By Nathan Barton

As I pointed out in a recent commentary, the FedGov (and ALL governments) have many ways to steal money.  A major one is, of course, the personal and corporate income tax.

This story was recently featured in Daily Policy Digest, taken from the Cato Institute. “In Texas, taxes on income are against the state constitution. However, Texans still pay the federal income tax. For achieving a genuine transition away from federal income taxation, state governments could change the way federal taxes are collected, says Ryan Murphy of the Cato Institute.

In principle, the state could effectively end the federal income tax by using two surprisingly simple and straightforward legislative maneuvers. Texas could choose to send each taxpayer a check in the form of a state tax credit equal to their federal income tax liability. It could then pay for the credit by increasing the state sales tax in a revenue-neutral way. Effectively, that would mean the end of all income taxes in the state while significantly raising sales taxes. This isn’t about cutting taxes; rather, this is the tax swap to end all tax swaps.

The real difference between a consumption tax and an income tax is that a consumption tax encourages saving and thrift. We have good reason to believe that discouraging saving — and therefore investment — has significant negative effects on growth. There’s no good reason to structure the tax code in such a way that it encourages using income on immediate consumption. If anything, we should raise revenues in such a way that discourages activities we think are harmful, not ones that are socially beneficial like saving.

Sales taxes are regressive, especially in comparison to progressive income taxes. But combating income inequality — or, far more importantly, poverty — should not impede this tax shift. Orthodox neoclassical welfare economics tells us to raise revenue in the most efficient way and to address distributional concerns in the most efficient way. That means consumption taxes followed by either wage subsidies or guaranteed minimum incomes for the poor.

The source is an article by Ryan H. Murphy, “How States Can Effectively End the Federal Income Tax — and Why They Should,” Cato Institute, Summer 2015.

Frankly, this proposal makes no sense to me.  Even if it did, it would only apply to the seven states that have no income tax at the state level: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.  (Two states have income tax on interest and dividends, but not on earned income: Tennessee and New Hampshire).

Secondly, the FedGov wouldn’t really care (though they’d be sure to squawk about it), because they would still be getting the money from the individual (and corporate) taxpayers – payroll deductions, quarterly payments, etc.  The proposal would just mean that the seven states would then reimburse the taxpayers for what the FedGov got from them.

Thirdly, the taxpayers get the short end of the stick, for two reasons.  (A) They have to fill out even MORE paperwork: a new form to submit to the state or at least file electronically (which exposes them even MORE to identity theft and other hazards), and (B) They front the money to the FedGov AND also pay higher sales taxes, to get it back sometime in the future, after Tax Day (15 April).

Fourth, it does not starve government at either the Fed level or the State level.  Why bother?  Indeed, the bureaucracy necessary to administer the “solution” would INCREASE state government.

Fifth, more than 80 percent of the Fifty States are using the income tax to steal from their citizens (and often those who are NOT citizens or not even working in the state).  This does nothing to help those people, nothing to roll back state taxes.  And don’t get me started on all the local governments that have income tax.

Sixth, a revenue-neutral increase in sales taxes (beyond not starving or even making state government go on a diet) still leaves us with the situation that government is stealing money from people.  Yes, the sales tax, being a consumption tax, is LESS immoral than an income tax, and even less so than a property tax: but they are all STILL immoral.

It seems to me that the best way to address the Federal income tax is to (A) reduce the power (and therefore the spending) of the FedGov, ESPECIALLY transfers to state and local and foreign governments, but eventually everything else; (B) repeal the Constitutional Amendment which “allows” the income tax, just as was done with the Prohibition amendment; (C) reduce/eliminate as much of the FedGov as we can, even if it is only a dozen employees at a time; and (D) REFUSE to pay whenever possible.

At the State Level, I submit the example of the people of Tennessee, who made life so miserable for their worthless legislators and state employees that they were able to make the income tax unconstitutional.  Not saying that state governments are good: just LESS bad than the FedGov.

Mama’s Note: All tax is theft, and all tax is used to manipulate people to serve those in control. Changing social behavior (such as a “sin tax”) is only one of the goals, though history demonstrates it is usually ineffective and that the “unintended consequences” are both significant and destructive to people in general. Look at the history of the “war on drugs,” and you see it started with the imposition of a tax.

So no, this proposal in Texas is just another example of smoke and mirrors by politicians. Nothing in it worth even a single bean, let alone a hill of them.