A Left Libertarian View of Tax Reform
Many assume that the libertarian view of tax reform is to simply decrease taxes to the maximum extent possible. In this viewpoint article, I will show why this is not necessarily the case. Judicious tax reform is an essential tool for unwinding the spring of government in an orderly manner, replacing rather than abolishing government functions in such a way as to eliminate the demand for government.
Many conservative libertarians (and not all libertarians are conservative) believe that tax reform must make tax collection as onerous as possible in order reduce government on the demand side. In his presentation to the 2006 Presidential Task Force on Tax Reform, former House Majority Leader Dick Armey proposed such a plan, a flat tax with no withholding that would force each taxpayer to write a check for their taxes. Frankly, I am surprised he did not advocate a head tax instead, although the tax plan he outlined was bad enough in terms of both equity and ease of collection.
One would think, from the debate on the debt, that the United States has the head tax mandated by the Constitution, which mandates direct tax liability be distributed among the states based on population – although no such tax was ever enacted. One can conclude this from figures which site per capita or per household debt figures. Such figures are inherently inaccurate, however, because the ability of this country to accumulate the debt it has comes from the ability to tax incomes, as authorized by the Sixteenth Amendment. The liability for the debt must therefore be calculated based on individual or family income tax liability.
Let’s run the numbers. For the current year, the personal income tax will collect $956 Billion. The current debt figure is $15.476 Trillion, including debts held by the government. I include this debt, which is primarily held by the Social Security Trust Fund, because eventually it will need to be paid back by taxpayers. These figures mean that each income tax payer owes roughly $16 for every dollar paid in taxes. If income tax liability is zero, no debt is owed. If tax liability is $1,000 over a year, that taxpayer owes $16,000 worth of the national debt. Taxpayers who pay $10,000 per year owe roughly $160,000. Oddly, most such taxpayers owe more on their mortgages at even that level. Taxpayers who pay $1,000,000 a year owe $16,000,000. Of course, if you pay that much in taxes, you likely have much more than that in assets.
A large national debt creates an aristocracy of debt holders who receive a sinecure from the taxpayers. Originally, the main taxes were tariffs and an excise tax on whisky. The lack of an income tax meant that this aristocracy was funded by the poor and that is hardly libertarian.
The libertarian solution is to fund both net interest and debt repayment solely from the income tax, as well as funding government operations that traditionally lead to government borrowing – most explicitly, overseas military adventures. The Wars in Iraq and Afghanistan, as well as any other overseas military deployment, are major causes for our long term debt picture, along with tax cuts which no one seems to think will be allowed to expire. To stop the increase in debt, which is an essentially libertarian aim, enact this proposal and wealthy taxpayers will be the first to oppose such deployments and any tax cuts which lead to an unending deficit. This is especially the case if distributions from inherited assets are considered normal income for tax purposes and included under this tax. Not including debt repayment, this would require an income and inheritance surtax generating $1.2 Trillion per year. Anything less would require running a deficit.
There are other classes of spending and taxation to consider. Discretionary spending seems to attract the most attention because it is the category of spending we can do the most about. In proposals I submitted last summer to the National Commission on Fiscal Responsibility and Reform (aka, the Fiscal Commission), I calculated that discretionary defense and civil spending could be $685 Billion and would be funded with a 13.3% Value Added Tax (VAT) for FY 2012, although this is likely un underestimate because of the difficulty in obtaining information on where defense outlays actually occur. I also omitted discretionary social services spending, which I funded with a separate business income tax. More accurate information may increase the VAT rate and decrease the income surtax estimate. The VAT I propose is based on figures published William G. Gale and Benjamin H. Harris of the Tax Policy Center in A Value-Added Tax for the United States: Part of the Solution, July 22, 2010.
Using some form of consumption tax for these expenditures is the most libertarian solution (and VAT is the most easily implemented) because you can put the amount of tax right on the receipt. If people demand more spending, the tax rate will go up. If spending is cut, the tax rate goes down. This funding scheme is especially effective if the VAT and spending are enacted on a regional basis. Doing so would require a constitutional amendment, as all excises must now be nationwide. A requirement that the regional discretionary/VAT budget be balanced would also require such an amendment – however I believe linking the two issues would make passage of both amendments quite likely.
Eventually, as the demand for domestic military and pork barrel spending goes down, the VAT rate will reduce, while truly national activities, such as NIH and the FDA drug approval process would become self-supporting. Liberty does not mean doing something stupid, like doing without cutting edge science.
The largest category of spending, making up 48% of the budget, is social spending on everything from education to housing to corrections to income maintenance – although by far the largest item in that category is health care. The total bill for these functions is $1.7 Trillion in FY2012. I would fund this with a business income tax (BIT) of 33.6%. Lawrence B. Lindsey, in his testimony to the Senate Budget Committee, called this a Business Revenue Tax – a term that is gaining currency in conservative circles. The BIT rate would also include the two most popular tax subsidy programs, the Health Insurance Exclusion and the Child Tax Credit – which would be expanded to replace the deductions for home mortgage interest and property taxes and the exemption for children – leading to a refundable deduction of $500 per child per month. The latter would replace most other entitlements for the poor, such as housing assistance and what used to be called Food Stamps. Employers would pay the child credit directly to employees in addition to the base wage, with an enhanced minimum wage so that no one is paid only through their child tax credit. After these exclusions, the average tax rate is 27.6% of value added.
This approach is superior to the approach taken by Fair Tax advocates, who would direct all subsidies, including their “prebate” through the government. I advocate eventually turning all of the spending programs in this category into employee benefit programs administered by employers, who would get a credit for each program area they run. This replacement would work on both the federal and state level and could include funding of Charter Schools rather than using property taxes and federal grants to fund the elementary and secondary education system. The cooperative funding of education can never really be eliminated. In a technological society it is just too much to expect that education requirements can be met by parents without some form of educational subsidy. Rather than routing that subsidy through the government, the libertarian solution is to route it through employers, who could conceivably even establish their own schools and avoid paying any tax or fee for education.
The BIT/BRT could also be regionally based with a balance requirement. If economic conditions require lower tax rates, or if the taxes enacted fail to raise needed revenue, deficit spending or a transfer of funds to the region funded by the income surtax would be necessary.
Both the VAT and the BIT would replace income and inheritance tax filing for all net individual income over $50,000 or family income over $100,000. Net income would be increased by 13.3% to cover the payment of the VAT, but gross income would go down by the amount of taxes no longer collected, including the Medicare Hospital Insurance Tax, the Disability Insurance Tax and that portion of Survivors Insurance Taxes funding widow(er)s under 60. Widows over sixty would be paid under the remaining OASI tax.
Income tax replacement is the most libertarian feature of this reform. The printing of the VAT on receipts will make each citizen conscious of paying taxes, much more so than presently, but will exempt most families from having to file paperwork with the government to either pay taxes or receive income support. Reducing this paperwork burden means discharging those civil servants in charge of implementing it – and no one can tell me that is not a libertarian result.
Having separate VAT, BIT and income surtaxes will keep the apparent rates lower, in contrast with proposals to combine all into a single tax. A separately collected income surtax allows more highly paid employees and investors to avoid sharing all of their financial data with their employers or investments while still allowing for collection at a higher rate. Separating a VAT, which can be zero rated for exports, from the BIT, which should not, preserves the incentive to substitute private subsidies for public ones. If the BIT could be zero rated for exports, there would be no incentive to provide the child tax credit, private health care for employees or retirees or separately funded education for children or college students through the employer – all such programs must remain governmental. A separate tax means that potentially, government involvement in these areas could be entirely dispensed with.
The residual Social Security Tax would rate would be higher than without tax reform, because gross income would be lower. My initial calculation is a 6.5% rate for employees and employers, rather than the 5% rate on each which currently covers retirees and their survivors, with no income cap. While these taxes could be merged into the business income/revenue tax or the Fair Tax as others suggest, doing so makes it more complicated to enact personal retirement accounts. Of course, my proposal for these accounts differs from the plan offered in by either the Cato Institute or the Bush Commission (aka the President’s Commission to Save Social Security). As I wrote in the January 2003 issue of Labor and Corporate Governance, I would equalize the employer contribution based on average income rather than personal income and would direct some percentage of it to personal accounts holding employer voting stock, rather than an index fund. There are no Index Fund billionaires (except those who operate them). People become rich by owning and controlling their own companies.
A portion of the employer stock purchased would be traded to an insurance fund holding shares from all such employers. If a third of these shares were traded than dissident employees holding 25.1% of the employee-held shares (16.7% of the total) could combine with the insurance fund held shares could fire management if the insurance fund agreed there was cause to do so. Such a fund would make sure no one loses money should their employer fail and would serve as a sword of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS approach, which would continue the trend of management accountable to no one. The other part of my proposal that does so is representative voting by occupation on corporate boards, with either professional or union personnel providing such representation.
Of course, the tax reform proposal I outline could be done without enacting personal accounts for Social Security, however doing so makes it distinctly left libertarian. It will eventually result in total employee-ownership of the corporate sector, the increasing provision of both financial and governmental services by employers and a pay and incentive system that enhances the continuing movement toward workplace democracy and empowerment. Indeed, the latter movement rings hollow if creativity and decision-making are democratized but ownership and pay are not. The movement toward effective cooperative ownership and service delivery is where left-libertarianism and right-wing libertarianism differ. Right-wing libertarianism simply replaces governmental masters with corporate masters, under the assumption that it is always possible to change employers, but not necessarily to change the government. This assumption is not valid if employers control the labor market to the extent that they do now. Shifting the employment sector toward employee-ownership both brings democracy to the workplace and makes the assumption valid, as employee-owners have less of an incentive to blacklist “disruptive” employees or create monopsonistic labor markets – indeed they have no such incentive.
If the Left really understood the impact of the Social Security personal account proposal I have presented here, they would adopt it, while the Tea Party would likely take up signs to “Keep Your Hands Off Social Security,” since their funders would lose all of their power.
If unions understood the international impact of this proposal, they would embrace it. Employee-owned multinational firms quickly gain the incentive to extend the same benefits to their entire supply chain, so that the deindustrialization of America can be reversed. As multi-national employees become employee owners, both the domestic and international labor markets will shift, especially if such firms adopt explicit rewards for creativity rather than rewarding creative people and managers with larger salaries to reward conformity.
The shift in labor markets will lead to more democracy and that will eventually lead to more global political integration. Such integration will enable deep cuts in our own defense budget and a shifting of aerospace industry resources from militarism to for-profit space exploration, although initial government funding will be needed to facilitate the transition. That is a small price to pay for peace and the eventual end of government. An end that cannot be achieved by simply turning society over to corporate masters – as simply doing so would lead workers to demand MORE government and lead international workers toward revolutionary movements, making the world less secure. That is fine if you own a defense company, but not fine if you wish to expand liberty.
Many conservative libertarians (and not all libertarians are conservative) believe that tax reform must make tax collection as onerous as possible in order reduce government on the demand side. In his presentation to the 2006 Presidential Task Force on Tax Reform, former House Majority Leader Dick Armey proposed such a plan, a flat tax with no withholding that would force each taxpayer to write a check for their taxes. Frankly, I am surprised he did not advocate a head tax instead, although the tax plan he outlined was bad enough in terms of both equity and ease of collection.
One would think, from the debate on the debt, that the United States has the head tax mandated by the Constitution, which mandates direct tax liability be distributed among the states based on population – although no such tax was ever enacted. One can conclude this from figures which site per capita or per household debt figures. Such figures are inherently inaccurate, however, because the ability of this country to accumulate the debt it has comes from the ability to tax incomes, as authorized by the Sixteenth Amendment. The liability for the debt must therefore be calculated based on individual or family income tax liability.
Let’s run the numbers. For the current year, the personal income tax will collect $956 Billion. The current debt figure is $15.476 Trillion, including debts held by the government. I include this debt, which is primarily held by the Social Security Trust Fund, because eventually it will need to be paid back by taxpayers. These figures mean that each income tax payer owes roughly $16 for every dollar paid in taxes. If income tax liability is zero, no debt is owed. If tax liability is $1,000 over a year, that taxpayer owes $16,000 worth of the national debt. Taxpayers who pay $10,000 per year owe roughly $160,000. Oddly, most such taxpayers owe more on their mortgages at even that level. Taxpayers who pay $1,000,000 a year owe $16,000,000. Of course, if you pay that much in taxes, you likely have much more than that in assets.
A large national debt creates an aristocracy of debt holders who receive a sinecure from the taxpayers. Originally, the main taxes were tariffs and an excise tax on whisky. The lack of an income tax meant that this aristocracy was funded by the poor and that is hardly libertarian.
The libertarian solution is to fund both net interest and debt repayment solely from the income tax, as well as funding government operations that traditionally lead to government borrowing – most explicitly, overseas military adventures. The Wars in Iraq and Afghanistan, as well as any other overseas military deployment, are major causes for our long term debt picture, along with tax cuts which no one seems to think will be allowed to expire. To stop the increase in debt, which is an essentially libertarian aim, enact this proposal and wealthy taxpayers will be the first to oppose such deployments and any tax cuts which lead to an unending deficit. This is especially the case if distributions from inherited assets are considered normal income for tax purposes and included under this tax. Not including debt repayment, this would require an income and inheritance surtax generating $1.2 Trillion per year. Anything less would require running a deficit.
There are other classes of spending and taxation to consider. Discretionary spending seems to attract the most attention because it is the category of spending we can do the most about. In proposals I submitted last summer to the National Commission on Fiscal Responsibility and Reform (aka, the Fiscal Commission), I calculated that discretionary defense and civil spending could be $685 Billion and would be funded with a 13.3% Value Added Tax (VAT) for FY 2012, although this is likely un underestimate because of the difficulty in obtaining information on where defense outlays actually occur. I also omitted discretionary social services spending, which I funded with a separate business income tax. More accurate information may increase the VAT rate and decrease the income surtax estimate. The VAT I propose is based on figures published William G. Gale and Benjamin H. Harris of the Tax Policy Center in A Value-Added Tax for the United States: Part of the Solution, July 22, 2010.
Using some form of consumption tax for these expenditures is the most libertarian solution (and VAT is the most easily implemented) because you can put the amount of tax right on the receipt. If people demand more spending, the tax rate will go up. If spending is cut, the tax rate goes down. This funding scheme is especially effective if the VAT and spending are enacted on a regional basis. Doing so would require a constitutional amendment, as all excises must now be nationwide. A requirement that the regional discretionary/VAT budget be balanced would also require such an amendment – however I believe linking the two issues would make passage of both amendments quite likely.
Eventually, as the demand for domestic military and pork barrel spending goes down, the VAT rate will reduce, while truly national activities, such as NIH and the FDA drug approval process would become self-supporting. Liberty does not mean doing something stupid, like doing without cutting edge science.
The largest category of spending, making up 48% of the budget, is social spending on everything from education to housing to corrections to income maintenance – although by far the largest item in that category is health care. The total bill for these functions is $1.7 Trillion in FY2012. I would fund this with a business income tax (BIT) of 33.6%. Lawrence B. Lindsey, in his testimony to the Senate Budget Committee, called this a Business Revenue Tax – a term that is gaining currency in conservative circles. The BIT rate would also include the two most popular tax subsidy programs, the Health Insurance Exclusion and the Child Tax Credit – which would be expanded to replace the deductions for home mortgage interest and property taxes and the exemption for children – leading to a refundable deduction of $500 per child per month. The latter would replace most other entitlements for the poor, such as housing assistance and what used to be called Food Stamps. Employers would pay the child credit directly to employees in addition to the base wage, with an enhanced minimum wage so that no one is paid only through their child tax credit. After these exclusions, the average tax rate is 27.6% of value added.
This approach is superior to the approach taken by Fair Tax advocates, who would direct all subsidies, including their “prebate” through the government. I advocate eventually turning all of the spending programs in this category into employee benefit programs administered by employers, who would get a credit for each program area they run. This replacement would work on both the federal and state level and could include funding of Charter Schools rather than using property taxes and federal grants to fund the elementary and secondary education system. The cooperative funding of education can never really be eliminated. In a technological society it is just too much to expect that education requirements can be met by parents without some form of educational subsidy. Rather than routing that subsidy through the government, the libertarian solution is to route it through employers, who could conceivably even establish their own schools and avoid paying any tax or fee for education.
The BIT/BRT could also be regionally based with a balance requirement. If economic conditions require lower tax rates, or if the taxes enacted fail to raise needed revenue, deficit spending or a transfer of funds to the region funded by the income surtax would be necessary.
Both the VAT and the BIT would replace income and inheritance tax filing for all net individual income over $50,000 or family income over $100,000. Net income would be increased by 13.3% to cover the payment of the VAT, but gross income would go down by the amount of taxes no longer collected, including the Medicare Hospital Insurance Tax, the Disability Insurance Tax and that portion of Survivors Insurance Taxes funding widow(er)s under 60. Widows over sixty would be paid under the remaining OASI tax.
Income tax replacement is the most libertarian feature of this reform. The printing of the VAT on receipts will make each citizen conscious of paying taxes, much more so than presently, but will exempt most families from having to file paperwork with the government to either pay taxes or receive income support. Reducing this paperwork burden means discharging those civil servants in charge of implementing it – and no one can tell me that is not a libertarian result.
Having separate VAT, BIT and income surtaxes will keep the apparent rates lower, in contrast with proposals to combine all into a single tax. A separately collected income surtax allows more highly paid employees and investors to avoid sharing all of their financial data with their employers or investments while still allowing for collection at a higher rate. Separating a VAT, which can be zero rated for exports, from the BIT, which should not, preserves the incentive to substitute private subsidies for public ones. If the BIT could be zero rated for exports, there would be no incentive to provide the child tax credit, private health care for employees or retirees or separately funded education for children or college students through the employer – all such programs must remain governmental. A separate tax means that potentially, government involvement in these areas could be entirely dispensed with.
The residual Social Security Tax would rate would be higher than without tax reform, because gross income would be lower. My initial calculation is a 6.5% rate for employees and employers, rather than the 5% rate on each which currently covers retirees and their survivors, with no income cap. While these taxes could be merged into the business income/revenue tax or the Fair Tax as others suggest, doing so makes it more complicated to enact personal retirement accounts. Of course, my proposal for these accounts differs from the plan offered in by either the Cato Institute or the Bush Commission (aka the President’s Commission to Save Social Security). As I wrote in the January 2003 issue of Labor and Corporate Governance, I would equalize the employer contribution based on average income rather than personal income and would direct some percentage of it to personal accounts holding employer voting stock, rather than an index fund. There are no Index Fund billionaires (except those who operate them). People become rich by owning and controlling their own companies.
A portion of the employer stock purchased would be traded to an insurance fund holding shares from all such employers. If a third of these shares were traded than dissident employees holding 25.1% of the employee-held shares (16.7% of the total) could combine with the insurance fund held shares could fire management if the insurance fund agreed there was cause to do so. Such a fund would make sure no one loses money should their employer fail and would serve as a sword of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS approach, which would continue the trend of management accountable to no one. The other part of my proposal that does so is representative voting by occupation on corporate boards, with either professional or union personnel providing such representation.
Of course, the tax reform proposal I outline could be done without enacting personal accounts for Social Security, however doing so makes it distinctly left libertarian. It will eventually result in total employee-ownership of the corporate sector, the increasing provision of both financial and governmental services by employers and a pay and incentive system that enhances the continuing movement toward workplace democracy and empowerment. Indeed, the latter movement rings hollow if creativity and decision-making are democratized but ownership and pay are not. The movement toward effective cooperative ownership and service delivery is where left-libertarianism and right-wing libertarianism differ. Right-wing libertarianism simply replaces governmental masters with corporate masters, under the assumption that it is always possible to change employers, but not necessarily to change the government. This assumption is not valid if employers control the labor market to the extent that they do now. Shifting the employment sector toward employee-ownership both brings democracy to the workplace and makes the assumption valid, as employee-owners have less of an incentive to blacklist “disruptive” employees or create monopsonistic labor markets – indeed they have no such incentive.
If the Left really understood the impact of the Social Security personal account proposal I have presented here, they would adopt it, while the Tea Party would likely take up signs to “Keep Your Hands Off Social Security,” since their funders would lose all of their power.
If unions understood the international impact of this proposal, they would embrace it. Employee-owned multinational firms quickly gain the incentive to extend the same benefits to their entire supply chain, so that the deindustrialization of America can be reversed. As multi-national employees become employee owners, both the domestic and international labor markets will shift, especially if such firms adopt explicit rewards for creativity rather than rewarding creative people and managers with larger salaries to reward conformity.
The shift in labor markets will lead to more democracy and that will eventually lead to more global political integration. Such integration will enable deep cuts in our own defense budget and a shifting of aerospace industry resources from militarism to for-profit space exploration, although initial government funding will be needed to facilitate the transition. That is a small price to pay for peace and the eventual end of government. An end that cannot be achieved by simply turning society over to corporate masters – as simply doing so would lead workers to demand MORE government and lead international workers toward revolutionary movements, making the world less secure. That is fine if you own a defense company, but not fine if you wish to expand liberty.
posted by Michael Bindner at 2:34 PM
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