Wealth distribution has been one of the most troublesome- and most sought after- programs in all human history. From Sargon the Great, the first tyrant in history to crush his enemies and loot their fallen cities to the Soviets of yesteryear and their farming collectives, governments seem to always have a knack for pulling off socialist stunts.
So in light of that, let’s look at the U.S. tax code, shall we? Boasting countless pages of complete nonsense, the document and its pandering mother figure, the IRS, generates almost $200 billion in business [See: 1] for professional consultants every year. It also has the added, magical quality of lacking proper customer (or would it be citizen?) support. You could pick up the telephone right now and dial the IRS hotline. Ask them any question about the tax code. They’ll put you on hold for a moment, look up the pertinent section, and let you know what the answer is. Then ask the helpful person on the other end if they are positive about their reply- that the text means what they say it means.
Ever seen a fish floundering out of water? This is the aural equivalent. The employee will quickly recover and launch into a dry tidbit of legalese that states, in a nutshell, that if they got the meaning of their own document wrong, it’s still your problem. You can’t blame them if they gave you faulty information on what to do on your form and you’re hauled into tax court for it. Saying “Judge, the IRS hotline explicitly said this is what I am supposed to do, and I followed it to the letter” will do you no good. If this is boxing, then you’ve just stepped out of the ring. The judge will give a reply to the effect of “Get over it- think of all the hard work those good people do” and then sentence you.
So, the obvious answer is to hire private, professional consultants who know the tax code better than its creators in the IRS do to avoid such pickles! Now, at the first glance, a $200 billion industry might seem to be a useful and good thing to have in our economy. But this myth is dispelled with a little bit of basic economic logic called cost and opportunity analysis. In short, which one is more productive: $200 billion spent in a self-contained market where the circulation of the money spent is interminably slow, or what if those 200 billion dollars were being spent on the airlines, entertainment industry, defense industries, and so on? Of course, that isn’t the end of the story. Movie theaters, for example, need spare parts and mechanics to continue operation- money is circulated quickly. Airlines need fuel and new aircraft. Defense contractors need quite a few things, raw materials being the most important item. The common theme? Money is circulated.
Now compare this to a professional tax consultant. Money is spent. Consultants don’t require mechanics or spare parts as far as I am aware. The result? Money that could have been circulated and spent on more intrinsically useful items has been diverted to a relatively self-contained universe where it does nothing, waiting to be spent in small quantities at a time. This is where opportunity analysis comes in. One can easily see that the opportunity to spend these 200 billion dollars on more useful and necessary ventures has been lost. For those who are interested, the technical economic term for this governmental lunacy is “loss of opportunity.” Specifically, it is the opportunity to do something that is intrinsically good in and of itself, not something that is “necessary” because an artificial and inefficient code of law is in place that forces us to go out of our collective way to figure the system out.
The second killer aspect of this widespread problem (it is hardly confined to the feds) is that our current tax code impedes businesses not just through expenses on code experts, but because a progressive tax is ultimately a discouragement to succeed. Think about it: if you are making $50,000 a year, you are taxed “x” percentage. Now bump up your payroll. You’re better off, making $75,000 a year. Your taxes just went up. Why? What did you do to deserve that? Well, in a nutshell, you’re doing better in the economy. That’s the only justification the government needs to enact such a policy.
Besides the obvious contradiction of a government stifling its own economy, there’s another, more immediate factor that comes into play as a result of the progressive tax. Companies that could manufacture 20,000 units of a commodity may purposely limit their production because of the progressive tax. If the maximum projected profit from selling all twenty thousand items is just enough to push said producer into the next tax bracket, then net profit after taxes might be less than if the producer stopped selling at, say, nineteen thousand units and avoided the tax hike in the first place. The result? The board of directors, and any sensible CEO who wants to keep his or her head (especially nowadays) will go for the overall savings, thus keeping another 1,000 units (or hundred thousand, or million…) from being put on the market and generating economic activity.
I know this to be true. I am a self-publisher for my book, Aeneas, which means that I get the privilege of manually navigating Florida’s tax code (which, thankfully, is not as bad as it could be). As of right now, I only have to pay one type of tax, due to some helpful loopholes and insights garnered from more experienced businessmen. However, consider this fact: if I make just enough money from book sales to push myself into the next sales tax bracket and possibly trigger other taxes, I would find it to be ultimately more profitable to stop selling books just before I enter the next bracket. Why? Because while the difference in my sales would be miniscule, the taxes would be larger and would ultimately drain away more funds than if I had remained in the last bracket.
So you might be thinking “Okay, but those are books, big deal.” True, but now apply that logic to airlines, cell phone services, and defense contractors. Get the picture?
Now compare this debacle to the idea of a flat sales tax. Despite the fact that it is rarely discussed in Congressional channels, it still has an interesting roster of supporters (both Democrat and Republican) in our government. Interestingly enough, flat tax policies also have the support of foreign governments such as Estonia, Albania, Russia, and Hong Kong- so much so that they all have enacted policies [See: 1]. Even Germany’s Social Democratic Party (of which their chancellor, Gerard Schroeder, is a member) has embraced the flat rate incarnation of tax code reform [See:2]. Not only are the policies then made more straightforward and easier for everyone involved, but the incentive to dodge taxes altogether is greatly decreased. When Russia instituted its across-the-board simple, flat tax laws of 13% sales tax, their overall tax revenues (adjusted for inflation) jumped by 28 percent in one year! [See: 3] As the Heritage Foundation’s Daniel Mitchell put it in his own commentary on the Russian policy that took effect in early 2001, “Who would have thought it—that America would beat the Soviets to the moon, but Russia would become the first to adopt the ideal free-market tax system? What’s next—France becomes a military superpower? The Congo wins the Winter Olympics?”
Indeed.
Food for thought: Our current tax code can artificially affect our important industries in a negative way. As Commander Spock would have said, “Fascinating.”
Bibliography:
1) Washington Times: “Freedom to Choose Flat Tax” by Stephen Moore(May 30, 2005) www.washingtontimes.com/commentary/20050529-112428-1057r.htm
2) Bloomberg Online: “Schroeder’s SPD Revives Plan for Flat Tax on German Companies”(June 21, 2005) www.bloomberg.com/apps/news?pid=10000100&sid=ak_4QWfUSBWU&refer=germany
3) Heritage Foundation: “Tax Reform” by Daniel Mitchell, PH.D.(March 21, 2002) www.heritage.org/Press/Commentary/ed032102.cfm
How very informative…it just goes to show, “fairness” is being taken too far these days.