I was going to leave the FairTax alone for a moment, as I covered it quite a bit in the last few posts, but unfortunately it provides such a perfect example, that I have to go to that well one more time.

I know I have listed a number of complaints about the FairTax, but one of my complaints is something I have never seen mentioned elsewhere, the embedded tax. As it is proposed, the FairTax would be included in the list price. Yes, it would be possible to find out how much tax was paid, but unlike state sales taxes which are added on to the list price, the list price will include the FairTax, and this is a problem*.

Why? What is wrong with including the tax in the final price?

Let me answer with another example. Under our current system almost all employees have wages withheld from their paycheck prior to  receiving it. They never see that money. They never have that money in their hands, they fail to see how the state takes one quarter to one third of their pay directly from their salary. Instead, come April 15th, they see the federal government as the nice people who send out a check once a year.

So, how do these two relate? Simple, the taxes don't hurt. The FairTax hides the actual rate of taxation from casual shoppers, those who do not seek it out. Likewise the current withholding system makes the taking of taxes painless. It makes the government  appear as a dispenser of money not a taker. Yes, under both systems, those with an interest in the matter can find out how much they are being taxed, but those sort of people are a minority. Your average citizen is, for the most part, insulated from realizing how much he is taxed. At least, he does not see a day to day reminder of how much he is being dunned by the government.

Add to this the fact that the government has convinced the average citizen that inflation is a mysterious event completely unrelated to deficit spending and the monetization of debt, and you have a perfect situation for out of control spending. Citizens may make small criticisms of deficit spending, but they really don't see it as something that harms them. They do not realize that all those zeros represent future devaluation of the dollars they have in the bank. And with their taxes being essentially painless, they don't really have any reason to fret too much over the taxation supporting the non-deficit spending either.

I don't have an easy solution to the problem of deficit spending and subsequent inflation. A currency based on a commodity such as gold or silver would help, but only if the banking market were made truly free, as any government regulated system could still be used as an inflation engine, even with commodity currency. It may be constrained somewhat by the need to prevent the flight of specie, but not that much. The ancient tradition of bank holidays could be revived to help in that effort.

But if I can't fix the problem of deficits and inflation, I can fix the problem of citizen apathy about taxation.

We need to make taxes HURT.

Here is my proposal. We establish taxes at a fixed flat rate. That rate is paid by everyone, quarterly. There is no withholding, there are no deductions. No one is exempt. If the rate is 25%, for example, everyone pays 25%. If you earn $1 in a year you still send a quarter to Uncle Sam.

So, let me explain why this is a good idea.

First, the need to remove deduction and exemptions. These are related, so I will deal with them together. Currently, everyone benefits from the government, yet 50% or more either pay no taxes or pay much less in taxes than they receive in benefits. These people have no interest in reducing the size of government, as they would lose more in services than they would gain in tax breaks. They are basically a built-in audience for big government, as any increase will benefit them more than it will harm them. For that reason I would exempt no one. Likewise, I would allow no deductions, as allowing, say, $10,000 per individual would mean an individual earning less than $10,000 would be exempt, creating the same problem.

Second, let me explain why no withholding and quarterly payments. I would eliminate withholding for the reason given above, that it allows the government to look like a good guy sending out checks instead of a hard nosed tax collector shaking us down for a thirds of our pay. And the state knows this. There are several times in history where withholding was adjusted specifically to increase the size of refunds, either to boost a flagging administration or stimulate the economy.  If we want taxes to hurt, we have to eliminate withholding.

However, withholding does do one other thing for the government, it provides a steady stream of income. Ideally, a responsible federal government could get yearly income and budget it out over twelve months, but I have my doubts about that, so I would suggest quarterly, or even monthly payments. They also have the added benefit of more frequently reminding voters of how much their taxes hurt.

And make no mistake, my proposal would hurt. Voters would have to save every week to pay the huge check they would need to send every quarter. Of course, on the plus side they would earn interest on that money, rather than giving an interest free loan to the government the way withholding does, but I think that would be small comfort once people realized how high taxes were. I think the most common reaction would be complete shock.

But that shock would be a good thing. The people should be stunned at how much it costs to run the state. And they should be stunned whenever the government claims it needs still more money. It really is the only way we will ever see fiscal reform, letting the people really understand exactly how much the government costs for what little benefit it provides. Anything less, anything painless, be it the present system, the FairTax, or something else, would only allow us to continue along the same course.

As I have said before, I would actually prefer a reversion to the original constitutional system of state funding of the federal government, for a number of reasons, but I doubt that will happen soon. So if we must have a federal tax, I propose this one.

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* There is an additional problem with this, in that it allows adjustment of rate without it being obvious to the casual purchaser. However, that is not relevant to my subject here.

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NOTE: My earlier tax proposal for the flat tax can be found here.


ADDENDUM

I realize it is unlikely the state will ever pass a tax system which show citizens exactly how much they are paying. I would recommend a step by step progression. First a flat tax, then remove deductions (which the government should like for the added income), then a move to eliminate withholding.

Yes, it is unlikely, but so is the passage of both the FairTax and a new constitutional amendment repealing the 16th amendment. Compared to the difficulties there, my actually seems a bit more feasible. However, I would really never expect the government on its own to enact anything like my proposal. The only hope would be either citizen pressure or a sudden change in congress like the 1994 elections.

For that matter, it doesn't even have to be precisely what I propose. I suggest a flat tax as a fair solution, but even if there were a graduated tax, so long as no one was excluded, it would still provide sufficient pain.

The two basic changes we need are (1) the elimination of a class of people paying little or no taxes and (2) a system which makes the paying of taxes as painful as possible. Any changes that even move us a small way in those directions will help. Unlike other proposals, mine is not an all-or-nothing scheme. Reducing the number of non-payers or increasing pain to any degree is a beneficial step.

ADDENDUM NUMBER TWO

I can't believe I forgot it, but I did not mention that I would eliminate corporate taxation, and any other tax which is not assessed directly against an individual. The reason I explained in my old post "If We Must..." as well as in my more recent post "Beware Populist Deception". Basically, corporate taxes are inherently deceptive. They appear to tax this faceless entity "the corporation" but end up being passed along either via cost increases or reduced dividends to individuals. As they are basically paid by randomly distributed individuals they are the least effective system of taxation imaginable. They also are an easy way for a demagogue to get us to tax ourselves. This goes against my idea that people must be aware of how much they are paying, so we need to eliminate them.