The Value-Added Tax: A New Tax System for the United States

251 Pages·2010·1.13 MB·English

by  Joseph George Caldwell

The Value-Added Tax: A New Tax System for the United States

by

Joseph George Caldwell, PhD

Originally published as
How to Stop the IRS…and Solve the Deficit Problem
November 16, 1987
Printed in the United States of America
ISBN 0-944848-00-1
This e-book edition November 8, 2000

Copyright © 1987, 2000 by Joseph George Caldwell. All rights
reserved.
Dedication

To the memories of George Orwell and Dr. E. Fritz
Schumacher

To Mom and Dad, in Spartanburg

To Timigale

To Jay, Chris and Steve

ii
Contents

The Value-Added Tax: A New Tax System for the United States ..... i
Summary ....................................................................................... xvi
About the Author... ....................................................................... xviii
1. Take Back Your Freedom! ........................................................... 1
Meaningful Reform Is Sorely Needed ........................................... 1
The Income Tax Is a Bad Tax ....................................................... 2
Why Would the US Government Keep a Bad Tax? ...................... 4
The Income Tax Can Be Replaced by a Good Tax -- The Value-
Added Tax ..................................................................................... 5
The Tax System Proposals of This Book Were Developed
Through Systems Engineering ...................................................... 7
A Personal Word from the Author ................................................. 8
2. How Did It Happen? .................................................................. 10
The US Tax System Has Its Roots in the US Constitution ......... 10
What Is a Direct Tax? .................................................................. 10
The Original Constitution Outlawed the Income Tax .................. 11
The US Tax System Changed as Conditions Changed .............. 12
The Income Tax Began as a Low Tax on the Rich ..................... 13
The Revenue Needs of World War II Prompted the Expansion of
the Personal Income Tax to the General Population .................. 14
For Many Years, Inflation-Caused Bracket Creep Increased the
Effective Rate of Taxation ........................................................... 14
The Current Situation: Tax Revenues Are Derived from a Narrow,
Volatile Base ............................................................................... 16
Having a Large Variety of Taxes Helps Hide Taxes by Keeping
Tax Rates Low ............................................................................ 16
The Current Tax System Promotes Budget Deficits ................... 18
The Current Tax System Is Not Well Suited for International Trade
.................................................................................................... 18
The Framers of the US Constitution Had a Good Idea when They
Outlawed the Income Tax ........................................................... 20
The Serious Inadequacies of the Income Tax Were Not Initially
Apparent ...................................................................................... 21
iii
The Inadequate Revenue-Producing Ability of the Income Tax
Has Turned the US into a Debtor Nation .................................... 22
3. The Income Tax Monster ........................................................... 25
The Income Tax Has Severe Sociopolitical and Economic
Drawbacks .................................................................................. 25
Problem 1. The Income Tax Has Destroyed the Privacy of the
American Citizen. ........................................................................ 25
Problem 2. The Income Tax Has Spawned an American
Gestapo. ...................................................................................... 26
Problem 3. The Income Tax Has Weakened the Constitution. .. 26
Problem 4. The Income Tax Is Unfair. ....................................... 27
Problem 5. The Income Tax Is Corrupting the Country. ............. 27
Problem 6. The Income Tax Is Too Complicated. ...................... 28
Problem 7. The Income Tax Has Serious Economic Deficiencies.
.................................................................................................... 29
Problem 8. The Cost of Administering and Complying with the
Income Tax Is Very High. ............................................................ 29
Problem 9. The Income Tax Base Is Contributing to Economic
Collapse. ..................................................................................... 30
Tax Reform Is a Failure............................................................... 32
Tax Reform Perpetuates Economic Distortions .......................... 33
Under Tax Reform, the Income Tax Is Even More Complicated
Than Before ................................................................................ 34
Meaningful Tax Reform Will Not Come Easily ............................ 35
4. The Assault on Privacy .............................................................. 38
Privacy Is a Valuable Asset ........................................................ 38
5. The American Gestapo? ............................................................ 76
Guilty Until Proved Innocent ....................................................... 76
The Income Tax System Has Spawned a Big-Brother Watchdog
Agency ........................................................................................ 78
The Income Tax System Has Been Converted from a Tax on the
Rich to a Tax on the General Population .................................... 79
Many People Regard the IRS as an American Gestapo ............. 81
Larson's Case Studies ................................................................ 82
Through the IRS, the US Has Established a Police State .......... 86
iv
The IRS Needs Resistors ........................................................... 89
The Case of Woody Herman....................................................... 90
The Efficiency and Dedication of the IRS Are Misdirected ......... 91
The IRS Attack on Churches ...................................................... 93
The Personal Income Tax Forces Businesses to Act as Tax
Collectors .................................................................................... 94
The US Income Tax System Is in Reality a Payroll Tax System 95
6. The Constitution Has Failed ...................................................... 98
The Personal Income Tax System Has Weakened the
Constitution ................................................................................. 98
7. The Income Tax Is Unfair ........................................................ 103
Tax Terms: Marginal Rate, Average Rate, Graduated,
Progressive ............................................................................... 103
Why a Progressive Income Tax? .............................................. 105
The Utility of Income ................................................................. 107
All People Do Not Have the Same Utility Functions ................. 107
The Progressive Income Tax Discriminates against Hard Work,
Long Hours, and Self-Improvement .......................................... 108
The Progressive Income Tax Weighs Heavily on Working Wives
and Mothers .............................................................................. 110
Tax Reform Imposes a Heavy "Marriage Tax" on Many Families
.................................................................................................. 112
The Verdict: The Progressive Income Tax Is Unfair ................. 113
The Politics of Envy................................................................... 114
The Personal Income Tax Is Not Well Suited to Tax Capital Gains
.................................................................................................. 116
Capital Gains May Be More Apparent Than Real ..................... 117
"Tax Reform Adjusts for Inflation" -- a Myth .............................. 118
Under Tax Reform, Older Americans Can Get Socked With a 38
Percent Tax on Lifetime Earnings -- Or More! .......................... 119
The Real Tax on Your Home's Appreciation May Exceed 100
Percent! ..................................................................................... 121
8. The Income Tax Is Corrupting America ................................... 124
The Income Tax System Contains Strong Incentives for Tax
Avoidance and Tax Evasion ..................................................... 124
v
The Overall Tax Burden in the US Is High, But No Higher Than in
Many Other Countries ............................................................... 126
Tax Rates Under Tax Reform ................................................... 127
High Income Tax Rates Have Given Rise to an Underground
Economy ................................................................................... 128
Tax Reform Will Not Dismantle the Underground Economy ..... 131
The Complexity and Vagueness of the Tax Code Contribute to
Tax Evasion .............................................................................. 132
The Irrational, Inequitable, Heavy-Burden Income Tax Creates a
Lack of Respect for the Law ..................................................... 134
The Income Tax Generates Citizen Resentment of the
Government .............................................................................. 135
Double Taxation ........................................................................ 137
The Personal Income Tax and the Business Income Tax Work
Together to Create a Strong Incentive to Evade Taxes ............ 138
"I Bought It Through My Business" ........................................... 139
Cars Are Not the Only Thing a Businessman Can Buy Through
His Business ............................................................................. 142
The IRS Can Eliminate Personal Tax Evasion by Eliminating
Personal Privacy, or by Eliminating the Personal Income Tax
System ...................................................................................... 145
The Income Tax System Creates Crimes That Waste Law
Enforcement Resources............................................................ 146
The Investigation, Prosecution, and Punishment of Artifactual
Crimes Costs Money: Is That Money Well Spent? ................... 148
The Income Tax System Encourages Surrogate Punishment .. 150
The Income Tax System Is an Unnecessary Incentive for Crime
.................................................................................................. 152
9. The Income Tax Is Too Complicated ....................................... 153
The Income Tax Is Out of Control ............................................. 153
Books on Tax Advice Sell Well ................................................. 154
A Rash of Books on the New Tax Law Attests to Its Complexity
.................................................................................................. 155
Under Current Law, the Tax Assessment Is Not Known for a Year
.................................................................................................. 156
vi
The Income Tax System Has Caused Citizen Resentment,
Suspicion and Fear, and a Contempt for the Government ....... 157
Why Is the Income Tax So Complicated? ................................. 159
It Is Not Possible to Measure Income ....................................... 159
Complexity Destroyed the Turnover Tax, and Will Destroy the
Income Tax ............................................................................... 163
10. The Income Tax Is Economically Deficient............................ 166
The Income Tax Discourages Saving and Investment ............. 166
The Income Tax Discourages Productivity ............................... 169
The Income Tax Encourages Debt Financing ........................... 170
The Business Profit Tax Subsidizes Inefficient Firms ............... 171
Use of the Income Tax Places the US at a Disadvantage in
International Trade .................................................................... 171
The US Income Tax Distorts the Economy ............................... 172
The Personal Income Tax and the Corporation Income Tax Are
Not Well Integrated ................................................................... 175
11. The Income Tax Is Too Costly ............................................... 177
The Administrative Cost of Collecting the Personal Income Tax is
High ........................................................................................... 177
The Cost of Compliance With the Personal Income Tax Is Very
High ........................................................................................... 178
The Income Tax System Causes the Waste of Much Productive
Effort in Tax Avoidance ............................................................. 179
The Income Tax System Causes the Waste of Productive Skills
.................................................................................................. 180
12. The Income Tax Is Contributing to Economic Collapse ........ 184
The Income Tax Causes Government Budget Deficits ............. 184
The Income Tax Base Is Too Narrow ....................................... 185
Both the Personal Income Tax and the Business Profit Tax Have
Small Tax Bases ....................................................................... 188
The Volatility of the Business Profit Tax Base Contributes to
Government Budget Deficits ..................................................... 189
The Income Tax Contributes to Extreme Concentrations of Wealth
.................................................................................................. 190
13. How to Design a New Tax System ........................................ 193
vii
Tax Policy Goals ....................................................................... 193
The Current System Rates Poorly in Accomplishing Tax Policy
Goals ......................................................................................... 195
The Tax Legislative Process Is Inadequate .............................. 196
The Current Legislative Process Does Not Take Advantage of
America's Talent ....................................................................... 196
The Income Tax System Is an Unstable System ...................... 198
The Current Tax Legislative Process Is Unsystematic ............. 199
Systems Engineering Is the Discipline for Developing Systems 200
Systems Engineering Has Achieved Success in Developing
Modern Social and Economic Systems .................................... 201
Systems Engineering Can Accommodate Social Institutions and
Cultural Values .......................................................................... 201
The Government Uses the Systems Approach with Demonstrated
Success ..................................................................................... 204
Examination of Existing Alternatives ......................................... 208
Criteria Associated With Tax Policy Goals ................................ 209
Tax-Engineering Methodology .................................................. 211
What Rates Are Correct?; What Tax "Mix" Is Appropriate? ...... 214
Economists Generally Prefer Taxes That Do Not Distort the
Economy ................................................................................... 216
How to Allocate Taxes Is a Value Judgment ............................ 216
The Government Must Set the Overall Tax Rate and Decide on
Progressivity .............................................................................. 217
Public Opinion Can Be a Major Factor in Tax Policy ................ 218
The Acceptability of a Tax Burden Depends on Political
Philosophy ................................................................................. 219
The US Tax System Allows for Collections at Several Levels of
Government .............................................................................. 219
Powers Reserved to the States ................................................ 221
14. Tax Alternatives ..................................................................... 226
Descriptions of Alternative Taxes ............................................. 226
Criteria, or Principles, for Choosing a Tax ................................ 226
How Tax Level and Distribution Are Measured ......................... 230
viii
The US Constitution Distinguishes Between Direct and Indirect
Taxes ........................................................................................ 233
Indirect Taxes Raise Prices; Direct Taxes Reduce Income ...... 234
Indirect Taxes Receive Preferential Treatment Under the GATT
.................................................................................................. 235
The Individual Income Tax ........................................................ 236
The Personal Income Tax Attempts to Address Ability to Pay and
to Moderate Recessions ........................................................... 236
The Personal Income Tax Has Many Undesirable Properties .. 237
The Corporation Income Tax .................................................... 238
The Corporate Income Tax Is a Tax on Profit ........................... 238
The Corporate Income Tax Has Many Economic Disadvantages
.................................................................................................. 239
The Corporate Income Tax Produces Unstable Revenues ...... 240
Payroll Taxes ............................................................................ 241
Social Security Contributions Are Not Contributions, and the
Social Security Trust Fund Is Not a Trust Fund ........................ 241
In Spite of Its Nonprogressive Character, Workers Do Not Voice
Strong Objection to the Social Security Tax ............................. 242
Consumption Taxes (Taxes on Goods and Services) .............. 243
Consumption Taxes Encourage Saving .................................... 244
The Sales Tax ........................................................................... 245
The VAT -- "Born In the USA" ................................................... 246
Two Ways to Administer the VAT: the Tax-Credit Method and the
Calculation Method ................................................................... 248
Examples of a VAT ................................................................... 251
Three Major Types of VAT: the Subtractive (Consumption-Type)
VAT, the Additive (Income-Type) VAT, and the Gross-National-
Product-Type VAT ..................................................................... 254
Synonyms: Additive VAT = Income-Type VAT; Subtractive VAT =
Consumption-Type VAT ............................................................ 255
Single-Rate Versus Multiple-Rate VATs ................................... 256
Two Final VAT Terms: Tax Inclusive Versus Tax Exclusive ..... 260
There Are Many Types of VAT ................................................. 260
The "Personal-Exemption-Type VAT" Is Not a VAT ................. 261
ix
The VAT Is Economically Neutral ............................................. 262
The Expenditure Tax ................................................................. 263
Excise Taxes ............................................................................. 264
Property and Wealth Taxes ...................................................... 265
Inheritance, Estate, and Gift Taxes ........................................... 266
Classification of Taxes; Income and Consumption Taxes Versus
Wealth Taxes ............................................................................ 267
Classification of Income and Consumption Taxes .................... 268
Comparison of Consumption Taxes to Income Taxes .............. 270
Advantages of Business Taxes over Taxes on Individuals ....... 272
The Problem of Determining the Tax Mix ................................. 273
Systems Engineering Can Help Develop a Good Tax System . 274
15. The Value-Added Tax, or VAT .............................................. 276
What About Income Taxes for Business? ................................. 276
The Free-Enterprise System Has Accomplished Impressive
Economic Growth ...................................................................... 277
The Business Profit Tax Has Economic Disadvantages, but It
Does Not Severely Compromise the Privacy of the Individual .. 278
A Low-Rate VAT Reduces the Incentives for Tax Evasion ....... 279
The VAT Is a Good Tax on Which to Base Spending Policy .... 280
The VAT .................................................................................... 280
Taxable Items Are More Simply Defined Under the VAT Than
Under the Income Tax............................................................... 282
Under a VAT, the Incentive to Make Purchases Through One's
Firm Can Be Dramatically Reduced .......................................... 282
Use of a Low-Rate VAT Would Dramatically Reduce the Incentive
to Shelter Income in One's Firm ................................................ 284
Is There Any Tax System That Completely Removes the Incentive
to Make Purchases Through One's Business? ......................... 286
Elimination of the Personal Income Tax and Business Profit Tax
Probably Will Face Government Opposition ............................. 288
Replacing the Personal Income Tax and the Business Profit Tax
by a VAT Would Reestablish the Privacy of Individuals ........... 289
The VAT Includes a Tax on Labor ............................................ 290
Effect on Wages ........................................................................ 291
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