million will now cost $1.3 million. But this means that government budgets must rise by an equivalent amount. So either we increase, for example, the military purchases budget by 30% (in which case, the proposal is no longer “neutral”) or we purchase 30% fewer items (in which case, the proposal is no longer “neutral.”)

Regressive

For people who must convert all of their income into consumption, there is no difference between an income tax and and a universal sales tax—100% of the income is taxed either way. In other words, for people who must spend all of their income to get by, this is equivalent to a 30% income tax—with no deductions—far in excess of what most people now pay. People with excess income avoid the tax by saving rather than purchasing. But people with high incomes already save; those at the top simply cannot convert all of their income to purchasing. That saved portion of their incomes will simply be tax free. Sales taxes are inherently regressive, falling more heavily on those who must spend all of their incomes.

The fair tax people address this problem by proposing to give a “pre-bate” to everybody. The prebate is a monthly check given to each citizen to cover the cost of the tax up to the poverty level. The cost of this prebate will be somewhere between $485 billion and $600 billion, not counting fraud, which will be massive. Can you imagine the market in phony birth certificates? But even this ploy will not make the tax progressive. The false assumption is made that all income is converted to purchase, but it is not. The very rich spend a much lower percentage of their incomes. The real effect is a tax cut for the rich, and a tax increase for everybody else. Indeed, the fair tax people promise the mathematically impossible: they promise lower taxes for everybody and revenue neutrality. At best, they can deliver one or the other, but not both, and possible neither. If you lower the taxes for one, you must raise them for another, or abandon the claim of neutrality. That's simple math.

Dubious Assumptions

Throughout their proposals, the fair tax people advance rosy scenarios about the effects of the tax on wages, interest rates, productivity, etc. However, all of these scenarios are based on dubious assumptions that have weak theoretical foundations and no empirical base at all. Yet, without these assumptions, the whole thing is a dangerous experiment that could bankrupt the country (even more so than it already is). Such radical plans ought to have a better base. This plan has nothing behind it but wishful thinking.

Comparing the Plans

I have merely scratched the surface of the problems with a national sales tax. To look at it in more detail, you can examine their plan at fairtax.org. To see an excellent critique of the plan, check out the Fact Check site. Also, Bruce Bartlett has an excellent analysis at the Wall Street Journal site.

The Democrats Rejoice

The Democrats are holding their fire, hoping against hope that the Republicans will be dumb enough to propose a 30% tax on home purchases, new cars, medicine, and everything else. Those of them who pray are praying, “Please God, let the Republicans nominate a National Sales Tax candidate.” Even the Democratic Party—famous for blowing easy elections—couldn't possible lose under such conditions. The party looks forward to a summer and fall where each time a citizen purchases something, anything, he gets to contemplate the effect of a 30% (39%?) sales tax on that item. The present system, with all of its obvious faults and flaws, will seem to him to be a bargain. Every time a mother buys milk and bread for her family, every time someone checks in with their doctor for a checkup, and every time a family thinks about buying a home, they will have occassion to think about the National Sales Tax. Every checkout counter will be an advertisement for the Democratic candidate, no matter who (or how bad) that candidate happens to be.

As for Huckabee, he is certainly a sincere and genial man, one that people could easily take to heart. I do not think that he is capable of consciously participating in a fraud. But his performance to date leads me to believe that he is simply incapable of evaluating policy proposals on a practical basis. He is, if I may put it this way, a kind of Republican Jimmy Carter—and I mean that as a compliment. Jimmy made such a poor president, but an excellent ex-president. Like Jimmy, he means well, but, also like Jimmy, he has difficulty weighing the pros and cons of things.

My suggestion to the Republican Party is that they simply designate Huckabee as “Honorary ex-President” and get on with the business of finding someone a little bit better at evaluating policy proposals.

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The Postmodernist Pope

When the only tool you have is a hammer, you tend to treat everything like a nail. The particular hammer I am wielding these days is that of postmodernism, while I prepare to write an article on rather surprising use of G. K. Chesterton within some postmodernist authors. Now, postmodern writing is deliberate designed to give the reader a headache, so it is with a sense of relief that I took a break to read the Pope’s latest encyclical, Spe Salvi. I was astounded to find the major elements of the postmodern critique of modernism were incorporated into this remarkable encyclical.

The postmodernists critique modernism, and especially Liberal Capitalism, on the grounds of modernism’s radical individualism and naïve notions of “objective” and “scientific” truth. The postmodernists insist on regarding the individual in his social setting, and they make language and culture the primary means for understanding humans. In other words, they make relationships the key to humanity. However, postmodernism has a real problem, in that it secretly accepts back that which it purports to reject; having rejected Enlightenment notions of truth, received from Bacon and Descartes and Hume, it then regards these as the only possible notions of truth and so ends rejecting truth itself. Therefore, its critique has nowhere to go except to nihilism or relativism. The postmodernist critique of the Enlightenment is very good, but lacking a clear alternative, it is a dead end. Indeed, the postmodernists attempt a critique of capitalism on the grounds of justice, but having relativized truth, such a critique must fail. As a practical matter, post-modernism ends up as hyper-modernism (for a description of how this works in practice, see Battling the Swooshtika). However, Christian thinkers can, and have, appropriated elements of the postmodernism into their thought because they have a more secure and older notion of truth, one that is not vulnerable to either the modernist or postmodernist attack. The Radical Orthodoxy movement especially has appropriated postmodernism to the advantage of the Church.

But then, no one is more radically orthodox than this Pope, and in this encyclical he shows that his orthodoxy—and the Church’s—is more than a match for both modernism and postmodernism. He is able to turn the best within each to the advantage of the Church and the believer. However, his critique is not solely directed outward; he uses the postmodernist language to critique a Christianity based solely on an individualistic and purely private notion of salvation; in other words, his critique is also a self-critique. Pope Benedict will not allow us to abandon the world to its own devices, while we sit by in splendid isolation. No, the Pope rejects the notion of the “‘salvation of the soul’ as a flight from responsibility for the whole, and …[a] project as a selfish search for salvation which rejects the idea of serving others.”

While this community-oriented vision of the “blessed life” is certainly directed beyond the present world, as such it also has to do with the building up of this world—in very different ways, according to the historical context and the possibilities offered or excluded thereby.

The Pope begins this meditation by taking up one of the key postmodernist themes, that of language as primarily performative rather than merely informative, and this is especially true of the language of the gospels. What this means for Benedict is that:

The Gospel is not merely a communication of things that can be known—it is one that makes things happen and is life-changing. The dark door of time, of the future, has been thrown open. The one who has hope lives differently; the one who hopes has been granted the gift of a new life.

What unites the informative and performative elements of the Gospels is the virtue of hope. Benedict here enters an argument that has raged since the Reformation over the proper understanding of Hebrews 5:1, “Faith is the hypostasis of things hoped for; the proof of things not seen.” What does the term hypostasis mean here? In the ancient Church, it was translated as substancia, “substance,” something that actually existed. But beginning with Luther, it was translated by “assurance.” In other words, hope was demoted from the substantial order to the merely psychological. (Cf. my article, Lost in Translation: Hope and Hypostasis in Hebrews) For the Pope, hope is substantial, and this makes all the difference in the world:

Faith is not merely a personal reaching out towards things to come that are still totally absent: it gives us something. It gives us even now something of the reality we are waiting for, and this present reality constitutes for us a “proof” of the things that are still unseen. Faith draws the future into the present, so that it is no longer simply a “not yet”. The fact that this future exists changes the present; the present is touched by the future reality, and thus the things of the future spill over into those of the present and those of the present into those of the future.

The Pope goes on to demonstrate the shortcomings of the Enlightenment notions of progress and rationalism. Without Christian hope—and the God who is the substance of that hope—progress and rationalism become barbarism and irrationality. The modern world has sought its freedom by cutting itself off from the very source of freedom.

What this means is that every generation has the task of engaging anew in the arduous search for the right way to order human affairs; this task is never simply completed. Yet every generation must also make its own contribution to establishing convincing structures of freedom and of good, which can help the following generation as a guideline for the proper use of human freedom; hence, always within human limits, they provide a certain guarantee also for the future. In other words: good structures help, but of themselves they are not enough. Man can never be redeemed simply from outside. Francis Bacon and those who followed in the intellectual current of modernity that he inspired were wrong to believe that man would be redeemed through science. Such an expectation asks too much of science; this kind of hope is deceptive. Science can contribute greatly to making the world and mankind more human. Yet it can also destroy mankind and the world unless it is steered by forces that lie outside it. On the other hand, we must also acknowledge that modern Christianity, faced with the successes of science in progressively structuring the world, has to a large extent restricted its attention to the individual and his salvation. In so doing it has limited the horizon of its hope and has failed to recognize sufficiently the greatness of its task—even if it has continued to achieve great things in the formation of man and in care for the weak and the suffering.

The Pope also addresses, under the aspect of hope, the themes of the last judgment and the end of man, and he does so in a way that unites justice and grace with the judgment, which is shown to be the judgment of love—all consuming and purifying love:

The judgment of God is hope, both because it is justice and because it is grace. If it were merely grace, making all earthly things cease to matter, God would still owe us an answer to the question about justice—the crucial question that we ask of history and of God. If it were merely justice, in the end it could bring only fear to us all. The incarnation of God in Christ has so closely linked the two together—judgment and grace—that justice is firmly established: we all work out our salvation “with fear and trembling” (Phil 2:12). Nevertheless grace allows us all to hope, and to go trustfully to meet the Judge whom we know as our “advocate”, or parakletos (cf. 1 Jn 2:1).

There is much, much more here, and I can barely scratch the surface. This encyclical is but a day old. But I am convinced that it is an encyclical for the ages, one of those that will be read in generation after generation. It is an encyclical that not only addresses the Christian, but reaches out to those who, although they are concerned with justice, have held back from the faith, often because they found it too unfaithful to its own sources and too disdainful of the world. To these, the Pope says, “come home.”

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