Direct Taxation vs. Indirect Taxation
Today’s income tax is a form of direct taxation, which is to say the government levies the tax directly on individuals and businesses. Most other forms of taxation, specifically sales taxes and excise taxes, are indirect, because they typically tax an activity or a particular item, such as cigarettes or gasoline, as opposed to taxing an individual.
Direct taxation grates on the nerves of the citizenry because it smacks of theft. It is legal, to be sure, and one can make the case that it is legal only because our elected officials made it so, and thus we had a hand in its passage. However, for those of us living today, that is hardly the case. The income tax has been around since before virtually any of us were born, much less able to vote. And in its inception, the income tax barely affected anyone. In addition, the threat of audit and prosecution further enforces the feeling of extortion, to great effect. The IRS enjoys a 70% or so compliance rate in great part due to the fear of prosecution and the very harsh financial and criminal penalties it can enforce.
Sales taxes, on the other hand, don’t smack of theft, even high sales taxes. They are still annoying, but we understand why they are there, and we know that we are agreeing to pay them by purchasing the item that is being taxed. Sales taxes are levied upon a business activity, not upon individuals or businesses directly. Sales taxes do not have the highwayman-like quality of income taxes in that no one demands a certain amount of sales tax from you each year. You determine how much you buy. You control how you spend your money. And short of attempting to defraud someone or conspiring to avoid taxes, there is no legal penalty for not paying.
Maintaining an income tax or any direct tax on citizens has the effect of instituting an organization of government police whose charge is to constantly review your bank accounts and your finances, leaving you alone only so long as you keep paying. You are in effect, paying the government for protection from your government.
My point in discussing this is to, for a moment, bring a philosophical perspective to the argument for the FairTax. We tend to debate about economics a lot in forums such as these. We tend to discuss a lot about who ‘wins’ and ‘loses’ financially. But I think at the core of the FairTax bill is the simple notion that indirect taxation (sales taxes) should be preferable to direct taxation on principle alone, regardless of whether it is easier, or whether it creates more or less revenue, or what have you. It just so happens that the FairTax plan is easier, and revenue-neutral, and all of that good stuff.
What do you think?