Our Entire Tax System is Fraud

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Mon, Apr 20 - 9:00 am EST | 2 years ago by
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    “The power to tax is the power to destroy.”
    ~ Supreme Court Chief Justice John Marshall, McCulloch v. Maryland, 1819

    Lines of Departure - Tax

    A few months ago1 I devoted several columns to the potential coming breakup of the United States, why that would be a terrible and horrifying thing, in practice, and why it is necessary for the common man (oh, and woman, of course) to reject the extremes that are pulling us apart and leading us into a breakup. The tough part there was that very few people see themselves as siding with or being on the lunatic fringe.

    Now, with the pain of Income Tax Day still throbbing, with the knowledge that Tax Freedom Day – the day when we can stop working to pay our federal tax bite2 – is yet many days away, I think I may have something that might, just might, pull some people from the extremes.

    Here’s the core problem: our tax system is fraud from start to finish. I don’t mean merely that it is unfair, counterproductive, absurdly complex, or corrupt, though it is too often all those things, too. No, I mean that the way the core elements of it have been sold to the public are simply fraudulent, that it operates in no way as it has been billed as operating, and that the very rich and their lapdogs, the politicians of right and left, both, are laughing at you for your unsurpassable gullibility.

    So, one suspects, is the left as a whole.

    First, a little rundown of what our tax system is. It, contrary to its being billed as “progressive,” is already essentially nearly flat as to rate. That’s right, add it all up, progressive Federal income tax, usually essentially flat state and sometimes local income tax, regressive sales taxes, highly dubious property taxes, pass-through taxes, Social Security and Medicare taxes, to include the part you think your employer is paying for you, Obamacare “taxes,” all of it; tally it all up and I would be surprised to death if there were as much as four percent difference in rate between high income genuine tax payers and low income tax payers, for any given locality. I think, but cannot prove, that two percent is more likely.

    Secondly, our tax system depends on pass-through taxation. This is to say, it all depends on the fraud and illusion of making you think – as with Social Security and Medicare, above – that someone else is paying your tax. No, people of good conscience and fair mind can argue about the efficacy of trickle-down economics, but if you don’t understand and accept the existence of pass-through taxation, you’re a fool.

    You won’t necessarily understand this until you are running your own business (BTDT), paying both sides of the Social Security-Medicare tax, and hiking up your hourly rate (BTDT, too) to cover the tax while paying other expenses and still having enough to live on. But let’s try a hypothetical to explain it. Imagine that Congress repeals Social Security and Medicare, but also mandates that your employer must not only not take out that payment from your paycheck, but must add to your paycheck his matching amount, and further, that the income tax rates are to drop to make exempt from income tax that amount added to your check from your employer.

    What is the effect of that on your employer’s bottom line? Nil, his costs have remained the same. What is the effect on prices from other business entities you buy from? Nil, their costs have remained the same. Now there is an important effect from this; you and all your peers suddenly have a lot more money in your pocket chasing the same amount of goods and services. What’s the effect of that fifteen percent plus3 raise? Prices rise, as money is devalued.

    (Don’t worry about that, though; I am certain that a consortium cum quorum of politicians would almost instantly arise to take that money from you, to spend it better on your behalf than you could hope to for yourself, thus averting potentially politically catastrophic inflation and salvaging priceless political careers.4)

    The point of that, though, is that the half of Social Security and Medicare taxes that are made to appear as if your employer is paying them are being paid by you. They’re paid by you in the form of lesser in-hand wages and they’re paid by you in form of higher prices for everything else you may buy, where the entity from which you buy has passed a portion – indeed, the entirety – of his cost onto you and onto the people that work for him.

    Of course, SS and Medicare are not the only area of taxation rife with pass-through. Contemplate the entirety of the corporate income tax. Billed as a progressive income tax on rich corporations and shareholders, in practice it operates mostly or entirely as a sales tax on consumers.5 When someone like Krugman tries to characterize resistance or opposition to the corporate income tax as “feeling terribly sorry for the oppressed US corporation,”6 he is, quite unsurprisingly, either missing the point or deliberately obfuscating it. No, we don’t need to feel a gram of pity for “oppressed US corporations,” that much he has right. Why? Because they don’t pay the value of a gram’s worth of camel dung; they pass all the tax on. The politicians didn’t tell you that part, did they?

    Now the Krug does seem to have a bit of a point insofar as the corporate income tax is aimed at shareholders and their dividends, but it is much, much less of a point that he’d like us to think.

    More on that over the next couple of weeks.

    Next week, the two economies.


    1 https://everyjoe.com/2015/01/12/politics/breakup-of-united-states-terrible-idea/#1, et seq. Note: everything I am going to write in this series is debatable, and I highly encourage the reader to debate it.

    2 And begin working on paying our state tax bite, naturally.

    3 https://www.ssa.gov/news/press/factsheets/colafacts2015.html

    4 You understand, right, that I write those words with my teeth grinding?

    5 https://spectator.org/articles/62371/costly-lie-called-corporate-income-tax

    6 https://krugman.blogs.nytimes.com/2008/08/18/pity-the-poor-corporations/?_r=0

    Tom Kratman is a retired infantry lieutenant colonel, recovering attorney, and science fiction and military fiction writer. His latest novel, The Rods and the Axe, is available from Amazon.com for $9.99 for the Kindle version, or $25 for the hardback. A political refugee and defector from the People’s Republic of Massachusetts, he makes his home in Blacksburg, Virginia. He holds the non-exclusive military and foreign affairs portfolio for EveryJoe. Tom’s books can be ordered through baen.com.

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