Election 2012 – Tax Reform Not Campaign Issue, Again

he Obama campaign team has mentioned taxation and wrongly criticized that tax cuts are only for the rich.
Early in the campaign there was a big stink about how Romney paid less of a percentage in taxes (legally owed through legal deductions) compared to more than others paid. However, since the tax code is levied by percentage, Romney paid, in dollars, much more than both Obama and Biden paid altogether. He also contributed almost 25% of his earning for last year to charitable institutions – also far more than the combined amounts of Obama and Biden.

The opposition, Romney/Ryan team did not come back with this common sense answer to their allegations and misconceptions: If the tax code is unfair, why do we still have it? It was declared by the Supreme Court in 1895 that the Wilson-Gorman Act was unconstitutional because it was a “direct tax” and other factors in their decision. It was a tax that levied 2% tax on income of $4,000 or more, which was 2% of American taxpayers. The tax was also applied to net profits of corporations, companies, and associations. In constitutional arguments in Pollock v. Farmers’ Loan and Trust Co., the plaintiffs insisted that the income tax was a direct tax, the law taxing real property, which was equivalent to a property tax and a direct tax. Article I, Section 9, United States Constitution:

No capitation or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration …

In addition, the plaintiffs used the uniformity clause of the Constitution in Article I, Section 8:

all Duties, Imposts and Excises shall be uniform throughout the United States.

This means that the present tax code of progressive tax rates according to income is unconstitutional because it is not “uniform” like a flat tax would be. To make a long story short, the Wilson-Gorman law was thrown out by a 5-4 Supreme Court justice vote. They declared that taxes on income were constitutional.

Therefore, what Congress did to get their way was to introduce and pass the Sixteenth Amendment so as to allow taxation upon income as a law.
The next argument that arose was that the 16thAmendment was never ratified, [Christopher S. JacksonThe Inane Gospel of Tax Protest: Resist Rendering Unto Caesar – Whatever His Demands, 32 Gonzaga Law Review 291, at 301-303 (1996-97)] and it reads:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

In every instance of a court case, the ratification argument has been rejected on several occasions.
Arguments against the income tax system are that it is overly complex, unfair in that not everyone pays the same or pays at all (after deductions and yearly paperwork submission). The unconstitutional power of the IRS causes income tax to be abusive infringing upon and affording government the power of intrusion upon our individual rights, liberties, and right to choose.
The Supreme Court rejected the argument that the progressive income tax is unconstitutional in Thome v. Andersonand Tyee Realty Co. v. Anderson.
Just as the Supreme Court did not declare ObamaCareunconstitutional – so income tax continued on its destructive course and the IRS power increased. [See Also: Key part of ObamaCare Unconstitutional, Forbes]

Therefore, because of the 16th Amendment, the income tax is constitutional. However, it still remains to be overly complicated (not even folks at IRS understand it fully), inefficient (too many loopholes), unfair (not everyone pays the same tax rate), and intrusive – what right under natural law does any person, entity, or government have to take a portion of wages you have earned before you get to spend it and decide when and where it is to be spent? It is an immoral tax and a tax that taxes money several times – “taxation upon taxation”.

So why hasn’t Congress repealed the 16thAmendment and replaced the tax system?
For one, it would be a great tax to enact the change – politicians do not like working for their annual wages.
Secondly, the outcry is not strong enough because those that pay little or no tax do not stand up in defiance because it does not involve them. This “47%”, brought up by Romney recently and used as a political tool by Obama team, and Romney was telling the truth. However, his figures include seniors who are collecting Social Security as a sole, fixed income (who do not have to pay taxes on income). Regardless, the system is not fair on those terms.
Motley Fool published an excellent article on the nonsensical logic of government defending and keeping the income tax system. It shows that tax dollars are being spent bribing American companies to finance corporate investments with debt – which was part of the cause of the Crash of 2008.

 I’m trying to point out a travesty of modern finance: the unequal treatment of debt and equity, better known as the tax-deductibility of interest. Thanks to interest deductibility, our tax code unfairly benefits companies that lever themselves to the moon — e.g., big banks — while putting those who choose equity financing — like Apple — at a comparative disadvantage. And the disparity is real. The Congressional Budget Office finds that equity-financed corporate investments pay an effective tax rate of 36.1%, while debt-financed investments pay an effective tax rate of -6.4%. Yes, that’s a negative tax rate for debt-financed corporate investment. Taxpayers are paying corporations to lever up. It’s totally unfair and unwise.

What this means is the current tax law puts a lower tax burden on firms that use debt financing than on those that use the equity market to finance new projects. The Fair Tax Act eliminates corporate tax and its complications and removes the tax system from financing decisions and creates an even field. Presently some corporations pay more than others, while some pay none at all. This is what people are calling “corporate welfare”.

Under the FairTax, the corporate income tax, dividend tax, capital gains tax, payroll taxes, and individual income taxes (including any taxes on interest) would be completely eliminated. Instead, a national sales tax of 23% would be levied on all new goods and services. An “advanced refund” mechanism would also be put in place to ensure that the tax does not hurt those below the poverty line. I’m not the best one to explain the details, so I recommend checking out the FairTax website. If nothing is taxed besides sales, there can be no perverse tax incentives to lever or de-lever. Debt and equity are truly on an equal footing, as they should be.

The Fair Tax Act would:

  • Create a level playing field in taxation.
  • Encourage people to save.
  • Actually increase the revenue for government.
  • Forcing Congress to maintain a fiscal budget by reducing spending because they can only spend according to that budget. (this part would have to be incorporated with a constitutional amendment that directs the action)
  • It will remove all loopholes, as well as the expense of government to counter tax evaders.
  • The tax code laws will be simple and consistent. Every year tax rules change in order to please one group or another, yet providing a barrier to another group in keeping ahead of the earning versus tax rate.
  • Taxes will be based on what people purchase, not what people earn – no need for loopholes.
  • Government would save millions on paperwork and auditing would no longer be required, which means the IRS will become just a small auditing department and lose its abusive powers.

In the aforementioned explanation, I demonstrated that some corporations do get over on taxation the way the present system works. The Fair Tax Act of 2011would automatically, even at a flat rate across the board, receive more tax funding from the wealthiest and be fair for those who are within the “poor” income bracket. The more income one has the more money is spent, therefore the “wealthy” will pay more in taxes and the class envious will have nothing to whine about.

In every election, this issue is ignored or little mention by any candidate; when it is one of the most important in terms of our economic survival. It will also solve the issue of fairness, simplicity, and reduce greatly intrusiveness of government in the private sector. [See HR 25 and S-13] The act would require that the 16th Amendment be simultaneously repealed when the Fair Tax Act is passed (and signed). [H.J. Res. 16]