The American Income Tax
Written by Darrell Anderson.
Excise: A hateful tax levied upon commodities, and adjudged not by common judges of property, but by wretches hired by those whom the excise is paid.
Samuel Johnson, A Dictionary of the English Language, 1755
Taxes on specific activities and commodities are difficult to levy without violating the rules of equality/uniformity and consent. Similar to tariffs, targeting a specific commodity deprives those people of property rights at the expense of other people. For example, the Whiskey Rebellion of 1794 was a result of an excise tax on whiskey. In that day, whiskey often was used as a form of money. Because of the logistical difficulty of transporting grain across the Appalachian mountains, farmers converted the corn into whiskey and then used the whiskey in trade and barter. Such an excise was detested, and rightly so because money was being taxed. Furthermore, such a tax was hardly uniform because 1) only grain farmers were targeted, and 2) only grain farmers who produced whiskey were targeted.
Such a tax often is called a luxury tax, or a “sin tax” or a tax on vices. Such taxes, although implemented with good intentions, are usually fraught with violations of fundamental rights. As often is quipped, the road to Hell is paved with good intentions. Such taxes often are levied more to regulate specific activities and behaviors rather than generate revenues. Such an effort is contrary to free enterprise and contrary to liberty. The process of government is instituted to protect rights and property. Society, not the political system, bears the responsibility for regulating morals.
Can an excise on a specific commodity or activity be levied with true uniformity and honoring consent? For example, an excise tax on rubber tires or gasoline fuel might be justified if the revenues collected are targeted specifically to support directly related “common goods and services” — roads and transportation systems for example, and if all people are equally affected by the tax and share in using those “common goods and services.” Although in this example the observation is true in today’s American market that almost all people use roads and transportation services, rarely are such revenues specifically earmarked for strict sole purposes. Although the people in some states have tried to implement such an idea directly into the state constitution, more often state legislators simply dump all collected revenues into the general treasury and then disburse funds through the budgeting process. Perhaps if all state legislators were required to use a true fund accounting system, then such an excise tax might succeed.
Such a tax might seem reasonable because only those consumers using rubber tires or gasoline help directly pay for those particular “common goods and services.” Such a tax might seem reasonable because only those people who choose to use rubber tires or gasoline become subject to the tax. There seems to be no forced transfer of wealth from one class of people to another class of people in supporting those “common goods and services.” The collected revenues are theoretically earmarked for one purpose only.
However, there is a troubling aspect to this particular thinking. Just as with the Whisky Rebellion where whisky was an essential and necessary commodity, rubber tires and gasoline fuel are today essential commodities. Such taxes are already levied today — for example, the various excise taxes levied on telephone usage. For most people today the telephone has become a necessary commodity for everyday living and business. One of the major points of discontent for the American colonists was the British were forcing the colonists to pay taxes on essential commodities that only could be purchased from British merchants. A simple case of a captive market.
Many excise taxes today often are referred to as consumption taxes. Consumption taxes were the generally preferred means of raising revenues in early America. Although the idea of a consumption tax was readily supported in early America, the idea was restricted to “luxury” or “non-essential” items. Whiskey was typically considered a luxury item, but what Congress failed to understand was that in some parts of the new nation, there was no common circulating currency to help exchange goods and services and commodities themselves became a source of exchange. A fund accounting system earmarks incoming funds for specific purposes, with individual ledgers tracking income and outgo for that specific fund and purpose. Revenues earmarked for a specific fund cannot be moved or allocated to another purpose. Many non-profit organizations use fund accounting systems.
The thinking back then was every individual must obtain necessities to survive, but nobody was required to obtain luxury or non-essential items. That idea was popularized by Adam Smith in his Wealth of Nations. In general the idea is true. Thus, such taxation appears much more palatable to many people.
In early America the division of labor certainly existed with industrialization just beginning and skilled craftsmen and tradesmen were common. However, many people then were more self-sufficient than today. Second, currency was scarce, therefore many people resorted to trading and bartering of goods and services. Land taxes often were in the nature of taxing the net produce of the land. In fact, because of the lack of a circulating currency, land taxes were often paid in kind, that is, in goods from the farm.
Thus, if people farming solely for their family, he easily avoided any major taxation, paying only occasionally. In other words, ability to pay based upon what an individual could spare was a reasonable and rational approach in early America. Consent was more easily honored in such an environment because self-sufficient people more easily avoided taxable activities. Because so many people were more self-sufficient, participating in taxable activities was not an everyday occurrence for many people.
Consumption taxes were more easily embraced then because only occasionally did people experience such taxes. Taxes then were seen as being better measured through consumption, not production and income, nor accrued or perceived wealth. Directly taxing wealth was not a popular idea. Yet, the wealthy person tended to participate more in commerce rather than being more self-sufficient, and theoretically consented to being taxed. Such an individual could become more self-sufficient and avoid being subject to being taxed in commerce. The person who participated more in commerce paid more in taxes. Much of the taxation was in the nature of duties, and initially few necessities were taxed.
There is no doubt today that many activities are engaged in the realm of commerce, and that today’s high division of labor places just about every interaction and property exchange into that world of commerce. Generally, most people today no longer are self-sufficient, and depend heavily upon the division of labor to provide for their survival. Although many purchases today can be considered non-essential, many cannot.
Therefore, legislators can no longer simply tax any activity or commodity under the banner of commerce. An argument can be made that although, for example, groceries are a fundamental need, rubber tires, gasoline, and telephones are not truly essential. That is, an individual could always choose to return to walking or using a horse and buggy or communicating by postal services. Yet, such a reply is certainly pushing the envelope of reason.
These specific arguments can be somewhat quieted by reversing the approach. Instead of targeting specific commodities and activities, levy a broad-based excise on all commercial activities. In short, a retail sales tax.
Many people will argue that such an excise tax is regressive because poor people are forced to pay the tax when buying essential necessities. Others will argue that taxing necessities violates fundamental rights. The solution is rather straightforward. Certain necessities such as groceries, prescription drugs, and “mandated expenses” should be exempted. Many state sales taxes currently do exempt many necessities. Exemption, however, does open the door to violating the rules of equality/uniformity — unless the exemptions affect all people equally. Nonetheless, straightforward exemptions would eliminate arguments about regressive taxation and eliminates the same arguments raised by the colonists.
There can be little argument that the more prosperous an individual becomes, the more such an individual likely will consume in the market. Consumption happens through personal spending. People who have more disposable income tend to consume more, and therefore possess a better ability to pay. Theoretically, a consumption tax today still supports the idea of ability to pay.
One “advantage” a sales tax has over other taxes is the tax is blunt and obvious. There is little doubt how much is collected and paid. Exposure and visibility is something most politicians do not want with a tax.
Although the cost of any taxation fundamentally is passed to other people, a sales tax does solve some of the previously addressed problems of taxation by being collected only once. There is no middle person as a consumption tax is collected and forwarded directly to the politician’s treasury. There are no hidden embedded fees or costs, no mystery, no indirect costs to pass. Although from the consumer’s perspective the tax adds to the final purchase price, a consumption tax does not affect the base price of a product as does income taxes, value added taxes, duties or imposts, or property taxes. Unlike these taxes, the sales tax is not multiplied through the various phases of production and marketing, with the final consumer paying all hidden and embedded costs.
A broad-based sales tax is much less intrusive than an income tax. Certainly the tax does not enslave like the property tax. Unlike tariffs, a sales tax does not establish trade restrictions and artificial scarcity. Certainly a sales tax is easy to understand and easier to administer. However, a sales tax does somewhat inhibit free trade. Especially if the tax rate is large.
Compared to the other taxes discussed a broad-based sales tax does better at honoring the rules of equality/uniformity and apportionment. Exempting necessities deadens some of the pain of force and coercion, and begins to open the door to honoring explicit consent.
Yet, a tax is still a tax. A tax is still a forced taking of property unless paid voluntarily. Because people today participate so heavily in commerce, avoiding a general sales tax would be impossible perhaps for all people. In other words, consumers today are a captive audience and cannot avoid a broad excise tax — even when necessities are exempt. Consent would only partially be honored.
Yet a weak argument can be offered with respect to consent. A difference between measuring ability to pay through consumption instead of production and income should be obvious. Although in the current environment such a tax is still a forced payment, through consumption the measurement of ability to pay is arguably more voluntary because an individual chooses when and what to consume. Taxing production discourages investment and savings. When measured through subjective quotas of production and income the ability to pay is extortion and deprivation of property.
Today the division of labor is incredibly high. Few people can survive in today’s modern world without a dependency upon other people. In other words, although the principles of equality/uniformity and proportional ability to pay might be honored, consent would not. Few people today are self-sufficient, and thus could not avoid a broad-based sales tax.
To be fair and equitable, any tax collected must affect all people equally, within their own ability to pay. To be fair and equitable, either all participants pay or nobody pays. Measuring ability to pay is less intrusive through consumption. Those people who have more income to spend pay a higher share of taxes through consumption. Those who are limited in income pay a smaller share. Attempting to measure ability to pay through production, income, accumulated wealth, or perceived wealth destroys the very foundations of life, liberty, and property. To preserve privacy and avoid the abusive intrusions of the state an individual’s production and income must remain private.
There is an interesting point to notice about consent. An individual might argue that those who do not consent to paying a sales tax can refuse to participate in those activities that are taxed. True, but the only way such a tax can be levied without violating consent is to allow those same people to buy and sell elsewhere. In today’s world that is called buying and selling in the “black market.” That option must be allowed or the rule of consent is violated. If “black markets” were allowed, many people would frequent those markets and not the taxable markets, thus defeating the tax.
The term “black market” is a misnomer — the term generates various emotions. Many people equate the term with illegality and unlawfulness. Yet, if by remembering that at the core all humans are economic-minded creatures, then “black markets” are acceptable avenues to satisfy the pursuit of happiness — as long as people do not trespass upon the rights and property of other people. “Black markets” exist only within the legal plunder mindset where trade and commerce are subjectively regulated by fiat. Certain markets might be statutorily declared “illegal,” but such markets certainly are acceptable to satisfy needs and wants. The challenge with “black markets” is generally they tend to erode respect for the existing subjective legal system.
Yet, if “black markets” were accepted, then paying such a tax honors consent because people truly can choose to participate or not participate in those taxable activities.
Because the sole purpose of the process of government is to protect rights and property, people within that process have no authority to regulate commerce. Public servants certainly can try to tax those activities, but with an alternate “black market” nobody is truly forced to pay the tax. An obvious question arises as to what retailer in his or her right mind would agree to collect such a tax when people could go to “black market” sellers and avoid the tax?
The only way a sales tax becomes palatable is exempting essentials and necessities; no exemptions or preferences are provided based upon product type, manufacturers, or industries; and consent is honored. Honoring consent means there are no criminal or civil penalties for not collecting the tax. Is that possible?
There is a rather straightforward solution to honor consent and still allow the choice of “black markets.” If people engage in a declared taxable exchange activity, and a dispute between the parties arises after the exchange, and the parties cannot produce evidence that a sales tax was rendered, then those parties would be prevented from availing themselves to state-sponsored adjudication. They would have to resolve disputes in another peaceful but accepted arena, such as third-party mediation or arbitration. In such an approach, consent is honored, as well as providing acceptable remedies to protect property and contracts.
For example, an individual might buy a bread toaster from a retailer who does not collect the sales tax. Yet, when buying a high-priced item, such as a $20,000 automobile, the buyer might reconsider and pay the sales tax. But automotive manufacturers could sell quality warranty contracts that would bypass the need for adjudication and the sales tax.
A more serious example could be experimental drugs for curing diseases.
A broad-based sales tax could succeed, but only if explicit consent is truly honored. The same would be true of any tax. Those people who choose to exchange outside the declared taxable areas assume all risks of protection and responsibility to resolve related disputes. Likewise, within a fund accounting system, excises on specific commodities could succeed — gasoline and rubber tires, for example — if consent was truly honored. Such exchanges without collecting the excise tax bars any possible protections that could be provided by the state adjudication or enforcement systems. An excise tax does raise the cost to consumers, but when consent is partially honored the tax is paid voluntarily. Otherwise an excise tax negates the concepts of self-ownership, rights, property, contracts, and consent.
 Adams, Those Dirty Rotten Taxes, p. 75.
 Paine, Common Sense, Chapter 1.
 For example, refer to the Colorado Constitution, Article 10, Section 18; Ohio Constitution, Article 12 Section 5a.
 A fund accounting system earmarks incoming funds for specific purposes, with individual ledgers tracking income and outgo for that specific fund and purpose. Revenues earmarked for a specific fund cannot be moved or allocated to another purpose. Many non-profit organizations use fund accounting systems.
 The practice varies. For example, Michigan exempts groceries, Colorado does not.