How To Eliminate Personal Income Taxes


There is an irony to the income tax debate going on today.  The Republican Party attacks income taxes as being too high, and how they restrain investment.  The irony is, it was their own party that developed today’s personal income tax under President Howard Taft.  In 1913 the 16th Amendment was passed creating a permanent income tax.  That amendment says, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”  And that is it.  There is absolutely no language saying what form any tax must take, just that Congress has the power to levy them.

The fix is actually very simple and ultimately fair, a national sales tax.  Consider, every person pays taxes as he goes with certain exemptions, which I will get to.  If that sales tax were 5%, it would meant all transactions would be subject to that tax, and a person could not claim exemption for any reason.  Now, so it would not unfairly impact the poor, certain items would be exempt from taxation, food, medicine, medical services, clothing up to a certain price per article, and other such items.

To make it even more fair, transactions between businesses would take three levels, 5% for small business under 100 employees, 10% for businesses 100 to 500, and 15% for businesses about 500.  Businesses, unlike individuals, would have no exemptions, particularly, but not limited to, transactions outside the United States.  There is one really interesting aspect to this and that is that political donations would immediately become taxable.  Since such donations are little more than paying for a service they would not gain an exemption from the still existing 503(c), not for profit, agency.  Such agency would be limited to museums, charitable foundations, etc.

The first group who would complain about this setup will be tax accountants and lawyers.  Since an automated point of transaction system can be set up to immediately feed funds into the U.S. Treasury, the need for lawyers and accountants to oversee individual and corporate taxation would plummet.  A simple set of electronic transactions laws could be set up to insure tax collection.  Corporations, however, could gain a lot of ground on the tax rate they now pay, upwards of 43%.  If, for example, it was determined that the corporate transaction rate should but put at 30%, they would still gain.  But corporations would still be eligible for certain right offs for things like capital equipment depreciation and claim a tax refund at the end of each fiscal year.  Individuals would be eligible to do the same, however, their tax rate being so low that the threshold to get such a refund would generally be too high.

There could also be written in a transaction threshold before a tax is levied.  For example, there might be a $5000 threshold for the purchase of any first vehicle in a family.  If a guy buys a $10,000 car, he pays a $250 tax for the next $5000.  This helps keep an undo burden on the poor.  Now if a guy buys a $105,000 car, he is going to pay $5000.

By instituting a national income tax and eliminating the personal income tax, April 15 would become a memory as no individual would ever be required to make out a 1040 or any of its brothers, no more W-2, no more W-4, no more 1099, etc.  That all by itself will greatly reduce the IRS bureaucracy.

The fairness of such a plan should be evident but the willingness of Congress to even consider such an idea may be too much.

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