Abraham Baldwin Speaks on Taxes

“My experiences as a Chaplain during the War, as Yale’s Professor of Divinity, as a lawyer in Connecticut, and as a state legislator and as Representative and Senator from Georgia have given me a unique perspective.  I considered the Constitution the most important public service I performed during my career and I believe it is important that we got it right and acceptable.  As one of the authors of the Great Compromise, and throughout my political career, I have attempted to establish positions that benefit all parties.  I am disappointed that today’s political situation seems to be comprised of a vast series of taxes each of which benefits some particular special interest and few of which benefit the nation as a whole.

“Taxes have become so pervasive and complex that an entire profession has arisen to provide citizens tax advice.  We believe that taxation without representation is unfair, yet can an individual even understand how his taxes are being collected and used in such a complex environment?  Many features in the tax code are designed to provide incentives for desired behaviors, yet every one of these have unintended consequences (loopholes) that result.  If the government wants to incentivize certain behavior, why not do so directly rather than a convoluted approach that modifies taxes.  For example, home ownership is incentivized by making mortgage interest tax deductible.  As a result, banks benefit by increased interest payments to them, home ownership without a mortgage provides no benefit, and the richest portion of the population (which presumably has the largest mortgages) is rewarded more than the poorer home owners.  If the objective is to incentivize home ownership, why not make a fixed direct payment to home owners annually and avoid complex tax changes?

Numerous articles have estimated that the majority of taxpayers, either intentionally or unintentionally, file inaccurate tax returns.  As a result the Internal Revenue Service has grown from 15,000 employees (for 2,000,000 taxpayers) in 1920 to 90,000 employees in 2008 (for 140,000,000 taxpayers).  Numerous solutions to the tax code’s complexity have been proposed, but so many special interests benefit from today’s code that change has become virtually impossible. 

If we were to propose an income tax code, it would be simple, require little enforcement, and be ‘fair.’  Income gets touched in two places, the employer and the employee.  Of these, there are many times fewer employers than employees (approximately 8 million employers and 125 million employees).  If all the taxes were collected from employers rather than employees, the enforcement and auditing functions could be reduced at least ten-fold.  Taxes are withheld today by many employers at various rates which may or may not be consistent with the actual tax due.  If the tax were well defined, say a fixed percentage, it would be simple for employers to pay the correct tax and individuals would have no reason to even file a tax return.  Due to the regressive nature of such taxes, a fixed amount could be paid by the government to all wage-earning citizens.  The net effect of this would be to make the first increment of income (say income up to the ‘poverty level’) untaxed and all other income taxed at a fixed rate.  This rebate to all wage-earners (or even all citizens) could then be increased for items like Social Security or homeowner incentives and reduced for things like health insurance.  In any case there would be a single payment from the government to every taxpayer or citizen.  Another resulting benefit would be that wages of illegal immigrants would be more likely to be taxed because the employer becomes responsible for the tax.

But, what about unearned income, such as that derived from investments?  Consider what it means to invest.  A person provides another person, or business, with funds to produce a product.  Typically one or more persons are involved in the production of the product.  Each of these persons are paid from the investment funds and whatever they are paid is taxed.  Thus the investments are taxed.  The earnings from the investments are derived from some entity purchasing the product at a price higher than the cost incurred in producing it.  The funds used to purchase the product are also taxed because they represent someone’s or something’s compensation from some source.  Thus there are taxing mechanisms in place to capture a share of the unearned income without actually taxing it directly.  To some extent this is a regressive form of taxation because most investors are from the upper income brackets and most workers are from the lower income brackets.  However, I believe that the tax reforms proposed here compensate for that by eliminating many of the deductions that also tend to favor the upper income brackets, and the further benefit of reducing the number of taxpayers by employers rather than individuals paying the taxes justifies this approach.

Corporate taxes are the next issue.  As discussed earlier, businesses which create wealth should pay no taxes.  Those that simply transfer monies or generate no new wealth directly should be taxed at a fixed rate based on their earnings.  The tax rate should be the same as the payroll tax rate.  This prevents transferring of earnings to employees to avoid the taxes.