Taxes, we are told, have been around almost as long as death. Even the most primitive tribe typically has some form of “taxation,” such as the expectation to take part in community defense. We generally don’t see taxes as something that has evolved over the years, like technology. However, many of our current taxation methods did not exist a century ago. Like the radio and the transistor, they are technologies of the 20th century. Taxation has recently been an area of rapid innovation. I say this to instill hope and expectation that the tax systems of the future will be different and better than those of the past.
You may have noticed that many of our facilities have coughed up blood recently. This was predicted a few years ago in The Fourth Turning (1997) by William Strauss and Neil Howe, which recently sold out on Amazon.com. I easily embraced this idea, which is one reason I was inspired to write The Magic Formula (2019). I felt we needed a book for a time of crisis and also a blueprint for what would come after that. You now need a blueprint so that you know what to build when the era of destruction is over and it is time to build again.
United States, Tax Revenue / GDP, 1792-2017
When the constitution was ratified in 1789, taxation was very primitive. Most taxes in Britain and America were indirect taxes – mainly excise duties on individual products and duties on individual products. This soon leads to thousands and thousands of taxes and all the problems that come with them. The amounts that could effectively be raised as a percentage of GDP were also not very high. There had been some experimentation with general sales tax – a tax on every sale. But a single product or the things that went into the product are taxed over and over again when it is put on the market. This also applied to the sale of assets. Even at what seemed like a low rate, it soon got terribly oppressive. These “sales taxes” were associated with the decline of the Muslim caliphates in the 10th century and the Spanish Empire in the 16th century. The Netherlands declared independence from Spain in 1581 in order to partially avoid this tax.
Direct taxes – taxes on people instead of things – have been a sign of tyranny since Greek and Roman times. A direct tax common throughout history has been a simple per capita tax. Everyone pays a flat rate. The problem is that any type of tax of this type will soon hit large numbers of people who simply cannot pay them. How many Americans (without the help of consumer debt) have not been able to pay a tax of $ 2,000 per person to date? What if you don’t pay? Are you throwing them in jail? Often a person’s house, land, tools, and livestock – the things they needed to make a living – were confiscated and sold, rendering them destitute (and thus unable to pay the tax ). Sometimes people sold their children into slavery. Direct taxes like this were involved in the French Revolution of 1789.
Although there were forerunners, the first modern income tax arose in Great Britain in 1799 during the long wars with France. It was very similar to today’s income tax, with multiple rates and a “tax return” very similar to ours. The peak rate was 10%. It generated huge revenue, and that revenue-generating success was a key element in enabling Britain to defeat France in the Napoleonic Wars. Nonetheless, this tax was seen as such a violation of Britain’s freedom of liberty that it was abolished in 1816 immediately after the war ended.
In 1842 the income tax reappeared, but under a different guise. It was similar to today’s wage tax. For most people there was no “tax return”. In fact, it was an indirect labor tax. Entrepreneurs paid a similar tax. There was only one sentence – a “single” tax. That was very successful. The revenue it generated enabled the UK to remove hundreds of tariffs, including the repeal of the Corn Acts in 1846, which was embroiled in a famine in Ireland. Finally, there was a revenue solution that, up to that point, did not cause direct tax disasters and did not have the massive overcomplication and pathetic inefficiency of the system of hundreds of excise taxes and duties.
Unfortunately, the income tax combined with the Marxist movements exerting influence in the 19th century resulted in a monstrous new creature, the progressive income tax. This began in the UK in 1910 and in the US in 1913. With the onset of World War I, top tax rates soon rose to over 40% and have not fallen below much since then. This was the idea of having different rates for different people as part of a program of “redistribution” or other forms of social engineering. Income taxes soon got complicated as hell, leaving us with a tax code of thousands of pages today. We have also created endless political contradiction and chronic economic underperformance.
It soon turned out that these income taxes weren’t really enough to generate that much income. Rich people can pay a lot, but there really aren’t that many of them. In terms of revenue / GDP, it doesn’t matter much. And when interest rates were well above 20%, there were all sorts of negative economic effects.
The next advance was the common retail sales tax introduced in the 1930s. This was a huge leap forward compared to general sales tax (on all transactions) and also compared to the thousands of excise taxes and duties. Retail sales tax was only levied on finished goods and the sale of assets was excluded. In 1936 the United States introduced wage tax – as already mentioned, similar to the British income tax of the 19th century, but also very different from today’s tiered income tax. This was a unified (uniform) flat tax, there was no tax return and in more than 70 years there has been no complexization. This tax now generates around 35% of all federal tax revenue.
These taxes could generate large revenues, with low tax rates and not too much economic opposition. This made it possible to largely eliminate the primitive consumption tax and customs system. Tariffs are now viewed as a means of managing trade relationships rather than a basis for tax revenue.
The next advance was VAT, which was first introduced in France in 1958. If you look at the history of taxation, it’s amazing that it took us 6,000 years to figure that out. While VAT is usually viewed as a variant of VAT, it is remarkably similar to today’s “flat income tax” proposals. Since you need to sell something in order to generate income, it makes sense. The applicable VAT takes a position within the entire trading process. Flat-rate income taxes, wage taxes, sales taxes, and retail sales taxes are usually variants of the same thing – a single flat-rate business tax.
Today France is known for its extremely high taxes. However, French income tax does not generate more income than that of the US. It probably can’t. The French government does not get its additional income from “taxing the rich”. It comes from wage and sales tax – broad, flat, “uniform” taxes. If France were to completely cut its income tax, it would still have very high taxes and very high tax revenues – probably more than 35% of GDP – that could fund very high levels of government services. But the economy would do much better and you would remove all the hassles, disputes, and the complexities of income tax.
This is actually the principle expressed in Article 9 of the French Constitution of 1789:
Personal or real financial privileges in paying taxes are forever abolished. Taxes are levied on all citizens and on all goods in the same way and in the same form. There are plans to consider according to which taxes are to be paid by all on a pro rata basis.
In those days, the aristocracy enjoyed “financial privileges” (low or no taxes), which is often the case when the aristocrats have political power, as in the ancien regime. Today, those with political power are the democratic majority. So it’s no wonder that around 47% of Americans don’t pay any income tax. Any exemption or deduction that taints the Income Tax Act is a “financial privilege” for an interest group. In both cases, the solution then and now was: “Taxes should be paid by everyone on a pro-rata basis” – the principle of uniformity. This was enshrined in the constitution (also in 1789) as a “uniformity clause” in Article I, Section 8.
In practice this would mean that a wage tax on employees should be matched with a “flat income tax” on companies at the same rate. This was roughly the successful nineteenth century British system.
It gets a lot easier when the government’s spending side is smaller. Then you could have flat taxes (one general tax rate for all people in all situations) and low taxes too. This could take the form of a provision system for old age pensions and also for the health care system, as it is used in Singapore today. There is a backup welfare system in place if this proves insufficient, but even so, this system has allowed Singapore to keep its revenue / GDP ratio at 14.2%. You could probably finance this with a 20% sales tax and no other taxes – no income, wage or property taxes. Or you could split it up, like Herman Cain’s “9-9-9 Plan”. Economist Lawrence Lindsey, who drafted President George Bush’s 2001 tax cut plan, said his ideal federal tax system was a simple value-added tax.
The main reason we have an income tax today is because in the days before modern retail, wage and sales taxes were invented, we needed a way to generate income during wartime. This was combined with Marxist ideas that have since been discredited. But now we have these other alternatives so we don’t need income tax anymore. I think we’ll have a chance to get rid of it soon.
The magic formula is: low taxes, stable money. The “Stable Money” part is a gold standard. I think people are now starting to understand why stable money was not achieved any other way. Any human-run system eventually succumbs to human influences known as “politics”. In the Reagan era, low taxes just meant the existing system of lower tax rates. However, our understanding of control technology has evolved significantly since the 1980s. We can do a lot better now.