Book Review: Lawrence A. Hunter's "Taxed To Death"

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I was first introduced to Larry Hunter back in 2008 by a mutual friend. It was amid the banking implosion, and Larry and I were somewhat alone in saying the bailouts were a terrible idea that would rob the economy of a natural recovery.

Since then I've at times served as Hunter's editor, and have learned a lot from him. Most important there has been his energetic support for scrapping the tax code in favor of a simple consumption tax.

The latter always made sense to me given my belief that an income tax is a negative price placed on work. And since all economic advancement is a function of savings, the best kind of tax is one on consumption so that neither work nor saving are penalized.

Happily, Hunter several years ago alerted me to what is arguably an even better feature of the consumption tax: it's the only way we citizens can limit how much we hand over to the federal government each year. This is hugely important. If we can limit the federal government's intake it not only means less in the way of economy-sapping government spending, but it also means that it will be harder for the feds to run up deficits owing to our power to limit what we send them. It says here that worry about deficits ignores the true problem which is spending, but for those kept up at night about deficits, a consumption tax is arguably the answer for them.

Thankfully for readers, Hunter has written a very interesting new book, Taxed to Death: A Concerned Citizen's Guide to How the Income Tax & IRS Harm Everyone in America. For those concerned about taxes and the growing power of the IRS, this is a book for them.

Hunter does not pull punches. He begins by saying that "Income taxes are political weapons of mass destruction used by governments against their own people," and that "During the past century, the IRS has grown into a vicious, hydra-headed monster, a bureaucratic despot, completely out of control and in principle uncontrollable." Hunter doesn't shy away from being up front, and he has a point.

Indeed, how odd that a country founded on great skepticism about politicians such that its founders penned a founding document that is a monument to skepticism now has an unelected IRS bureaucracy that the citizenry must cower before each year. Something's wrong with that, and something's seriously wrong when we're forced to hand over so much of our earnings each year to the very political class that was supposed to be limited in its activities by the Constitution. Of course as Hunter so entertainingly writes, "politicians and judges read the Constitution the way a sinner reads the Bible: constantly searching for loopholes."

Hunter argues early that the situation with the IRS and the tax code is going to get worse, that "The revelations about the IRS's most recent illegal unconstitutional targeting of individuals, non-profit organizations and businesses for their political, religious and ideological beliefs, is just the tip of the iceberg." Figure what's happened is bad enough. As is we have to prove our income each year, and then it's arguable that IRS targeting of Tea Party and other political entities altered the course of history thanks to the inability of groups to influence the 2012 elections, not to mention the passage and rollout of Obamacare itself.

Still, we are ultimately talking about the federal government here. Not excusing for even a second its meddling ways, it would be interesting if Hunter had further covered the arguable truth that a federal government eager to meddle in everything meddles in nothing. These aren't the most competent of people, by definition.

That's why Hunter at times strikes as too negative. The IRS is undeniably a major problem, but when Hunter argues that it is or will create a "welfare-warfare superstructure of collectivism," I think he perhaps gives these salary-takers too much credit. They lack the skill to create what Hunter presumes, and no doubt they lack the ambition.

Considering Hunter's point that an "income tax is simply not fit for a free and prosperous people," he's 100% right. Still, is the IRS the problem, or is it the political class itself? Hunter correctly writes that "IRS abuse is in the nature of the beast, part and parcel of the income tax and largely uncorrelated to which political party or group of bureaucrats happens to be riding the beast at any given moment." To reform the IRS is to miss the point. It's the tax code that needs to be fixed, and quite realistically abolished. A Congress that writes the tax code is the problem.

Hunter writes that the U.S. "has suffered under the curse of the income tax since 1913, and it has taken an enormous toll in lost economic output and prosperity." That's what is most bothersome. Though we live in a staggeringly rich country, the horrifying "unseen" is how much wealthier we would be, how much higher our living standards would be, how much more advanced our healthcare would be, if the federal government hadn't been penalizing work for 100 years, not to mention pouring gasoline on the slower growth fire through economy-sapping spending.

Hunter notes that the top 1 percent of earners pay 37 percent of total income tax revenue, but before readers assume Hunter's dislike of the income tax is rooted in throwing a bone to the 1 percent, they should read on. Hunter writes that "it is precisely the people with too little income to tax who suffer the most." Absolutely.

There are no companies, no start-ups and no jobs without investment first. The rich, by definition, have the most to invest. So when the tax code penalizes their achievement, or singles them out for having had the temerity to be born rich, those who ultimately suffer are those who don't earn a lot of money, and who weren't born rich precisely because there's reduced investment in the companies of tomorrow that will improve our lives and employ us.

If you like taxation and government spending you must think that John Boehner, Nancy Pelosi, Mitch McConnell, and Harry Reid are better at allocating capital than Warren Buffett, Paul Tudor Jones, Jeff Bezos, and the late Steve Jobs. Think about that for a moment. Hunter's argument isn't partisan, rather it's rooted in common sense. Politicians are the individuals least capable of allocating capital.

Where there's disagreement is in Hunter's assertion that "the more efforts are made to redistribute income, the more inequality increases." To be clear, forced wealth redistribution is surely abhorrent, but implicit in Hunter's point is that inequality is something unfortunate. In truth, as inequality rises, lifestyle inequality shrinks substantially. The Forbes 400 is a monument to people who've grown rich through turning the former baubles of the rich into goods we all enjoy. Assuming the federal government were to get out of the way, even more capital would be allocated to the "vital few." Inequality would grow for sure, but this would occur alongside skyrocketing living standards for us all. Something tells me Hunter agrees here.

Where we most definitely agree is that the Fed's program of quantitative easing is a major indictment of the economics profession itself, and an economic retardant for it in Hunter's skillful words "cleansing private banks' balance sheets and taking worthless or underperforming assets onto the Fed's balance sheet like some kind of financial sin eater." The Fed defends its actions as necessary to save the economy from a severe recession, but per Hunter's point, the Fed fails to understand that a recession is exactly what we need so that the economy can be cleansed of all the errors previously made. In vainly trying to help us, the Fed is in fact robbing us of an economic recovery.

Where we perhaps disagree when it comes to the Fed is that its creation in 1913 dissolved "the finely crafted automatic constitutional constraint on the government's ability to borrow money." This is a popular view, but lest we forget, the Treasuries that represent U.S. debt pay out dollars, and while the Fed's role (or lack thereof) in the falling dollar since 1913 is much debated, it can at the very least be said that the dollar has not been very healthy for stretches of time since 1913. That in mind, logic dictates that if we had maintained a gold-defined dollar these last 100 years that the federal government's ability to borrow would in fact be much greater. Again, Treasuries pay out dollars, if we had a stable dollar the U.S. economy would be in much better shape, and as rich countries are most able to borrow, Fed actions that have robbed us of wealth have also blunted the ability of the federal government to borrow. To reduce spending we must reform Congress, after which the Fed is a separate issue.

Hunter seems to agree, that all the deficit worrying really misses the point. He writes that ultimately "it is the amount of private resources extracted from the private sector and spent through the public sector that generates the ultimate burden on society." Deficits are just finance, and it's unrealistic to think they would fall absent the Fed. Logic dictates that our economy would be much better off without the Fed, and with a better economy, the ability of the political class to borrow against it would be even greater.

Considering the nominal cost of tax compliance. Hunter points to an estimate of 6.1 billion hours annually, at a cost of $377 billion as of 2008. Of course, as Hunter knows well, this doesn't come close to telling the real story. Indeed, what's unknown is how much bigger the economy would be if those annual hours and spending had been annually directed toward real private production over compliance with a tax code that is a monument to social engineering. It's useful then to repeat an earlier point that the seen is what a rich country we are, but the unseen is the exponentially greater wealth we'd all be enjoying absent the tax code and compliance with same.

Hunter's solution to all of this is not a flat tax. Indeed, such a tax would in his words still "require a powerful tax collector with direct access to individuals' pocketbooks, their bank accounts, and their personal information." So true, plus it could also easily be meddled with on the way to higher rates as he points out.

I would add to Hunter's problems with a flat tax that in a sense, it might be too successful. Americans are wildly productive, and because they are, even a flat tax of 10% would involve the voluntary handoff of trillions of dollars each year to the feds.

Hunter's previously alluded to solution is a consumption tax whereby the feds would have no clue what we earn, not to mention our ability to limit what we hand over. If we're having bad years such that we're buying less, so will the federal government suffer. And if we choose to starve them some years by living abroad, that's fine too.

What I wish Hunter had talked about more is the possibility that a consumption tax would similarly become a lobbyist's dream. Indeed, it's easy to assume that high schools and colleges would seek exemption since the "children are our future," grocery stores might win exemption by using imagery of starving children, the airlines might point to their frequent visits to bankruptcy court as a reason to exempt them...Hunter no doubt knows all of this, and it's probably true that he would say any good policy needs to be guarded from errant politicians.

The one major area of disagreement concerns a passage that some readers may well enjoy. About midway through his excellent book Hunter writes that "the welfare state redistributes more and more of less and less until driven to its ultimate lunacy, it leaves everyone sharing equally in the misery it creates." That doesn't ring true. The reality is that Americans love success too much, and many would work long hours no matter the tax rate. This isn't me defending the horrid tax code and the rise of the welfare state as much as it's me saying that Americans are far too enterprising to ever share equally in misery.

That's what's so interesting about the tax debate in the U.S. right now. Like Hunter I believe that incentives matter, and that liberty matters even more. In that case, like Hunter I think it's essential to scrap the tax code with liberty in mind, not to mention the growth that it would bring.

Still, what I can't get out of my head is all the success that continues to take place in high tax New York and California. This country needs a tax revolt, and needs it badly because our tax code is an affront to free peoples. The irony might be a tax revolt that happily takes place here, in a country full of entrepreneurial people least vulnerable to taxation.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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