Many Americans who have wrestled with a 1040 form, or who have paid someone
to prepare their taxes, no doubt cheered the news that Congress will soon resume
working on tax reform. However taxpayers should temper their enthusiasm because,
even in the unlikely event tax collection is simplified, tax reform will not
reduce the American people's tax burden.
Congressional leadership's one nonnegotiable requirement of any tax reform
is "revenue neutrality." So any tax reform plan that has any chance of even
being considered, much less passed, by Congress must ensure that the federal
government does not lose a nickel in tax revenue. Congress's obsession with
protecting the government's coffers causes reformers to mix tax cuts with tax
increases. Congress's insistence on "offsetting" tax cuts with tax increases
creates a political food fight where politicians face off over who should have
their taxes raised, who should have their taxes cut, and who should have their
taxes stay the same.
One offset currently being discussed is an increased tax on imports. This "border
adjustment" tax would benefit export-driven industries at the expense of businesses
that rely on imported products. A border adjustment tax would harm consumers
who use, and retailers who sell, imported goods. The border adjustment tax
is another example of politicians using tax reform to pick winners and losers
instead of simply reducing everyone's taxes.
When I was in Congress, I was often told that offsets do not raise taxes,
they simply close loopholes. This is merely a game of semantics: by removing
a way for some Americans to lower their taxes, closing a loophole is clearly
a tax increase. While some claim loopholes are another way government distorts
the market, I agree with the great economist Ludwig von Mises that "capitalism
breathes through loopholes."
By allowing individuals to keep more of their own money, loopholes promote
economic efficiency since, as economist Thomas DiLorenzo put it, "private individuals
always spend their own money more efficiently than government bureaucrats do."
Instead of making the tax system more "efficient" by closing loopholes, Congress
should increase both economic efficiency and economic liberty by repealing
the income tax and replacing it with nothing.
The revenue loss from ending the income tax should be "offset" with spending
cuts. All federal spending, whether financed by taxes or by debt, forcibly
removes resources from the private sector. Thus, all government spending is
in essence a form of taxation. Therefore, cutting income and other taxes without
cutting spending merely replaces one type of taxation with another. Instead
of directly paying for big government via income taxes, deficit spending means
citizens will be hit with an increase in the inflation tax. This tax, imposed
on the people with the Federal Reserve's monetization of debt, is the worst
form of tax because it is both hidden and regressive.
Unfortunately, while Congress may make some small cuts in domestic spending,
those cuts will be dwarfed by spending increases on infrastructure Keynesianism
at home and military Keynesianism abroad. As long as Congress refuses to make
serious reductions in spending, the American people will be subject to the
tyranny of the IRS and the Federal Reserve.
The suffering will only get worse when concerns over government debt cause
the dollar to lose its status as the world reserve currency. This will lead
to a dollar crisis and a major economic meltdown. The only way to avoid this
fate is for the people to demand a return to limited government in all areas,
sound money, and an end to the income tax.
