Hostile Takeover: Resisting Centralized Government's Stranglehold on America

by Matt Kibbe

  Though the United States once may have been the premier location for doing business worldwide, that image has been tarnished, in large part, due to a tax code that puts American businesses at a competitive disadvantage. Rates that were low relative to other nations are no longer a draw to businesses. As of April 1, 2012, when Japanese tax cuts took effect, the United States will have the highest corporate tax rates in the developed world.39,40 Since 1960, the number of the world’s twenty largest companies headquartered in the United States has been in steep decline, from eighteen in 1960, to just eight in 1996, and only six in 2010.41

  The result of decades of meddling is a system so complex that only the most resourceful can navigate it. According to the U.S. Government Accountability Office, the lawyers have a field day with the tax code: “Tax avoidance has become such a concern that some tax experts say corporate tax departments have become ‘profit centers’ as corporations seek to take advantage of the tax laws in order to maximize shareholder value.”42 Indeed, General Electric, with its team of well-heeled lobbyists drawn from the ranks of the IRS and the congressional tax-writing committees, filed a 57,000-page tax return.43 The massive tax return is a symptom of a broken tax code that has long been a tool of political influence, with Congress setting policies based not on efficiency or fairness but “by graft and by pull.”

  The picture is no better for individual tax filers. The tax code itself has more than 693 sections applicable to individuals, and 1,501 sections applicable to businesses. The IRS has issued more than 20,000 pages of regulations, according to Congress’s Joint Committee on Taxation.44 And even the IRS may not be able to help you understand it. Numerous studies have found that, when called for advice, the IRS has provided the wrong answer up to 35 percent of the time. Filling out IRS Form 1040 takes taxpayers an estimated 2.4 billion hours.45

  Complexity does more than just increase compliance costs. It also increases the deadweight costs in the economy, when resources are diverted from productive to less-valued uses. This includes resources paid to accountants and lawyers to decipher the tax code as well as the more significant costs of lobbying and campaign spending as various interests pursue favorable changes to the tax code. Quite simply, the tax code has become an awkward, inefficient political tool for redistributing income to favored political interests. Tax credits, tax breaks, earned income credits, and deductions are used to reward or promote everything from renewable energy to child-rearing. Far from simply raising revenue, the tax code has become a favored target of lobbyists and others seeking special benefits or social goals.

  SIMPLE, LOW, FAIR, HONEST

  AT THE MOST BASIC LEVEL, A TAX CODE SHOULD BE DESIGNED TO COLLECT revenues fairly, efficiently, and in a way that does not promote corruption, encourage tax avoidance, or hamper economic growth. In short, if we are going to have an income tax, it should be a flat tax, period.

  It is time to scrap the code and replace it with a simple, fair, flat tax, which would greatly ease the burden of compliance and, with it, the need for an intrusive IRS. A flat tax would make the process of paying tax far less painful, while at the same time stimulating the economy. The average American would benefit; all individuals would be treated exactly the same as everybody else, and the average taxpayer would no longer be at the mercy of special-interest lobbyists who constantly seek to shift the tax burden to others.

  How would it work?

  Step one. Scrap the existing code.

  Step two. Establish a single, flat rate on personal and business income.

  These steps would massively shrink the current tax code, replacing hundreds of pages of tax forms with one postcard-size return. Taxpayers would calculate their income (salary and wages plus pension and retirement benefits), subtract their personal allowances based on marital status and number of dependents, and pay a flat rate on the rest. In one popular flat tax proposal, a family of four would have the first $40,000 of its income tax free, $10,000 per person; any amount above this would be taxed at 17 percent.

  Step three. Do the same thing with corporate taxes.

  These would also be simplified tremendously, reducing compliance costs and allowing businesses to invest in job growth while also lowering costs to consumers. Like the individual flat tax, with the business flat tax income would be taxed once and only once. Businesses would calculate total revenue, subtract total expenses, and pay a flat tax on that amount. Expenses would include purchases of goods and services, wages, salaries, and pensions, as well as capital expenditures such as land and buildings. The people or businesses that profited from those expenses would pay those taxes. Businesses making a profit, therefore, would pay a flat rate on those profits, while businesses with no profits or losses would pay nothing.

  Step four. File your taxes on a postcard.

  Step five. Use all the time and money you’ve saved in the full pursuit of life, liberty, and happiness.

  Under real tax reform, everyone will understand the tax code, and clever lawyers or lobbyists will have no influence over how America pays its taxes. All taxpayers would be treated equally—imagine that—and the tax code would no longer discriminate against individuals based on how they spend their income. At the same time, generous personal allowances would assist those families struggling to make ends meet, by reducing their tax burden.

  In addition, American taxpayers can reclaim the billions of hours they spend trying to comply with the current code. By eliminating the confusing and confounding layers of credits, deductions, and penalties that have been carved out by special interests over the years, taxpayers will reclaim the high ground, paying taxes simply and efficiently, without the painful, contorted maneuvers foisted on them by special interests.

  While this is great news for the taxpayer, it is bad news for the lobbyists who curry favor in Washington. The tax code is arguably responsible for the majority of lobbying activity in Washington. One measure of this activity is that members of the congressional tax-writing committees are the most heavily lobbied. According to data from the Federal Election Commission (FEC) compiled by the Center for Responsive Politics, during the 2009–2010 congressional cycle, the thirty-nine members of the House Ways and Means Committee received a total of $31,473,562 in contributions from various political action committees (PACs). During this same period, the twenty members of the Senate Finance Committee received a total of $59,285,173 in PAC contributions.46 Under a flat tax, this growth industry and its backroom deals would evaporate.

  A simple flat tax thus offers a number of advantages over the existing tax code. The fixed rate exercises a real restraint on government growth. Politicians who try to raise it would likely face universal opposition. And the flat tax is much more transparent than the current code, allowing taxpayers to keep a much closer watch over the spending proclivities of Congress.

  Under existing tax law, interest, dividend income, and capital gains are taxed at both the corporate and the individual level, meaning investors are double-taxed. With the flat tax, however, this income would no longer be taxable, ending the excessive double taxation of investment income.

  Additionally, rescinding the capital gains tax removes negative incentives for investment, since returns would be greater with lower taxes. Improved gains from investments would encourage more savings, through stocks, bonds, and bank accounts. Savings plans like IRAs would have no caps and all returns would be tax free. By encouraging savings, the flat tax would fuel economic growth, as savings prompts capital formation, which increases productivity, lowers costs, and increases wages.

  Adopting a flat tax will also boost economic growth by increasing take-home wages, which will increase incentives to work and expand economic output.47 Additionally, removing punitive taxes on capital gains and interest would promote greater investment in the economy. In other words, hard work and success would be rewarded. Economist Lawrence Kotlikoff found that within ten years, the capital stock would increase an estimated 17 percent, which would help to fuel an initial inc
rease in the national output of 4 percent.48 If GDP does grow immediately by 4 percent, and over the next ten years the capital base increases by 17 percent, this would greatly promote long-term fiscal health, as wages, profits, dividends, and consequently, incomes would increase rapidly.

  This all sounds great, you might say, but the federal government still needs to function. Won’t lowering tax rates prevent the government from providing essential services? In fact, historical data shows that lowering tax rates can increase government revenue by growing the economy. According to economist Veronique de Rugy, when President Coolidge slashed tax rates for the highest bracket of taxpayers (from 60 to 25 percent), their share of the overall tax burden actually doubled.49 Tax rate cuts by President Kennedy (one of the original supply-siders?) similarly saw revenues from the wealthy climb by 57 percent, while the Reagan tax rate cuts saw the revenues from the top 1 percent increase from 17.6 percent of the totals to 27.5 percent, according to Cato economist Dan Mitchell.50

  Why did this happen? Because freedom works. When individuals and entrepreneurs pay less in taxes, they can spend more on developing their businesses, investing in expansion, and hiring new workers. Lower rates unlock wealth and capital that otherwise sits idle and protected in tax shelters and havens. More wealth creation means more income being taxed and more government revenue. So we can have both economic growth and sufficient revenue to fund the constitutionally appropriate functions of government.

  Such a healthy, growing economy is obviously not only good in the abstract; it has real-world impact. It means more jobs, more wealth creation, and more opportunities for Americans of all backgrounds to assert their economic liberty and pursue their happiness. Indeed, economic growth is important to all Americans and provides the engine for families to live the American dream. To shackle growth with a tax code that is inefficient, complex, and unfair makes no sense.

  I STILL HAVEN’T FOUND WHAT I’M LOOKING FOR

  INCENTIVES MATTER, AND SO DO TAX SYSTEMS. AS WITH ANYTHING else, if you punish wealth creation (through the tax code), you will get less of it. If you punish the capital that drives innovation, and the wealth that rewards successful innovation, you will get less of it. Barack Obama and Warren Buffett apparently don’t buy into this economic law. But U2 certainly does. Wildly successful, the band U2 is known as much for the advocacy by its leader, Bono, on behalf of third-world debt relief as it is for its music. In 2006, the band responded with their feet to what would have amounted to a massive tax increase imposed by the government of Ireland on the group’s royalty payments (profit is such a dirty word I won’t employ it here). As you might expect, U2 picked up and moved a good portion of its business interests, reincorporating as U2 Ltd in the Netherlands. The shift, according to the band’s manager, Paul McGuinness, made economic sense. “Like any other business,” he said, “U2 operates in a tax-efficient manner.”51

  Democratic senator John Kerry of Massachusetts, who along with his wife, Teresa Heinz Kerry, is estimated to be worth a total of $1 billion,52 also seems to understand the importance of tax systems. At least when it comes to protecting his family’s fortune, that is. In 2010, the Massachusetts resident registered the new family yacht in Rhode Island, which had repealed the Boat Sales and Use tax in 1993. According to the Boston Herald, “Isabel—Kerry’s luxe, 76-foot New Zealand–built Friendship sloop,” features “an Edwardian-style, glossy varnished teak interior, two VIP main cabins, and a pilothouse fitted with a wet bar and cold wine storage.” Here’s the catch: “Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say Isabel sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000.”53

  Soon after the senator’s “tax-efficient manner” of registering his new 76-foot toy was discovered by the press, the progressive, tax-loving Democrat agreed to “voluntarily pay $500,000 to Massachusetts tax collectors on his luxury yacht, a pledge made hours after state officials had begun inquiring into whether he had attempted to evade the payment by docking the boat in Rhode Island.”54

  Senator Kerry is one of President Obama’s most reliable votes in the U.S. Senate. Bono, meanwhile, should “count himself as one of President Obama’s unofficial foreign policy advisers,” according to Politico.55 At a 2010 sit-down with the president at the White House, Obama got a download on the rock star’s vision for third-world economic development:

  A recurring theme was innovation. We agreed that there are simple technologies that need to be made more available to transform not only public health, but also agriculture, helping farmers check prices and weather patterns. While acknowledging these are difficult times for donor economies, we discussed the President’s food security initiative and agreed to encourage other countries who signed up to keep their commitment to invest $22 billion over 3 years.56

  Perhaps “tax efficiency” and the need for simple, low, fair, and honest tax systems could be added to the next briefing agenda? After all, a number of struggling nations—twenty-three at last count—have scrapped their punitive tax systems for a simple, low flat tax on income, and the results have been exactly what you might predict: more economic growth, more tax compliance, more freedom. To be sure, tax reforms do not substitute for sound money, strictly enforced property rights, and the rule of law that ensures other people won’t hurt you or take your stuff. But the simple logic of a tax system that does not try to socially engineer preferred behavior from the top down is undeniable.

  Back here in the United States, too many wealthy, well-connected people are perfectly comfortable with big, expensive government and a tax code that punishes accomplishment, because they know, when push comes to shove, that their tax lawyer will find a way to work around it, or their man in Washington will just draft a brand-new carve-out.

  The political marketplace for special provisions in the tax code is a particularly brazen example of the insider trading that takes place within the walls of the political establishment. Every year, a pitched battle over temporary, one-year tax provisions—so called “tax extenders”—becomes the most important occasion in Washington. There is no economic logic for the permanent uncertainty of not knowing, from one fiscal year to the next, what your personal or company tax treatment will be. It’s not the logic that matters here. The purpose of an annual battle over tax extenders is to sustain the symbiotic culture of members of Congress who sit on the right committee, feeding off the PAC dollars of any interest needing an extender, while the well-heeled interests most skilled in manipulating the tax-writing process feed off the political pull of the politicians whose attentions they just bought.

  Days after the president’s massive health care bill passed in 2010, one lobbyist explained to me why it was that small businesses that own tanning beds ended up, at the eleventh hour, becoming a “pay for” revenue offset for new Obamacare spending. What on earth do tanning beds have to do with the funding of government-run health care? “They didn’t show up,” she said. The message is clear: Play the game, write the checks, feed the beast, or someone who is playing the game better might just put you out of business.

  That tanning-bed tax, by the way, has so far only raised one-third of the revenue officially projected when it was proposed, as local salons shut down and customers seek out cheaper alternatives—like sunbathing.57

  How do we break the cycle? You have to show up. Government goes to those who show up. We will only succeed in scrapping the tax code and replacing it with a simple, honest system when America beats Washington and all the interests aligned against honest tax policy. Once, this was a pipe dream. But today, all the tax lobbyists lined up outside the House Ways and Means Committee or the Senate Finance Committee do not have the privileged vantage of a closed system where the only people who know what is being drafted and debated and voted on are those inside the process. We the People now have millions of freedom-loving eyeballs and an army o
f citizen reporters who get the facts first and distribute them through chosen pathways and social-media outlets online. The lowered cost of the right information at the right time takes away much of the strategic advantage once enjoyed by the swarm of interests inside the Washington Beltway.

  At some point, Thomas Jefferson believed, you have to choose “between economy and liberty, or profusion and servitude.” You have to show up. Otherwise, you might become the next “pay for” dropped into the small print of the next “shared sacrifice” tax hike legislation ostensibly targeting those among us who have been deemed, from the top down, to have already “made enough money.”

  CHAPTER 9

  A STANDARD OF VALUE

  Freedom of our currency is the fundamental issue; it is the keystone of a free society.

  —Hans Sennholz, Money and Freedom

  DR. HANS SENNHOLZ WAS THE CHAIRMAN OF THE ECONOMICS DEPARTMENT at Grove City College when I was a student there. He was an intellectual mentor and his Austrian approach to economics was an important influence on my own way of thinking. Sennholz’s thought, in turn, was shaped by the work of Ludwig von Mises, Sennholz having received his doctorate in economics under Mises at New York University soon after the Viennese expat had arrived in the United States. Both Mises and Sennholz were known for their students’ as well as their own scholarly work in economics.

  Before reading this book, you may never have heard of Sennholz or even Mises. But one of Sennholz’s most successful “students” is someone you probably do know. That’s Congressman Ron Paul, M.D., of Texas, who says that Sennholz’s ideas on money and the business cycle were “a tremendous influence.”1

  I think it’s safe to say that we would not be talking about the failures of top-down monetary policy in the United States without the uncompromising determination of Dr. Paul, and the attention he has brought to the issue of sound money through his presidential campaigns. We would not have access to revealing new information produced by the first public audit of the Fed. We would not be debating, in the mainstream media, the massive damage, from the top down, that the government’s grossly irresponsible manipulation of the dollar has wrought on our economy.