How Not to Abolish the Income Tax

Throughout this country’s history, Americans have always paid taxes of various kinds. But no matter what kind, all taxation is theft. Everyone but a criminal obtains his income voluntarily. He either sells some good or service or he receives some kind of  stipend or gift But as explained by the Austrian economist Murray Rothbard (1926–1995):

Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.

The income tax

This most insidious of taxes is the income tax. As Frank Chodorov (1887–1966) explained in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens, “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.” Yet, for the majority of American history, there was no income tax.

A temporary income tax was instituted during the so-called Civil War. On August 5, 1861, President Lincoln signed legislation creating the nation’s first income tax. It required a flat tax of 3 percent on all incomes over $800. In July 1862, Congress replaced its first income tax with a more progressive version that included several tax brackets and allowed for deductions. Although the Supreme Court upheld the constitutionality of the income tax in 1864, it was repealed in 1872. In 1894, Congress enacted a tax of 2 percent on income over $4,000, but the legislation was struck down by the Supreme Court as unconstitutional.

The current incarnation of the income tax was instituted in 1913. It began as a modest 1 percent tax only on taxable income above $3,000, followed by a series of surcharges of up to 6 percent applied to higher incomes. The maximum rate of 7 percent was applied to taxable income over $500,000. Thanks to generous exemptions and deductions, only a small percentage of the population paid taxes on their income. That soon changed with the advent of U.S. intervention into World War I.

The tax rate in the highest tax bracket increased to 67 percent in 1917, 77 percent in 1918, 81 percent in 1940, 88 percent in 1942, and a whopping 94 percent in 1944. In 1942, the top rate began applying to all incomes over $200,000 instead of over $5 million. After dropping briefly, the top rate stayed near or above 90 percent between 1950 and 1963. Under President Ronald Reagan, the top rate fell from 70 down to 50 percent, and then down to 38.5 before stopping at 28 percent. The tax brackets were also eventually reduced to just two. After both tax rates and brackets increased during the presidencies of George H. W. Bush and Bill Clinton years, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) — collectively known as the [George W.] Bush tax cuts — adjusted the tax brackets downward and lowered the top rate down to 35 percent. However, because the Bush tax cuts were only temporary, the top rate soon went back up to 39.6 percent — as it had been under President Clinton.

Under President Donald Trump, we got the Tax Cuts and Jobs Act (TCJA). This set the tax brackets at the current 10, 12, 22, 24, 32, 35, and 37 percent but did not repeal the Obama-era Net Investment Income Tax (NIIT) that levies a 3.8 percent tax on investment income to the extent that the net amount exceeds $200,000 ($250,000 married filing jointly).

From the very beginning, the income tax has been quite progressive. A progressive tax system — one of the planks of the Communist Manifesto — is one in which the tax rate increases as the taxable amount increases. According to the latest figures released by the Internal Revenue Service (IRS), as reported by the Tax Foundation:

The bottom 50 percent of taxpayers (taxpayers with AGI below $44,269) earned 11.5 percent of total AGI and paid 3.1 percent ($48.4 billion) of all federal individual income taxes.

The top 1 percent (taxpayers with AGI of $546,434 and above) earned 20.1 percent of total AGI in 2019 and paid 38.8 percent of all federal income taxes.

The top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined.

The tax code is even more progressive than it seems because the IRS dataset excludes the refundable portion of tax credits like the Earned Income Tax Credit (EITC). “The rich” are also punished through the phase-out of tax exemptions, deductions, and credits as their income rises.

There are two other taxes on income that Americans must pay as well. Although they are called FICA contributions, payroll taxes, or Social Security and Medicare taxes, this doesn’t change the fact that they are taxes on income — the same income that Americans pay income tax on. The Social Security tax rate is 12.4 percent (split equally between employer and employee) on the first $160,200 of wages. This means that most individuals pay a 6.2 percent tax on all of their income — the same income that they pay income tax on. And, to add insult to injury, up to 85 percent of Social Security benefits are subject to income tax.

The Medicare tax rate is 2.9 percent (split equally between employer and employee) on every dollar earned. There is also an additional 0.9 percent Medicare tax paid by just employees on income exceeding $200,000 ($250,000 for married filing jointly). This means that individuals pay a 1.45 percent tax on their income — the same income that they pay income tax and Social Security tax on. Self-employed individuals pay the full 2.9 and 12.4 percent, less a reduction in their net earnings from self-employment and a tax deduction equal to 50 percent of the amount of the Medicare and Social Security taxes they paid.

And these are just the income taxes that individuals pay. There is also a corporate income tax of 21 percent that consumers ultimately pay via higher prices for goods and services.

Replacement taxes

Clearly, the income tax needs to be repealed. It is highly progressive. It is extremely complex. It punishes success. It triple taxes Americans. It reduces savings and investment. It imposes heavy compliance costs. It influences the financial decisions of individuals and businesses. It violates privacy. And worst of all, it funds the welfare/warfare state.

Various proposals have been put forth over the years to reform the income tax or replace it with something else: a flat tax, a consumption tax, a value added tax, a consumed income tax, a business transfer tax. Yet, these proposals all suffer from the same fatal flaw: They don’t withhold one penny from the federal leviathan’s welfare/warfare state. They are all revenue neutral. Nevertheless, some Republicans just don’t get it.

On January 9, Rep. Earl L. “Buddy” Carter (R-Ga.) introduced in the U.S. House of Representatives a bill (H.R.25) to abolish the Internal Revenue Service (IRS) and repeal the income tax (including payroll taxes that “fund” Social Security and Medicare) and estate and gift taxes and replace them with “a national sales tax to be administered primarily by the States.” According to a press release of Rep. Carter, “Instead of adding 87,000 new agents to weaponize the IRS against small business owners and middle America, this bill will eliminate the need for the department entirely by simplifying the tax code with provisions that work for the American people and encourage growth and innovation. Armed, unelected bureaucrats should not have more power over your paycheck than you do.” Bill cosponsors Rep. Bob Good (R-Va.) Rep. Jeff Duncan (R-S.C.) chimed in:

I support the Fair Tax because it simplifies our tax code. This transforms the U.S. tax code from a mandatory, progressive, and convoluted system to a fully transparent and unbiased system which does away with the IRS as we know it. It is good for our economy because it encourages work, savings, and investment.

As a former small business owner, I understand the unnecessary burden our failing income tax system has on Americans. The Fair Tax Act eliminates the tax code, replaces the income tax with a sales tax, and abolishes the abusive Internal Revenue Service. If enacted, this will invigorate the American taxpayer and help more Americans achieve the American Dream.

The “FairTax Act of 2023” is not much different from previous incarnations of the FairTax that have been put forward in Congress since Rep. John Linder (R-Ga.) introduced the first FairTax bill in 1999. It imposes a 23 percent “tax on the use or consumption in the United States of taxable property or services.” This includes any property (“including leaseholds of any term or rents with respect to such property”) but excludes intangible property (“copyrights, trademarks, patents, goodwill, financial instruments, securities, commercial paper, debts, notes and bonds”) and used property. This includes any service “performed by an employee for which the employee is paid wages or a salary by a taxable employer.”

The national sales tax is on top of state sales taxes that are currently collected by 45 states, on top of the sales tax that many cities and counties also collect, and on top of the special taxes that exist on things like hotel rooms and rental cars throughout the country. But even if no cash is exchanged for a good or service, barter transactions are still subject to the sales tax, “If gross payment for taxable property or services is made in other than money, then the person responsible for collecting and remitting the tax shall remit the tax to the sales tax administering authority in money as if gross payment had been made in money at the tax inclusive fair market value of the taxable property or services purchased.” Purchases made by the federal and state governments are subject to tax. This means that the federal government will be taxing itself.

To ensure that the FairTax is progressive like the current income tax, “Each qualified family shall be eligible to receive a sales tax rebate each month” by the Social Security Administration. The rebate is equal to the tax rate times the monthly poverty level, which is defined as one-twelfth of the annual poverty level determined by the Department of Health and Human Services (DHS). Families must be “duly registered qualified families” to receive the rebate, and must register annually.  

Like any tax, there are penalties for noncompliance. Any person liable to collect and remit taxes who fails to register will be “prohibited from selling taxable property or services.” Failure to collect the sales tax or asserting “an invalid intermediate or export sales exemption” can result in civil and criminal penalties, including a year in jail. Failure to remit taxes collected subjects one to “a penalty equal to the greater of $1,000 or 50 percent of the tax not remitted” or up to two years in jail.

The FairTax fraud

There are so many problems with the FairTax I hardly know where to begin. So let’s begin with the biggest fraud of all — the 23 percent tax rate. The rate is actually 30 percent, but 23 sounds much more palatable than 30 percent. According to the FairTax new math, “In the calendar year 2025, the rate of tax is 23 percent of the gross payments for the taxable property or service.” This means that if you buy something with a pretax price of $100, you pay a national sales tax of $30 because $30 is 23 percent of the gross payment (the good or service plus the tax) of $130.

The FairTax is absolute. Get a haircut — pay the 30 percent tax; get a kidney transplant — pay the 30 percent tax. Buy a new car — pay the 30 percent tax; buy a new house — pay the 30 percent tax. Purchase funeral services — pay the 30 percent tax; purchase food — pay the 30 percent tax. This would absolutely devastate the economy, create huge black markets, and turn millions of Americans into tax evaders.

The FairTax does not abolish the IRS, it merely changes its name. If there is no IRS, then who will ensure that the states collect a national sales tax? And if there is no replacement for the IRS, then why would any business collect the tax from its customers, and why would any state collect the tax from businesses and remit it to the federal government? But there is a replacement for the IRS and its commissioner. According to the “FairTax Act of 2023”:

There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.”

Indeed, the proposed legislation even says that the tax code will be amended by replacing all mentions of  “Internal Revenue Service” with “Department of the Treasury” and all mentions of “Commissioner” or “Commissioner of Internal Revenue” with “Secretary” (a reference to the Secretary of the Treasury Department). So much for abolishing the IRS.

What is fair about allowing the government to confiscate 30 percent of the value of every new good sold and every service rendered? The FairTax says that the government has that right. This is no different than claiming that the government has a right to the portion of each American’s income that it takes under the current system. As the late economist Murray Rothbard explained:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.

Maintaining that the FairTax is a “fair” tax system, or that it is “fairer” than our current system, is highly subjective.

The FairTax institutes a new welfare program. The monthly sales tax “rebate” goes to every household no matter how much they pay in sales tax. What is this but the beginnings of a universal basic income? The FairTax “rebate” will not only allow the majority of Americans to effectively pay no sales tax, it will in many cases give them money over and above that which they paid in sales tax. How long will it be before the “rebate” is increased for the “poor” and decreased for the “rich,” making the FairTax even more progressive than the current system?

The FairTax has unknown and potentially huge transition costs. The FairTax will make it easier for Congress to raise taxes. And the idea that the federal government should tax itself when it makes purchases is ludicrous.

Conclusion

The only thing the FairTax does is change the way the state confiscates the wealth of its citizens. Changing to a national sales tax is pointless if it doesn’t reduce or eliminate the taxes that feed the federal leviathan’s multitrillion dollar welfare/warfare state. Replacing the income tax with another tax that will devastate the economy, institute a new welfare program, and allow the federal government to collect the same obscene amount of revenue that it does right now is no way to abolish the income tax. As former congressman Ron Paul has well said: “The real issue is total spending by government, not tax reform.”

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