Ending the Tax Debate

One of the most divisive issues separating Republicans and Democrats is taxation. Taxation is a politician's best friend, a tool that can be used to pay off supporters (which results in votes), and to attract donations from those seeking preferential treatment in the tax code. Taxation is used in rhetoric to divide people into classes: the rich, the middle class, and the poor. The patriots knew what they were talking about when they adapted the slogan, "No taxation without representation".

Today, by means of taxation, people are punished for their successes and rewarded for their failures. The tax code enables politicians to extract property from its rightful owners and redistribute it to others who have no defensible claim to it. Moreover, the tax code is used to promote and further government-centric preferences. Deductions, credits, subsidies, and grants are wielded by politicians to manipulate various markets and society as a whole. These actions result in the misallocation of scarce resources while distorting price signals. The stability of both is absolutely necessary for the proper functioning of free markets.

The premise behind taxation has been lost for generations. First and foremost, the premise that taxation is immoral. Whenever anyone takes from another it is immoral. If your neighbor takes your property it is immoral regardless of your neighbor's intention. Likewise, when government takes your property it is immoral regardless of the government's intentions. The founders and framers recognized the need for a minimal level of taxation to support the legitimate role of government, which is to better secure our unalienable rights. Taxation is justifiable in relation to legitimate government only.

Corporate taxation is a zero-sum game for corporations. Corporations and individuals are not taxed in the same manner. Individuals pay taxes on gross income less certain deductions. Corporations pay taxes on net income, with taxes acting as another expense item like salaries or rent. All expenses are factored into the price for goods and services. Ultimately, consumers and not corporations pay corporate taxes.

Estate taxes are an insidious form of wealth and property confiscation. They are, in effect, double taxation -- the income earned before death has been taxed once, then the value of the estate is taxed again. More importantly, many family-owned businesses must be sold or closed due to estate taxes. Families are punished simply because one person dies and the children want to carry on the family business.

Before I get to the solution, it is essential to understand the powers delegated in the Constitution to the federal government regarding taxing, borrowing, and printing. Paper currency was used throughout the colonies during the Revolutionary War and under the Articles of Confederation. The war was funded by the printing of Continentals, which declined in value because they were being printed out of thin air. In 1779, George Washington wrote a letter to John Jay, president of the Continental Congress, saying:

In the last place, though first in importance, I shall ask, is there anything doing, or that can be done, to restore the credit of our currency? The depreciation of it is got to so alarming a point that a wagon-load of money will scarcely purchase a wagon-load of provisions.

The continual debasement of the currency led to the saying, "it's not worth a continental".

Under the Articles of Confederation, states printed their own money. There were competing currencies in each of the states, inthe form of both struck coins and paper money. Some states debased their currency while others acted more responsibly. For instance, Rhode Island debased its currency to the point where creditors would not accept it. The state passed debt-currency laws requiring creditors to accept Rhode Island currency under threat of penalty. These issues with debt, payment, currency debasement, etc. were the primary drivers behind the powers delegated to the federal government under the Constitution.

The Constitution delegated to Congress the power to borrow money against the credit of the United States along with striking coins. The states did not delegate powers to Congress to print money. Fresh in their minds were the experiences with the Continental and state-issued paper money. In fact, Madison's notes on the constitutional convention discuss debates on this very issue occurring on August 16, 1787.

In the original draft, the power to print money was included. The vote tally on the issue to strike out the words "and emit bills" was 10 for and 2 against. Madison initially opposed this change but acquiesced, his reasoning being, "Mr. Madison was satisfied that striking out the words would not disable the Govt. from the use of public notes as far as they could be safe & proper; & would only cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts."

Today, the government prints paper money and through judicial rulings has made paper money legal tender for public or private debts. Originally, the powers to tax and borrow were sufficient to ensure the federal government had a means to raise revenues. In 2012, government revenues were $2.3 trillion while expenses were $3.7 trillion. Government used both its taxing and borrowing powers to cover the shortfall. At the same time, it also printed billions of dollars.

Let's dispense with all pretenses of a limited government with the sole purpose of securing our unalienable rights. That horse left the barn long ago. Clearly the power to tax and borrow is insufficient for government to operate properly since government now prints money at will.

Instead of taxing, borrowing, and printing money, the solution is to eliminate all taxes and all borrowing. All three powers are unnecessary. Since government usurped the power to print paper money, they no longer need to tax and borrow. If taxes are eliminated, it removes substantial power from our representatives to use taxation as a tool to garner votes and donations, and eliminates all the class warfare rhetoric. Likewise, if borrowing money is eliminated, the debt would not increase with the exception of interest on the debt. The government would no longer need to borrow money to fund itself. In fact, the government could simply print enough money to pay off the debt. Ultimately, either the debt needs to be repudiated or the government needs to print money to pay it off because borrowing money will not suffice and taxation does not provide sufficient revenues.

The government should print whatever money it needs to fund itself. If expenses are $3.7 trillion then the government should simply print $3.7 trillion. No need to tax and no need to borrow. There is tremendous upside to this solution. Opponents would argue this would cause inflation, even hyperinflation. I believe that would be the outcome.

Taxation and borrowing obfuscate the real problems. Inflation provides clarity to our problems. It would force people to recognize Washington, D.C. is both broke and broken. Anyone with savings or investments, or those dependent upon entitlements like Social Security, can easily recognize the effects of currency debasement on their lives.

This solution would expose the failures and shortcomings in our current system of government and ensure our representatives and the people throughout the union no longer kick the can down the road. The idea that government provides "free things" would be clearly refuted. The ambiguity about the proper role of money, fiat currency, and the Federal Reserve System would also be exposed. The solution would dispense with all pretenses and cut right to the chase.