Can We See The End Of The Income Tax From Here?

The federal income tax is abusive. It is inconsistent with liberty. It has, as Chief Justice John Marshall noted, the power to destroy. There is nothing positive to be said about it. It cannot even raise government revenues efficiently. As we said a year ago, of all the good Donald Trump could do in his second term, eliminating the federal income tax would be one of his greatest achievements.

It’s clearly one of his goals.

“As time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replace the modern-day system of income tax,” Trump said during his State of the Union address. 

It’s unlikely, though, that there will be a one-for-one swap between the two.

“To put it simply, the math just doesn’t work,” said Alex Durante, Tax Foundation senior economist.

Just as Trump pointed out, tariffs were at one time the primary source of federal revenues. But the government was smaller then (and should be far smaller now), not only in nominal terms but in relative terms, as well.

In 1900, federal revenues as a portion of the gross domestic product were a mere 3%. The portion shot sky high to almost 20% in 1945 to fund the war effort. The peace dividend that followed was both meager and brief. From 1952 to the present, it has bounced around in tight neighborhood bounded by a low of 14.4% in 2010 and a high of 19.8% in 2000. Last year, it was roughly 17%.

Feeding the rapacious federal Leviathan today would require either a significant bump in tariff receipts (not a good idea) or a sharp shrinking of the size and scope of Washington (a beautiful idea).

Neither, of course, is likely.

But our friends at the Committee to Unleash Prosperity point out that a national sales tax of 18% “could replace the federal personal income tax, the capital gains tax, the corporate tax and the dividend tax.”

“Imagine that America had no income tax. This would be the greatest wealth and job generator in world history. The only problem would be that everyone in the world would want to come here. We’d need a bigger wall.”

Without income taxes, capital gains taxes, corporate taxes and dividend taxes, Americans would not only enter into a new era of economic freedom, they would have many more hours to spend as they please — working, relaxing, traveling, the list is endless — because the burden that requires them to burn more than 7.9 billion of their hours complying with IRS filing and reporting requirements would be lifted.

To understand how this translates into more approachable numbers, we go to Scott Hodge and Claire Rock of the Tax Foundation, who have calculated that the time and labor Americans waste on tax preparation “is equal to 3.8 million full-time workers doing nothing but tax return paperwork — roughly equal to the population of Los Angeles — and nearly 46 times the workforce at the IRS.”

“If we assume a reasonable hourly wage, the 7.9 billion hours Americans spend complying with the tax code costs the economy roughly $413 billion in lost productivity,” they say. “In addition, the IRS estimates that Americans spend roughly $133 billion annually in out-of-pocket costs to comply with the tax code. This brings the total compliance costs to $546 billion, or nearly 2% of GDP.”

The IRS is also a booted agency, by which we mean it has the administrative leverage and inclination to wreck people’s lives. We again bring up the story of Dan Pilla, who has spent decades helping Americans with IRS problems avoid the cruel treatment he experienced as a teenager. As an 18-year-old, he sued the federal tax collectors because he had “literally stumbled onto an area of the law that deals with taxpayers’ rights and limits the IRS’ power” after he figured out “the IRS was proceeding illegally to seize” his family’s home.

That would not happen if Washington were to replace its revenue-collecting system from one that has the power to destroy to one that is more civilized.

— Written by the I&I Editorial Board