The Myth of Tax ‘Reform’
Everyone will agree that the American tax system is a mess. Taxes are far too high, and the patchwork system is so complicated that even IRS officials don’t understand it. Hence the evident need for some sort of dramatic, even drastic, reform. As often happens, a group of dedicated and determined reformers has arisen to satisfy that need. But before we embrace this new gospel, we should heed the old maxim about jumping from the frying pan into the fire, and also remember the warning of the great H.L. Mencken, who defined “reform” as “Mainly a conspiracy of prehensile charlatans to mulct the American taxpayer.” And we should also bear in mind that all acts of government, however worthy they may seem, have a way of winding up solving no problems and only making matters worse.
Working within current tax realities, the reformers’ plans are varied and change nearly daily, as they meet conflicting political pressures. But whether they be Kemp-Kasten, Bradley-Gephardt, the Treasury plan of fall, 1984 (Regan, or Reagan I), or the final Reagan plan of spring, 1985 (Reagan II), there is one common and seemingly simple goal: that every person or group should pay the same proportional tax on their net income, and that all deductions, exemptions, and shelters be abolished in the name of this uniform proportional tax (a “flat tax with no exemptions”).
The flat tax reformers have much in common with militant ideologues that we have become all too familiar with in the twentieth century. In the first place, they are egalitarians in this case, assuming it to be sinful or at least grossly “unfair” for any person or group to escape the scythe of the great uniform tax. Second, and along with this egalitarianism, they assume in brusque and lordly fashion that they alone represent and embody the “general interest,” and that all objections to a uniform flat tax may be quickly dismissed as the self-interested croakings of the “special interests.” It doesn’t seem to matter if the “special interests” encompass most of the American populace; they must be unceremoniously swept aside to achieve the flat tax paradise. The fact that most of the impetus for this and other reforms comes from academic economists puts the icing on the flat tax cake. Academic idealists have always been accustomed to sweeping aside everyone else’s interests and concerns as petty and “special,” while they speak automatically for the larger interests of mankind. At best, the reformers cavalierly overlook the enormous amount of harm and pain they will inflict in the course of their grandiose reform.
One example: the flat tax would impose an enormous amount of harm and damage on every American homeowner. In their wisdom, the flat taxers have decided that deduction of interest payments on your mortgage is a “subsidy” granted by the tax system, and that your true net income would permit no such deduction. They have also concluded that the unwitting homeowner also enjoys another “subsidy” from the government: failure to tax his “imputed rent”; that is, the amount that he would have had to pay in rent if he had been renting the house instead of owning it. One of the many problems with the latter proposal is that the poor homeowner is never able to pay his “imputed” taxes; no, his taxes would have to be paid in cold cash, even though his income is “psychic” and not earned in money. But we press on. A third body blow to the homeowner would be the flat taxer’s insistence on eliminating federal tax deductions for state and local taxes, most of which are property taxes on one’s home. Thus, we have a three-fold tax increase inflicted on the homeowner, and the effect of this one-two-three punch would be a permanent lowering of the market value of one’s home, which consists of the present value of expected future returns from the house.
These are but a few of the many grave consequences and damages that would flow from the reformers’ measures. But the reformers literally do not care; no pains (almost invariably suffered by others) must be permitted to block or delay the speedy achievement of their Utopia. Any alterations are only grudging concessions to the fierce resistance of the “special interests” to the advent of the flat taxers’ New Jerusalem. Thus, the Regan plan of fall, 1984 (Reagan I), proposed to increase drastically the capital gains tax, toward the ideal of raising it to the precise level of the income tax, and also suggested a sharp lowering of oil depletion allowances. Great resistance was offered to the plan by risky venture capitalists, who would be particularly crushed by a high capital gains tax, and by the similarly damaged oil interests, always considered sinister in the popular imagination. As a result, the reformers were forced to abandon these two aspects of their Grand Plan in Reagan II. But in the long run, these forced retreats are not important; their goal—a uniform across-the-board flat tax—always remains the same.
But why is this plan so grand? So vitally important that our pain and hardships should be treated as nothing? Here the reformers offer little argument. Basically, their reasons boil down to two: their tax system would be simple (you could calculate your tax on a postcard), and above all, it would be fair.
The Argument for Simplicity
Making out your taxes, the reformers claim, would be simplicity itself. No more back-breaking work trying to figure out what’s going on, no more hiring tax lawyers or accountants. But the sweet simplicity of the argument can be disposed of very quickly. In the first place, anyone who wants simplicity can have it now, by using the short E-Z form, and two-thirds of Americans do so at the present time. So then the question to ask is: why do one-third of us choose complexity by spending many painful hours over the complex form, and why do we hire expensive lawyers and accountants to aid us? Surely, not because we love complexity and expense for their own sakes, but because we believe that there are things in life worse than complexity, and one of them is paying more taxes! We are willing to suffer some complexity in order to lower some of our monstrous tax burden. And by eliminating our deductions, exemptions, shelters, and so on, the reformers are imposing compulsory simplicity against our wishes. They are truly what the great nineteenth century Swiss historian Jacob Burckhardt said of the statist intellectuals of his day, “terrible simplifiers.”
But the joke is on us, for the reformers’ system would really in no way be simple. We would still have to go through a complex and murky maze. For the key to the flat taxers is that the uniform proportionate tax is to be levied on all net income. But what is net income? The answers are far from simple, and good arguments can be found on either side. The interesting and crucial fact is that, on each of these arguments, the flat taxers invariably come down against the harried taxpayer, and in favor of bringing ever more of our income and assets into the greedy maw of the taxing Leviathan State.
Thus, are “capital gains” inc
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LewRockwell.com is a libertarian website that publishes articles, essays, and blog posts advocating for minimal government, free markets, and individual liberty. The site was founded by Lew Rockwell, an American libertarian political commentator, activist, and former congressional staffer. The website often features content that is critical of mainstream politics, state intervention, and foreign policy, among other topics. It is a platform frequently used to disseminate Austrian economics, a school of economic thought that is popular among some libertarians.
