Suppose you were given the following choices.

Option #1:

The federal government taxed everybody, rich and poor, at 75% of income, but literally threw into Lake Erie all but 10% of the revenue. The government was then forced to live on the 10% it received and only permitted certain limited functions (national defense, courts, and managing disputes between states, as possible examples). The government was not allowed to regulate wages, prices or in any other way interfere with the free market. The rate was constitutionally set and could never be changed (I know I live in a dream world, where envy doesn’t exist, but bare with me for just a moment).

Option #2:
The federal government had a flat tax rate of 50% and could spend it whatever way Congress saw fit, without constitutional limit. The rate was constitutionally set and would never be changed.

Option #3
Rates could never go higher than 35%, but rates could vary and change twice a year. Some citizens would pay 0%, others 15%, others 35%. There is no limit on government regulation or how it spends its money. (This is the closest scenario to what we have today).

My choice would be #1, without question and without hesitation. Here’s why:
First, as long as taxation is not “progressive” and the rate is fixed, taxes cannot be used for social engineering. Statists would hate that for they would lose leverage and control over the electorate. It is the combination of changing rates and progressive rates that allow governments to pit one citizen against another. It is this politicizing of taxes that opens the door to corruption.  It is not campaign money that people give to politicians that is the problem, it is the taxpayers money that politicians spend to benefit those special interests that is the problem. If you cut off access to government coffers and regulation instigated by big contributors, you would see the big donations dry up in 10 minutes.
Second, even very high taxes, if unchanged, are eventually absorbed into the market. It is based upon the same principal as inflation. It is the relative value of a dollar to the past that makes inflation so onerous. Ultimately I don’t care whether bread costs $400 a loaf, as long as I make $500,000 a year and have the freedom to make more. True cost is not measured in numbers but rather man-hours required to gain a certain standard of living. This principle is easily proved by the fact our standard of living is much higher today than when bread cost 10 cents a loaf. This is true even though bread now costs 25 times as much.
Third, it is regulation and government intrusion into the market that destroys freedom, not high tax rates. If government could not spend money on nor regulate schools, retirement, health insurance, wetlands, etc., its ability to destroy our freedom would dissipate quickly.

A couple of caveats are in order, here.

A. I am not suggesting that much of this has any real possibility of happening in the U.S. in the foreseeable future. I am arguing for a change of perspective.
B. I am not arguing for higher taxes. I am arguing for flatter taxes, a stable tax rate, and less (i.e, constitutionally limited) government spending (not so much the dollar amount, but an actual reduction in the size of government). The FAIR Tax or a flat tax ought to be implemented as soon as possible, though see “A” above.
Application of these principles is simple. We better start hounding our government officials about government programs, regulation and spending as much as we do about taxes or we will end up enslaved. Lower taxes, without reductions in spending means higher debt, which can then only be solved in one of three ways: inflation, progressively higher and unstable tax rates, or bankruptcy.

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Application to the race for 2012: Huckabee supported the Fair Tax in 2008. Steve Forbes supported a Flat Tax long before that. Regardless of what candidate you support we must move towards less progressive tax rates and a stable tax rate if we want the tyranny to stop.

2 comments
  1. Great post, David!! Economics affects so much of life that it is a subject of great importance, and not something to be dismissed as a matter that only concerns lovers of money.

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