What you don’t know can hurt you

The devil is loose in the details. Today, there is an opinion editorial in the Wall Street Journal by Georgetown University School of Law’s constitutional expert, Randy Barnett. Professor Barnett links the tea parties that took place all over the country last week to a need to wind back federal power. In it, he suggests we should

eliminate the federal income tax, after five years, in favor of a national sales or excise tax.

It is an interesting argument, but ultimately one that might prove as muddled as the Tea Parties last week.

As with all changes to the tax code, we must identify who are the winners and who are the losers. So much of our taxation system is a coercive one – encouraging us to do certain things (for which we receive deductions and lower taxes), while punishing us for doing other things (such as extra ‘sin’ taxes on the purchase of cigarettes, alcohol, motor boats, etc.)

Then, with a national sales or excise tax we need to ask to whom this would apply. Will everyone, under all circumstances, pay the same sales tax on all items? As onerous as I find a sales tax on the essentials of life (food, water, clothes, etc.) I don’t think those will be as controversial as some others.

How about a sales or excise tax on the purchase of a house? In many countries this can add tens of thousands of dollars to the cost of a place to live. The affordable housing crowd aren’t likely to endorse that.

Can you imagine a sales tax that businesses must pay on every item they purchase? Maybe on office supplies and the office furniture, but I can hear squawks about adding six percent to the cost of large machinery such as a grain harvester or a printing press. All those taxes would, of course, be passed on to the purchaser who would, then, pay a sales tax!

If you exclude businesses from paying a sales or excise tax, then I suspect we will all suddenly develop an entrepreneurial spirit and get business credit cards to use with all our purchases. Perhaps we would no longer own our own homes but rent them from some trust or corporation set up to hold the property on our behalf!

What about hospitals, our churches and other non-profits? Many don’t pay corporate taxes today (since they don’t make a profit), so this would be a direct hit to our health care system, our charities, and the many other groups that are having a particularly hard time in today’s economic climate.

Would foreign countries buying missiles, tanks and other military hardware from U.S. companies, or would we see all those companies suddenly become offshore entities (headquartered in the Bahamas, perhaps?)

And, lastly, would state and local governments be exempt from these sales and excise taxes? Or would they have to raise the income and property taxes in their state to now fund the activities of the federal government?

The more you think about it, the sillier this proposal becomes. Yes, the devil is in the details and until we know them, the better the devil we know than the devil you don’t!

(edited April 24) Our own constitutional expert, Professor Natelson, weighs in with an endorsement of Barnett, as “a staunch friend of freedom”, here.