Tax it all — One law of politics is
that every level of government always wants more money. Ever since the
1930s, when the sales tax was invented to replace property taxes —
which people simply could not afford to pay — as the basic way of
funding state government, the states have sought to extend the tax as far as
possible. They have succeeded in extending it in many ways, but one kind of
transaction has remained exempt: the purchase of goods by the citizen of
one state from a citizen (or business) of another state. That's why, for
example, unless you live in Maine, you don't have to pay sales tax when you
buy stuff from L.L. Bean.
Tax raisers have run into a brick wall in the form of Article 1, Section 8 of
the U.S. Constitution, which grants to Congress the power "to regulate
commerce. . . . among the several states." The Supreme Court has repeatedly
ruled that unless Congress gives the states the right to tax interstate
transactions, the states cannot tax them. And Congress has never done
so.
The states have cleverly worked around this by enacting "use" taxes,
taxes on goods or services purchased in interstate commerce. Unlike the
sales tax, it is not exacted of merchants, but of consumers themselves. If, for
example, you buy a new down jacket from L.L. Bean and you live in California,
you are supposed to obtain a "use tax return" from the state, fill in the
details of your purchase, and remit the use tax to the state.
Of course, virtually no one does this, and enforcing the law against
individuals is too complicated and would yield too little revenue to make it
worthwhile. (A state sales and use tax enforcer once told me that the law is
only really enforced against businesses and, occasionally, against people
the state "wants to get.")
Part of the reason why Congress has been unwilling to enact a law
authorizing state taxation of interstate commerce is that many very small
mail-order concerns would, in effect, be put out of business by it. The reason
is that figuring out the rate to charge is very complicated. Sales taxes are
authorized by 45 of the 50 states and the District of Columbia. But don't get
the idea that there are just 46 sets of rules and regulations a mail order
merchant would have to learn. Many states have authorized cities, counties,
school districts and even transit districts to enact their own sales taxes.
There are about 7,600 different sales tax jurisdictions in the U.S., and they
frequently change their tax rates and rules about what is exempt. It would
be a huge burden on a large business like L.L. Bean to keep track of all the
different rates and the boundaries of different taxing authorities — and
an impossible burden on smaller merchants.
Recently, however, several state governors have organized the
Streamline Sales Tax Project. The idea is to reduce the overwhelming
complexity of the tax, so that they will have better luck lobbying Congress to
authorize taxation of interstate sales.
Here's the lesson of all this: the only way to get politicians to simplify
taxes, is to convince them that simplification will enable them to raise the
things. — R.W. Bradford
Death and taxes — David Boaz
wonders above why "so many people object to a tax that falls on only a few
rich people." He's talking about the tax on property that a person attempts
to leave to his heirs. I think part of the reason is the manifest unfairness of it
all.
Here is how the system works: a person works his entire life and, thanks
to some combination of his own perspicacity, hard work, prudence, and
good fortune, he saves a substantial amount of money. Along the way, he
pays income tax on every dime he earns. This is a not inconsiderable sum:
depending upon the jurisdiction in which he lives, such a person may pay
income taxes totalling more than 50% of his income. Some people who are
middle aged today have paid as much as 90% of their income in taxes.
Well, this exemplary person dies, and if, thanks to his thrift or good
fortune, he has retained a substantial amount of his earnings and wants to
leave it to his family, the taxman thereupon demands that his estate turn
over to the government as much as 55% of the savings upon which he has
already paid income taxes of as much as 90%.
This is, I believe, patently and obviously unfair. I suspect that's why the
arguments to keep the death tax are almost always nothing more than
blatant "screw-the-rich" rhetoric. Envy may be widespread, but most
people do not regard it as a virtue, despite the efforts of the political
class.
I am also a bit surprised that opponents of the death tax seldom use
arguments based on fairness. Bush and his allies have framed the current
debate on elimination of taxation on dividends primarily on the theory that
doing away with the tax would stimulate the economy. This is a dubious
argument at best. An appeal to fairness would be much more persuasive:
after a corporation pays income tax on its earnings, why should its
stockholders (the owners of the corporation) have to pay income tax on the
same earnings when they are distributed to them?
There is another aspect of death taxes that I've never heard discussed:
ultimately, they are a tax on productive capital. Consider how one can avoid
these taxes. There are only two ways: you can give your money to a
government-certified, government-regulated charity or you can spend it on
consumer goods for yourself.
You cannot give it (or at least very much of it) to your children without
paying a "gift tax," a tax that was established for the explicit purpose of
keeping people from avoiding death taxes. Indeed, Uncle Sam is so worried
that he won't be able to confiscate most of your estate that he piles on extra
taxes if you try to leave it to your grandkids.
Think about that. Suppose you are 90 years old and have managed to save
$900,000. Your only son is 68 years old and has terminal cancer. If you revise
your will to leave your estate to your grandchildren, Uncle Sam deems this
an attempt to reduce your tax by "generation skipping" — that is,
denying him a chance to take a bite out of it when you die and another bite
out of it when your son succumbs to cancer. (Leaving property to a grandkid
is considered a "loophole," you know, and is therefore evil.)
That leaves the other way in which the elderly can dispose of their money
without incurring taxes or turning it over to a government-certified and
government-regulated "charity." They can spend it on themselves. Not that
they can do anything lasting with it — if they buy real estate or art or a
new car or securities or any kind of property, this property becomes part of
their estate and is subject to the same tax.
What they can do is spend it on services and products that they consume
immediately. If you've ever wondered why luxury cruise ships are so full of
old people, you might want to remember this.
So one effect of this manifestly unfair tax is to encourage people to
remove their assets from the world's stock of working capital and spend it
on extravagant personal indulgences. This makes the world a substantially
less prosperous place.
The death tax also has a powerful effect toward centralizing the economy
into the hands of major corporations. If a family-owned small business is
successful at all, it quickly becomes valuable enough to incur substantial
death duties when its owner dies. The only way they can be paid is if the
business, or part of it, is sold to raise cash.
The newspaper in the small town where I grew up, for example, is now
part of a national chain owned by an international media corporation. So is
the radio station. Many of the farms in the surrounding area that were
family-owned when I was a kid are now owned by so-called
"agri-businesses." The timberlands that surround the town where I now live
are mostly owned by huge lumber companies.
Most people think that the corporatization and centralization of
ownership is not a good thing. Yet the single biggest reason why it happens
is the death tax. Most of the people I know of who have sold out their
successful small business to some major national company did so either
because a death tax was due or was inevitably coming due.
I suspect that most people who decry economic centralization and
control and big business haven't figured out that death taxes inexorably
lead to control by big corporations.
This is another of the prices we pay for screwing the rich. — R.W.
Bradford
