President Bush sent Congress a $2.23 trillion spending plan last week that would accelerate tax cuts to bolster the weak economy, overhaul some of the government’s biggest social programs and shower billions of additional dollars on defense and homeland security. Even though hundreds of other government programs would be squeezed, the president projects the deficit will still hit record highs of $304 billion this year and $307 billion in 2004. Over the next five years, deficits would total $1.08 trillion. …
Interestingly, 2.23 trillion dollars divided by 291 million U.S. citizens equals a $7594.00 annual share for each citizen. This is the amount that one year of federal government services would cost every man, woman and child living in America. Now since a great many of America’s citizens don’t pay taxes, the system is going to break down rather rapidly. The head of a typical family of four would be facing a family share of over $30,000, and we haven’t added in state or city taxes.
Perhaps, we need to change our system. The following proposal is reposted from The Foundation.
Joseph George Caldwell, Ph.D.
In my online book, I propose a new tax system for the United States which eliminates the personal and corporate income tax system in the United States. The central theme of the book is that the income tax system is not only a bad tax system from an economic viewpoint, but that it has severe political and sociological drawbacks as well. The book describes how the invasion of privacy and authoritarian tactics on which the current system is based have seriously damaged the relationship of the US citizen to his government.
The book describes the inadequacies of the current US tax system; its incredible complexity; its undesirable economic incentives which discourage saving, investment, and economic growth; the high administrative cost; the instability in government revenues caused by a narrow, volatile tax base; the incentive for wasting productivity in tax avoidance; the problem it causes in international trade; the invasion of privacy; and the tyranny of the IRS. The book shows how the Tax Reform Act of 1986 has not solved the fundamental problems of the income tax system, and explores why the US Government has perpetuated such a bad tax system for so long.
A major problem with the current US tax system is its inability to produce a sufficient level of revenue to cover desired government programs. The current system has resulted in massive government deficits and extreme wealth concentrations that threaten US and world economic collapse. The new tax system proposed in this book addresses these problems; it can help avoid economic collapse and reduce the severity of depressions.
The historical development and inadequacies of the US tax system are summarized. The archaic legislative process by which the current system was developed is described, and a modern approach to “tax engineering,” based on the concepts of systems analysis and systems engineering, is presented. Alternative tax methods are identified, and the advantages and disadvantages of each method are discussed. A new tax system, based on the value-added tax, or “VAT,” is proposed. The book shows how the VAT can raise the same or greater revenues as the current income tax system, but with far less economic, political, and sociological cost. The new system takes a humanistic approach to taxation: the tax system is viewed as a servant of the citizen, rather than his master. The VAT is a practical and feasible alternative to the income tax system.
Through the income tax system, the US Government has set up an elaborate and powerful police-state system for regimentation of the individual citizen. You are registered and monitored, and have lost not only your privacy but also most of your Bill of Rights personal liberties to the IRS. This book tells how you can help eliminate the income tax and stop the intrusion of the IRS into your life.
What is the Value-Added Tax?
The value-added tax, or VAT, has its theoretical origins in the US. The concept was evidently first proposed by Professor T. S. Adams, who discussed the concept in papers published during the period 1911-21. It was promoted in 1918 by the German industrialist Wilhem von Siemens. It was considered for several decades until it was implemented in Michigan in 1953. France adopted the VAT in 1954, and since then most European countries and a number of other countries have adopted it.
In France, the VAT is called the taxe sur la valeur ajouté, or TVA. In Mexico, the tax is called the IVA—impuesto de valor agregado. The acronym TVA could have been adopted in English—tax on value added—but was not. Economist Alan Tait suggested that this reversal of the acronym in English is perhaps indicative of British attitudes toward things European.
The VAT is a consumption tax on the value added by the firm to the products it produces. The value added is the difference between sales receipts and amounts paid for goods and services purchased from other firms. Value added is hence equal to total wages, salaries, net rents, net interest, and profit.
The VAT advocated in this book is a very special kind of multistage sales tax. (There is a type of VAT that resembles the corporate income tax; it will be described in the next chapter.) It is applied at all stages of production, including manufacturing, wholesaling, and retailing (some countries exclude agriculture from the VAT). The VAT is recommended over a retail sales tax if a government has large revenue requirements, and wishes to extract the tax revenue by means of transaction taxes. By spreading the tax over all stages of the production process, tax rates may be kept low (thereby reducing the incentives to evade taxes). The retail sector represents only a small part of the total economy, so that a very high retail sales tax would be required to produce the substantial revenue needed by today’s modern economies, if the preretail sector were not taxed.
How does the VAT differ from an ordinary multistage sales tax (that is, from a turnover tax)? In a very simple but important way. At each stage, a firm is taxed (by means of a sales tax on its products) only on the economic value added to the products by the firm. The value added to the firm’s products is represented by the firm’s total revenue (sales) less the cost of supplies and services purchased from other firms (purchases). In other words, value added is the cost of labor, net interest, net rents, and profit.
The VAT is generally considered a consumption tax, and, indeed, it is most frequently implemented in the form of a sales tax, not only on retail sales, but on preretail sales as well. Economist Richard Lindholm objects to the characterization of the VAT as a consumption tax. In his book A New Federal Tax System, he argues, first, that referring to the VAT as a consumption tax wrongly implies that the VAT is simply a national retail sales tax (rather than a tax on all sales, both retail and preretail). Second, he argues that a broad-based tax such as the VAT is just as much a tax on production as a tax on consumption—that the production and consumption, or sale and purchase, of a good go hand in hand. Imposed on all sales, the VAT applies just as much to raw materials and capital goods as it does to goods and services intended for consumption.
Lindholm notes that the widespread characterization of the VAT as a consumption tax stems from France’s desire to adopt the VAT in 1954, and have it eligible for preferential treatment under the GATT. In order to qualify for preferential treatment under the destination-principle-based GATT, the VAT had to be a tax on consumption. Since, as a broad-based tax it could be represented either as a tax on consumption or production, the obvious choice in that context was to represent it as a consumption tax.
The point is that a broad-based tax is a tax on economic activity, overall; the amount of the tax (represented as a proportion of GDP) is the portion of a nation’s economic activity that is to be funneled into government expenditures, that is, brought under direct government control. It confuses the issue to characterize such a tax simply as a consumption tax. Calling a broad-based tax such as a VAT a consumption tax as opposed to a production tax is equivalent to calling a half-filled glass of water half empty as opposed to half full. The distinction is semantic, not real.
© 2003 Joseph George Caldwell