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Reforming the Tax Code
A radical compromise.

by James Leroy Wilson
November 18, 2004

Even though I believe George W. Bush’s first term as President was a near-total disaster, there are at least some signs for optimism in the second term. On the rhetorical level, at least, there are some things that make the Republican Party for more agreeable than the Democratic: the federal judiciary, gun rights, taxes.

Two encouraging signs are the President’s stated commitments to Social Security reform and tax reform. The partial privatization of Social Security is a good start. If individuals invested more of their money that had been going to Social Security, they would get a better return on it and the federal government can't fraudulently count Social Security taxes against the deficit.

But an even bolder stroke would be to completely reform the tax code. Here are some observations about this:

1. The tax rates should be low enough and the code simple enough so that evasion is not worth the risk, and the search for loopholes not worth the cost.

2. A simplified code, which involves closing loopholes, is not a virtue because the loopholes are closed, but rather because the task of filing and auditing is much simpler. The less that is open to interpretation for the taxpayer, his tax filer, or the government tax auditor, the fairer it is. Arbitrary interpretation of complex laws is a form of tyranny. Tax simplification is a justice issue.

3. The "flat tax" that taxes everyone at the same rate is not necessarily a virtue in itself. You can still have a graduated income tax while simplifying the tax code. Lowering rates should be the first priority, and simplification the second. Flattening the rate would be nice if the rate was 1%, but that’s not going to happen.

4. The total tax burden is the real drag on the economy. It matters little if it’s from income taxes, poll taxes, property taxes, or any other tax or combination of taxes.

5. In a better world, there would be no taxes on savings (capital) or income (production). Libertarians of the Henry George school believe in a tax on land rents, but there’s always the problem of assessing the value of the land. Taxes on consumption, on the other hand, hurt the poor more because by definition, the poor have to spend a far higher percentage of their income on consumption in the first place (they have to put food on the table), which damages their ability to save. In an ideal economy with an overall low tax burden, limited government and hard money (silver and gold), this may not be so bad because untaxed capital furthers employment while it reduces the cost of living through improved production. But we don’t live in that world.

6. The burden of taxes in our lives must be equal to the burden of government. Any question of tax reform must be accompanied by spending reforms. The role of the federal government in our lives must be addressed.

7. The system must be seen as "fair" to most Americans.

In light of these considerations, I suggest a tax system that removes every individual from the tax rolls. I have not investigated this system or talked to anyone about it. And I’m not exactly a staunch advocate of any form of tax. But I think this would be the "least bad" and most fair system that can best unleash the economy. It is simply this:

Corporate earnings and imports will be the only things that are taxed.

There will be no favoritism: corporate earnings will be taxed at a flat rate, and all imports taxed at a flat rate. The principle behind taxing just corporations, and not other businesses, is simple. Incorporation makes the owners of the business, its officers, and employees, exempt from personal liability. This is a tremendous privilege, an advantage that small, individually-owned firms do not have. After a small business fails, the owner may have to sell his house. When a corporation fails, their stockholders lose the value of their stock in that corporation, but that’s it. But because of the enormous capital that incorporation garners, and the productive capacity and profits of corporations, that their earnings will be taxed is a small price to pay. If tens of millions of workers didn’t have to pay any income taxes or file tax returns, much time and expense would be spared for both the people and their government, and the people would have more money to save and invest - perhaps even in corporations.

The same principle would apply to tariffs. The purpose would not be to protect American jobs, but rather to enforce the same standard. Imports would be taxed at a flat rate, for the sole purpose of raising revenue. Like domestic corporations, foreign exporters will know what price they have to pay to gain entry into the U.S. market. Just as incorporation grants unique privileges and immunities to stockholders, so also is the uniqueness of a foreign producer earning profits off of the American market. If they sell property under the protection of U.S. law, then surely they can pay for the costs of U.S. law enforcement. This way, if a corporation moves overseas, it will still have to pay taxes to export back in to the American market.

This is an incomplete picture. I invite questions, problems, and complete refutations. But it seems to me to be a reasonable middle-ground compromise. No average Joe or entrepreneur Jane will have to report to the government their wages, total earnings, the value of their homes, etc. Only corporations would file, and foreign producers would pay a tariff to gain access to the American market. This may be the best way simplify the system, unleash the economy, relieve the masses from taxes, and have the rich, who own more stocks, indirectly pay more.

About the Author:
James Leroy Wilson is a frequent contributor to (archives). His blog is Independent Country (

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