Income taxes are something that are assumed to be a given; if you make money doing something, the government is entitled to some of the profit. It is important to note that currently America is very reliant on income taxes–including both individual and payroll taxes–, which comprise over 85 percent of America’s national revenue.
Taxes are an incursion on people’s liberty, a necessary incursion, done to promote the general welfare–to make sure that they are a just incursion is the perennial challenge. Seeking to solve this perennial problem is something that really interests and excites me, it is a topic that is heavily debated and which has incredible depth. However, I want to come at it differently than most do, for a personal income tax is an assumed constant, and I believe that that assumption is a great loss to progress–I believe that the very existence of an income tax is something that must be reconsidered.
In this webpage I am going to argue that income taxes in America are currently, and to some extent intrinsically, bad and unjust, and therefore should be replaced. Before I do so however, it is important to first define what constitutes a good, just tax. And before I do that I must also explain how inequality ought to be viewed in America–or any meritocratic state for that matter.
Given inequalities place in America, let me proceed to define what makes a good, just piece of taxational legislation.
John Rawls, an esteemed American political philosopher, offers [a] useful “[principle] that [expresses] a democratic idea of justice,” which he thinks ought to be applied to economic legislation (Rawls). He posits that “social and economic inequalities are to… [be] to the greatest expected benefit of the least advantaged members of society”–this is what he calls the “Maximin Criterion” (Rawls). He acknowledges that, through lottery, some are better endowed than others and thus, are bound to attain more success, in this case that can be taken to be meant in pecuniary terms (Rawls). While Rawls concedes that “natural talents are not a collective asset,” he asserts, through his Maximin Criterion, that “the better endowed may improve their situations only on terms that help others. In this way inequalities are permitted in ways consistent with everyone’s self-respect” (Rawls).
More clearly, although no less pragmatically, related to taxes, Thomas Hobbes, one of the great political philosophers, argues that taxes are “nothing else but the wages, due to them that hold the public sword, to defend private men in the exercise of their trades, and calling” (Levy). Thus, he concludes, those who benefit the most from the protection of the public sword, which Rawls would explain through fortuitous endowment, ought to pay the most for said protection–Hobbes believes in “the proration of taxes in accordance with benefits received” (Levy).
Criteria for a good and just tax
Therefore, we can say that the successful owe their success, in part, to the state’s protection of their ability to ascend through merit, and, since they have benefited the most from this protection, they should pay the most for it; additionally, according to Rawls, their superior abilities, obtained through unmeritorious endowment, and which aided in their success, ought to be allowed to manifest in unequal success only insofar as it benefits, to the greatest extent possible, the least advantaged citizens of the state. Such are the two, most significant, in my opinion, criteria for good, just taxational legislation, and the ends of which such legislation ought to be the means of achieving. And such are the ends to which an income tax originally sought to achieve in America; however, the income tax would morph throughout history and come to abandon these ends, thus rendering itself no longer good nor just.
Genesis and Metamorphoses: A History of the Income Tax in America
The first incident of an income tax in America was during the Civil War, during which Congress passed The Revenue Act of 1861, which included a tax on personal income, to help pay for the war. However, the Federal Government’s ability to tax income was, constitutionally, relatively amorphous and remained unsolidified until the passing of the 16th Amendment–which effectively gave Congress the power to enact a personal income tax (“Income Tax”).
Support for a progressive personal income tax had its genesis in the populist party led by William Jennings Bryan (Herber). They proposed for the tax burden to be shifted from the lower and middle-class to the upper-class. As one newspaper of the time put it, “Those who can best afford to pay for maintaining the government should do so… An income tax it is hoped and believed will take some of the burden of the support and maintenance of the government off the shoulders of the poor and put it on the shoulders of the rich, where we believe it belongs” (News-Herald). This goes along very nicely with the aforementioned criteria for good, just taxes; the income tax would continue to go along nicely with these criteria, for a time at least.
World War I
The advent of the cemented right of Congress to impose an income tax was promptly implemented for the funding of the “War to End All Wars,” less one day. This adoption would take the form of the Revenue Act of 1916, which was based around the idea of “soak-the-rich” and, echoing support for the Sixteenth Amendment, an “ability to pay approach” (Brownlee 96-97). Indeed it did this as “in 1918, only about 15% of American families had to pay personal income taxes, and the tax payments of the wealthiest 1% of American families accounted for about 80% of the revenues from the personal income tax” (Brownlee 98).
The Great Depression
The income tax would then see its first major reformation during the Great Depression. Franklin D. Roosevelt wanted, in regard to tax reform, “not to destroy wealth, but to create a broader range of opportunity, to restrain the growth of unwholesome and sterile accumulations and to lay the burdens of Government where they can best be carried” (Brownlee 126). He indeed achieved his tax reform goals; according to Brownlee, “The Revenue Act of 1935–which came from Great Depression tax reform–, along with economic recovery, pushed households into higher tax brackets and raised effective rates on the rich by nearly 50%” (Brownlee 128). The initial goodness, justness, and adherence to its original intent would be short lived for the income tax however.
World War II
On the eve of World War II, it was bipartisanly agreed that the war would be more expensive than World War I; therefore, tax reform once again took place (Brownlee 139). This came in the form of the Revenue Act of 1942, whose chief defining was base-broadening–largely through the mass taxation of the middle-class (Brownlee 142). This was evident by the fact that there were 42.6 million taxpayers in 1945, as opposed to the 3.9 million in 1939; and, by the fact that in the same year the richest 1% now produced only 32% of the total revenue yielded from the personal income tax, although the effective rate on the rich reached an all-time high of 60% (Brownlee 146, 147). This new tax regime remained resilient and carried on for quite some time, largely due to postwar economic prosperity, while Congress incessantly made significant tax cuts–which they were able to do while still meeting fiscal goals all the way into the 1970s (Brownlee 149).
In 1984, Ronald Reagan told the American public in his State of the Union address that he was asking the Treasury to conduct a study on the income tax and make recommendations as to how to improve it (Herber). What emerged from this–through a rather dubious, in the way of meddling by lobbying and special-interest groups, convoluted process–was the Tax Reform Act of 1986 (Herber). As for the new additions presented by the act itself it had two: firstly, it relied heavily on a strong minimum income tax, continuing in the footsteps of Roosevelt–in terms of base-broadening; secondly, it continued in its dubiousness with its proclaimed maximum and minimum tax rates of 27% and 15%, respectively, when in fact its implicit maximum tax rate was 32% plus on incomes between $75,000 and $185,320–a clear departure from the intent of the Sixteenth Amendment (Herber).
The income tax would continue to divest itself from its original intent in this manner–of base-broadening and heavily taxing the middle-class–, and by 1995, as Christopher Cox, who at the time was chairmen of the Republican Policy Committee, would lament in his testimony before the House Ways and Means Committee, 95% of taxpayers were promised they would never have to pay taxes by the framers of the Sixteenth Amendment (Cox). We therefore, through judging by the aforementioned criteria, see how the income came to divest itself so far from its original goodness and justness–let us now examine America’s current failure to adhere to these criteria.
The Present Day
Before Trump’s Tax Cuts and Jobs Act, there was a long period of very little bipartisan cooperation on fiscal topics (Brownlee 285, 287). According to W. Elliot Brownlee, this fiscal stalemate “placed [great] economic hardship on both middle-class and poor families, particularly those suffering from persistently high rates of unemployment, while wealthy families monopolized nearly all the economic gains from economic recovery” (Brownlee 285 287). Trump’s tax plan only made matters worse, according to the Institute on Taxation and Economic Policy, “The Trump-GOP tax law will provide most of its benefits to high-income households and foreign investors while raising taxes on many low- and middle-income Americans” (Wamhoff, Steve, et al.). This is demonstrably in direct conflict with the aforementioned criteria for the good, just accrual of taxes; thus it can be said that, in the United States, tax accrual from income, as it is now done, is bad and unjust. Let us now examine how to rectify this failing of income taxes in America.
Reformation: A Proposal for Improving America’s Tax System
Any proposal must meet the two criteria for good, just taxation: 1.) it must be derived from those who benefit the most from the protection of “the public sword” and 2.) it must meet Rawls’ Maximin Criterion (Levy; Rawls).
From Benefits Received: The Consumption Tax
Sir William Petty, an esteemed English economist, suggests that “every man should pay according to what he actually enjoyeth” (Bartlett). What one enjoyeth is synonymous with what one consumeth. In capitalism, when one offers up a good or service to the society one is compensated with an income; thus, a tax on income is a tax on one’s contribution to society, while a tax on consumption is a tax on the benefits one reaps from society. Therefore, only a consumption tax can rightly derive taxes from those who benefit the most from the protection of “the public sword” (Levy).
Common Objections to a Consumption Tax
The biggest objection to a consumption tax is that it is inherently regressive–meaning it affects most those who are least monetarily advantaged. In order to avoid this, and so fulfill the second criteria for good, just taxation, any consumption tax must be both steeply progressive–the opposite of regressive–and bearing a large exemption. As for a specific exemption, I’d recommend the current top marginal bracket: which, for an individual, is $510,300 (Frankel). As for specific rates, whatever scheme, compatible with this exemption, which renders the Treasury’s revenue neutral is, in my eyes, most advisable.
Next to regressiveness, the biggest concern with a consumption tax is that it would hurt the economy by disincentivizing people to spend money, thereby meaning that businesses would sell less and so make less money. However, I think it stands to reason that any loss to the economy would be more than compensated by increased consumption of those, especially the middle-class, who find themselves with considerably more expendable income, as well as through incentivizing saving and investment–as these are not forms of consumption.
A Call to Action
Onto the micro-level of reform, one must first recognize that the income tax in America is deeply flawed, one should then try to rectify this flaw. The best thing that I think an individual can currently do to rectify this shortcoming in America’s tax system is to lobby for the Progressive Consumption Tax Act of 2016. According to its information site, this act “would generate reasonable revenues by taxing the purchase of goods and services, rather than income” while “[providing] a significant income tax exemption” and being revenue neutral (“What Is the Progressive Consumption Tax?”). While it is far from an ideal tax code, it is a good first step towards shifting the U.S. onto a consumption tax and further reform should evidently follow its passage.
Remembering Hobbes, taxes ought be “nothing else but the wages, due to them that hold the public sword, to defend private men in the exercise of their trades, and callings” (Levy). Let us then forge this sword and wield it proudly in the defense of the unalienable rights of life, liberty and the pursuit of happiness, for ourselves and our posterity.