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  • Tariffs Are Awful, but the Income Tax May Be Worse

    Posted on by Azrael Comment

    Every fiber of my economic being cries out against tariffs. If they are so good, why doesn’t each state in the US have one against the products of all of the other 49? That is, Ohio could “protect” its industries against the incursions from Arizona. This is obviously silly. One of the important reasons America is so prosperous is that we have a gigantic, internal, free trade area.

    Donald Trump supports them on the ground that the McKinley administration was prosperous, and relied upon tariffs. But this is to commit the post hoc ergo propter hoc logical fallacy: that since A precedes B, A must be the cause of B. No, America did indeed become rich during this epoch, but that was in spite of tariffs, not due to their benign influence. If you are looking for a historical episode to shed light on this matter, the Smoot-Hawley Tariff of 1930 will do far better: it greatly worsened an already bad recession, plunging our economy into a deep depression.

    Our President also claims that the US is victimized by a negative balance of trade: we buy more from Canada and other countries than they purchase from us. However, I have a horrid balance of trade with McDonald’s and Wal-Mart. I acquire several hundreds of dollars’ worth of their products every year, and neither has yet seen fit to reciprocate with any of my economic services (hint, hint!). On the other hand, I have a very strong positive balance of trade with my employer, Loyola University New Orleans. They pay me a decent salary; apart from a few lunches in their cafeteria, my expenditures to them fill their coffers to a zero degree. Should anyone worry about this sort of thing? Of course not. Ditto for international trade. If Country A buys more from B than it sells to it, money will flow from the former to the latter, reducing prices in the former and raising them in the latter, until matters balance out.

    Everyone realizes the foolishness of tariffs when it comes to absolute advantage. No Canadian objects to the importation of bananas from Costa Rica. Producing this tropical product in the frozen North would be financially prohibitive (gigantic hothouses). Ditto for maple syrup in the country to the south. The only way they could produce this item would be to place maple trees in gigantic refrigerators. Ludicrous and prohibitively expensive.

    But when it comes to comparative advantage, all too many people are out to lunch insofar as the teachings of Economics 101 are concerned. They fear that other countries might be more efficient than we are; with free trade, they would produce everything, we, nothing, and we would all starve to death from massive unemployment.

    To dispel this myth, let’s consider a thought experiment. A lawyer is as good a typist as his secretary. He can produce $1,000 per day by practicing his profession. But for every such day, he needs a certain amount of typing. He can produce $200 worth each day. In two days, he can thus earn $1200 on his own. If he hires a typist, he can earn $2,000 from lawyering in two days, but must pay his secretary $200 daily for a total of $400. If he trades with her, he will come out with $2,000-$400=$1,600, an appreciable gain for him.

    So is there any economic case for tariffs, given the foregoing? Yes, paradoxically, there is—in a way, if the alternative is a tax that’s even worse.

    At the start of his second term, President Trump initially fired 6% of the employees of the Internal Revenue Service. He is now looking to end the employment of some 50% of them. Suppose he follows this up by getting rid of all of the rest of the IRS bureaucrats, eliminating the dreaded income tax, and achieving revenue neutrality with tariffs. His motto might be: “Let’s turn back the clock to 1912,” the year before this tax was implemented (when it ranged from 1% to 7%!).

    What would the benefits be thereof? First of all, there are many intelligent, productive people who work for the IRS. There are some 90,000 of them. If dismissed by their employer, they would be freed up to produce goods and services desired by the populace. Ditto for the many accountants and tax lawyers who devote all or part of their time to helping their clients wrestle with complicated IRS regulations. Further, many of us fill out our own tax forms. This takes hours, days in some cases, time that could be better spent on leisure or productivity.

    The benefit here is that it takes relatively little labor to run a tariff system. Hey, we already have tariffs in place. An increase in their level would hardly call for much more manpower, likely hardly any more at all.

    Halfway measures will avail us little. But if Mr. Trump completely eliminates the IRS and the hated income tax along with it, there may be a reasonable case for increasing tariff rates. Not to present punitive levels, though.

    To put it another way, if we accept that there has to be a government, and it therefore needs some revenue to function, this might be the least-bad option.

    Should we worry about so many people becoming unemployed? Not at all. A similar sort of thing occurred when the car replaced the horse and buggy, when the cell phone substituted for Kodak, when we switched from typewriters to computers, etc. We are all the richer for this sort of thing, and will be in this case too.

    • Walter Edward Block is an American economist and anarcho-capitalist theorist who holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is a member of the FEE Faculty Network.

    Source: Tariffs Are Awful, but the Income Tax May Be Worse


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  • Life Before the Income Tax

    Posted on by Azrael 1 Comment

    tax-protest
    If someone from the 17th century came back to life, he or she would be surprised, most of all, by the means of transport and communication tools we use now.

    Probably, the most familiar things would be hospitals and schools.

    Personally, I think that there is something that would very surprise a person from those times even more: the fact that Governments take away individuals’ earnings compulsively.

    In fact, contrary to what many people think, income tax is a rather recent “invention,” created—in most cases—as an emergency tax to deal with extraordinary expenses, which later survived as a way to finance the growing fiscal deficits of Governments increasingly mismanaged, corrupt, and in debt.

    We will review two significant examples.

    After centuries imposing specific, eccentric taxes (e.g. chimney tax, window tax, malt tax, among others), Income Tax was first introduced by William Pitt in the United Kingdom in 1798, and it started to be charged in 1799. The aim was not to finance original expenses of the State but the Napoleonic Wars.

    At the time, no other country levied a tax over the earnings produced by its citizens. The United States, for example, would only start charging it, intermittently, some 60 years later, and definitively in 1913.

    The non-taxable minimum in the United Kingdom of the late 1700s would be equivalent to £6,000, and the maximum rate was ten percent. Only local income was susceptible to taxing, which was quite logical.

    At the time, the malt tax covered approximately ten percent of the Government’s budget.

    This first version of the Income Tax was in force only for three years, as it was annulled (logically) upon the signing of the Treaty of Amiens.

    Henry Addington, who had succeeded Pitt in 1801 and had eliminated the tax when the peace with France was signed, reestablished it in 1803 when new difficulties appeared with that country. It was kept in force until the Battle of Waterloo. When the tax was annulled again, every document that referred to it was burnt, due to the sense of shame associated with having established and charged this tax.

    From 1817 to 1842 there was no Income Tax in the United Kingdom or any other country.

    Although he criticized the tax during the 1841 campaign, Prime Minister Robert Peel reestablished it in 1841, not to finance a war but to cover the Government’s deficit.

    This time, the non-taxable minimum was over twice the previous one and the rate was around three percent.

    The First World War was the perfect excuse to increase the rates. So, they were increased to 17.5 percent in 1915, 25 percent in 1916 and 30 percent in 1918.

    For context, the only other country with an income tax at the time was the United States, which, as said above, had reestablished it in 1913, with a rate of 1 percent for incomes above $20,000.

    The system was modernized as years went by, but the rising trend did not slow down, with a notorious record of 99.25 percent (yes, that is correct) during the Second World War.

    Contrary to what one might believe, in the following two decades there was a minor reduction, but the tax remained over 95 percent.

    During the 1970s and 1980s there were further decreases, but not very significant.

    Only upon the election of Margaret Thatcher and the growth and increased sophistication of the offshore jurisdictions did the rates start to decrease substantially.

    In 1988, for example, after three consecutive reductions, the basic rate was 25 percent.

    Nowadays, that rate (the basic rate) is even lower: 20 percent and the maximum rate is 40 percent.

    Let’s have a look at what happened on the other side of the Atlantic Ocean.

    Although the United States became independent from the United Kingdom in 1776, after a conflict arising precisely from a taxing issue, it was not until 1861 that the country imposed the first income tax. And, just like in the United Kingdom, this was not done to finance the ordinary expenses of the State but the Civil War.

    In other words, for over a century and 15 presidential terms, the State was financed without needing to take away from taxpayers a part of their income. Moreover, when it was finally done, those funds were not used to finance original expenses, but a civil war.

    And even in that emergency situation (1862), the rate was between three percent and five percent, depending on the income level. That is to say, there were just two tax brackets, as is the case today, for example, in Paraguay.

    In 1872, the income tax was annulled, basically due to the pressure of taxpayers, who deemed it expropriatory, like the majority of Congress.

    In 1894, the income tax was incorporated again, but the next year, when ruling in the case 158 U.S. 601 (Pollock v. Farmers Loan & Trust Company), the Supreme Court declared it unconstitutional. The exact date of the ruling was May 20, 1895, and the main argument put forward by the majority of the justices was that a direct tax was not constitutional if there was not a proportional way to distribute it among the states forming the Union, based on a census carried out to this end. The decision was made with five votes in favor and four against.

    In 1909, the creation of this tax was proposed again, and in the presidential election of 1912, the three principal candidates—the president at the time, William H. Taft; the former president, Theodore Roosevelt; and the candidate who eventually won, Woodrow Wilson—supported the legalization of the income tax.

    The 16th Amendment was introduced precisely to achieve this goal. Paradoxically, Wyoming—now one of the states where non-residents frequently establish their foreign trusts—was the 36th state to pass the Amendment, which led to the tax being in force.

    In particular, this Amendment established that Congress shall have the right to create and collect taxes over income, whichever source they may be from, without apportionment between the different states and without the need for a census.

    As said above, the tax bracket for most of the population was 1 percent.

    So, when did everything become more complicated for taxpayers? With the establishment of the Revenue Act of 1918 (WWI), which raised this tax to 77 percent, a rate over twice as much as that of the United Kingdom.

    From looking at the way in which the public sector has been financed in the United States, the following can be seen:

    • between 1890 and 1920, all internal revenue came from foreign trade, in the form of custom duties;
    • between 1920 and 1940, the greatest part of the revenue came from corporate income tax, followed by personal income tax and custom duties; and
    • between 1940 and the year 2000, custom duties tended to disappear, and the personal income tax overtook the corporate income tax.

    As mentioned above, in time, more and more countries started adopting this new type of tax, especially countries with growing deficits.

    As an example, Switzerland imposed it in 1840, France in 1872, Spain in 1900, Norway in 1911, Russia in 1916, Canada in 1918, Brazil in 1924 and Argentina in 1932.

    As a result, inhabitants of these countries began to look for ways to legally elude these unfair taxes, often using structures in jurisdictions that continued to consider these taxes as expropriatory.

    In that context, countries that expected (and expect) to charge this tax (which they deemed unethical not so long ago) turned against the rest and accused them of being “unfair fiscal competition.”

    In other words, they unilaterally changed the rules and then attacked those who simply maintained the status quo.

    Later, they gathered in small cartels (e.g. OECD, G20, and others) to lend more legitimacy to these claims. That is how the first “black lists” of “tax havens” appeared, and how the pressure against them increased.

    When they realized that these organizations were not achieving their goals, they started to use other arguments, more amenable to the general public (money laundering, terrorism financing).

    Offshore jurisdictions were not created to capture the investments of fiscal residents of other countries, but it was these other countries which drove away their own fiscal residents by creating taxes on their income (first) and their assets (later), taking the tax burden to untenable limits.

    Reality indicates that the very concept of “tax haven” was created by high-tax countries which, not being able to compete, tried (unfairly) to get the most efficient countries out of the competition.

    As usual, he who does not want to compete is the least competitive one. No wonder.

    What learnings can we derive from the British and American experience?

    Several:

    • Firstly, there is a possibility that States finance themselves without receiving funds from the income or revenue of their inhabitants (or taxing these).
    • Secondly, until not long ago, all governments agreed that imposing taxes over income or revenue was expropriatory, and therefore could only be done under extraordinary circumstances. To impose this kind of tax was frowned upon, and those who were forced to do so were embarrassed.
    • Finally, were it not for the “fiscal wilderness” there would be no “tax havens”. If high-tax countries really wanted to “vanquish” tax havens, they should strive to provide legal security and reduce taxes, instead of lobbying through discredited, decadent multilateral organizations, which they have been doing for decades without any results.

    This article is reprinted with permission from the Panam Post.

     

     


    Martin Litwak

    Martin Litwak is the founder and CEO of @UntitledLegal, a boutique law firm specialized in investment funds and international estate planning, and the first Legal Family Office in the Americas. Martin Litwak is the author of the book “How the wealthiest people protect their assets and why we should do the same”.

    This article was originally published on FEE.org. Read the original article.


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  • Taxes Are Worse than You Thought

    Posted on by Azrael 1 Comment

    Taxes Are Worse than You Thought

    We are quickly approaching the deadline for filing (and paying) our federal and state income taxes (extended to April 18 this year because of Emancipation Day), and that means it’s time for my annual post at tax time to help put things in perspective.

    1. Some Historical Perspective. “In the beginning” when the US federal income tax was first introduced in 1913, it used to be a lot, lot simpler and a lot easier to file taxes; so easy in fact that it was basically like filling out your federal tax return on a postcard.



    For example, page 1 of the original IRS 1040 income tax form from 1913 appears above. There were only four pages in the original 1040 form, including two pages of worksheets, the actual one-page 1040 form above, and only one page of instructions (view all four pages here). In contrast, just the current 1040 instructions for 2016, without any forms, runs 106 pages.

    Individual federal income tax rates started at 1% in 1913, and the maximum marginal income tax rate was only 7% on incomes above $500,000 (more than $12 million in today’s dollars). The personal exemption in 1913 was $3,000 for individuals ($72,850 in today’s dollars) and $4,000 for married couples ($97,000 in today’s dollars), meaning that very few Americans had to pay federal income tax since the average income in 1913 was only about $750. The Tax Foundation has historical federal income tax rates for every year between 1913 and 2013 here for tax brackets expressed in both nominal dollars and inflation-adjusted dollars.

    2. Tax Graphic of the Day (above). Some more historical perspective…

    3. Opportunity Cost. In a 2012 report to Congress (most recent data available), the National Taxpayer Advocate estimated that American taxpayers and businesses spend 6.1 billion hours every year complying with the income tax code, based on IRS estimates of how much time taxpayers (both individual and businesses) spend collecting data for, and filling out their tax forms. In addition, Americans will spend an estimated $10 billion for the services of tax preparation firms and $2 billion on tax-preparation software programs like TurboTax that still require many hours of time.

    The amount of time spent on income tax compliance – 6.1 billion hours – would be the equivalent of more than 3 million Americans working full-time, year-round (or 2.1% of total US payrolls of 145.9 million). By way of comparison, the federal government currently employs 2.8 million full-time workers, and Wal-Mart, the world’s largest private employer, currently employs 2.2 million workers worldwide and 1.3 million workers in the US (both full-time and part-time). At the current average hourly wage of $21.90 an hour, the dollar value of the opportunity cost associated with tax filing would be more than $131 billion, slightly more than the 2016 GDP of Washington, D.C. ($127 billion).

    As T.R. Reid pointed out recently in a New York Times op-ed, it really doesn’t have to be that way. For example:

    In Japan, you get a postcard in early spring from Kokuzeicho (Japan’s IRS) that says how much you earned last year, how much tax you owed, and how much was withheld. If you disagree, you go into the tax office to work it out. For nearly everybody, though, the numbers are correct, so you never have to file a return.

    4. Tax Progressivity. And just how progressive is the US federal income tax system? Very, very progressive, see the chart above showing average effective tax rates by various income groups in 2014 (most recent year available). That pattern of income tax progressivity explains why almost all federal income taxes are paid by the top income groups (see next few items).

    5. Tax Progressivity and Tax Burden. According to the most recent IRS data, the federal income tax shares by six different income groups are displayed in the chart above. Almost all federal income taxes (97.3%) are paid by the top 50%, more than 2/3 of income taxes are paid for by the top 10% and nearly 40% of taxes are paid by the top 1% of taxpayers. For all of the criticism and negative publicity the “Top 1%” get, I’d like to personally thank that group this year at tax time for shouldering such a disproportionate share of our collective tax burden. It’s a form of “disparate impact” on the 1% that we all benefit from! So, I say “Thank You Top 1%” from all of us in the bottom 99% for your valuable and significant contribution to our nation’s tax burden.

     

    6. Tax Burden of the Top 1% vs. the Bottom 95%. The chart above gives us another perspective on the tax burden of the top 1% over time, and compares the tax share of that group to the tax burden of the bottom 95% in every year between 1980 and 2014 (most recent year available). In 2014, the top 1% earned 20.6% of the total income reported to the IRS and paid 39.4% of all federal income taxes collected ($543 billion). The bottom 95% of US taxpayers earned 64% of total income (almost three times as much as the top 1%) and paid only 40.5% of the total income taxes collected ($550 billion). So once again, to the 1.395 million taxpayers in the top 1%, I say “Thank You” for paying almost as much in federal income taxes in 2013 as the 132.6 million taxpayers in the bottom 95% by income.

    7. Bowling vs. Taxes. Speaking of the progressivity of income taxes, here’s a thought about the way we tax income vs. the way we score bowling. Under the scoring rules of bowling, you get rewarded, not penalized, for being successful. If you get a spare, the scoring system rewards you by adding the pins from the next ball into the current frame, and if you get a strike you get rewarded by adding your next 2 balls into the current frame.

    Under our progressive income tax system with seven tax rates in 2015 increasing from 10% to 39.6%, you get penalized, not rewarded, for being successful, productive and entrepreneurial, because the more you earn, the higher the tax rate you pay. The top marginal income tax rate has been as high as 91% in the 1950s and 1960s, and 70% in the 1970s. If we scored bowling the way we tax income, we would subtract, not add pins for a spare or strike, i.e., penalize successful bowling. If we taxed income the way we score bowling, we would have lower, not higher, tax rates on our most successful income-earners.

    8. Coincidence? Why are Tax Day (April 15) and Voting Day (first Tuesday in November) so far apart? Couldn’t we move Tax Day to the first Monday in November, or Voting Day to the first Tuesday following April 15?

    9. What’s in a Name? Why do we call the IRS a “service?” Couldn’t it have been named a department like Labor, a bureau like the BLS or the FBI, a commission like the FTC, an administration like FDA, an agency like EPA, etc.?

    10. 20 Inspirational Quotes about Taxes from Forbes, here are a few good ones:

    “The taxpayer: that’s someone who works for the federal government, but doesn’t have to take a civil service examination.” – Ronald Reagan

    “We have what it takes to take what you have.” – Suggested IRS Motto 

    “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.” – John F. Kennedy

    I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.” – Arthur Godfrey

    “A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money.” – G. Gordon Liddy

    Happy Tax Day!

    Republished from AEI.


    Mark J. Perry

    Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

    This article was originally published on FEE.org. Read the original article.


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