Why Pay Income Taxes

I was reading this historical summary of how income tax has evolved in the United States over the last 200 years.  What struck me was the notion of citizens not paying any income taxes (as was originally the case).  When you do the research, it’s actually viable that we could pay zero in income tax today, yet raise all the same revenues for the federal government to maintain current spending levels (although our government should spend less anyway!). 

First let’s consider the two biggest problems that burden our economy today:

  1. The Foreign Trade Deficit.  American’s send $1,000,000,000,000 (one-trillion) more overseas each year than we bring into the US. There is no funny-math here.  Certainly everyone can understand that if they spend $100,000 more than they make each year, it won’t be long before they are so far in debt that they can’t repay their loans, will go bankrupt, and will spend the rest of their days unable to get a loan due to poor credit.  Our government’s ledger has bigger numbers, but the concept is the same.  Our spending pattern is simply NOT SUSTAINABLE.
  2. Massive Federal Debt.  America has amassed a nearly $10T debt.  This is money we owe that needs to be repaid.  We currently have no plan for how to repay it.   That’s $33,000 for every man, woman and child in America.

Unfortunately, with our shopping mall culture, we think we need to buy cheap $4 dolls made in china so we can have a Merry Christmas.  We buy so many of those stupid dolls that we end up sending $250M more each year to China than they send to us.

The solution:

If we were to switch our government’s revenue basis from income tax to import tax, we could solve both of these massive economic problems.  The prices of foreign goods would go up, having a temporary impact on our standard of living (ability to buy lots of $4 dolls).  But, those dollars would be directly put back into the pockets of Americans.  This means you’d have more money to spend.  New American businesses would be built offering prices competitive with their foreign counterparts, and within a few years, you’d still have your $4 doll again for Christmas, but it would be made in America.  Plus, you wouldn’t have had to earn $6 to afford the $4 doll in the first place.

Does the math add up?

It would be silly to say this is simple; but a rough cut says yes:

Currently, we import $2.2T of goods each year (2006).  We export $1.4T. 

US Revenues from income tax in 2006 was $2.4T. 

This means that if we phased in a 200% import tax over 8 years, we could eliminate income tax and maintain federal spending.  It means the price of your $4 doll would now be $12.  Of course, you’d have to expect the increased price of foreign goods to decrease American demand for them, which would further increase their price. 

If America were to institute a policy like this, we’d have to expect other countries to react.  Of course China wouldn’t like it – they just want our money in their pockets.  Even with taxes, most of the trade with China would still occur, but the net export:import ratio would drop significantly, especially a American businesses grow. 

Is there an alternative?

There is no doubt that this change would be scary.  But, is there a choice?  We can’t continue to spend like we do.  We have to pay off our debt.  What other policy do we have available to us which can decrease our spending while simultaneously paying off our debt and putting money back into American’s pockets so that we can live?  I haven’t heard of any.

Sadly, we’re going to “spend till we die”.   We’re too chicken to do this.

Tell me what is wrong with my plan; other than that you want your $4 doll.

9 Responses to “Why Pay Income Taxes”

  1. Adrian says:

    There’s an interesting video at http://www.storyofstuff.com/ that talks about how it’s even possible that $4 items made from stuff mined all over the world and assembled on another continent is even feasible: externalized costs.

    I think the reaction of other countries would be more dramatic, and the trade imbalance wouldn’t narrow very much. But I’m not an economist, and I don’t have a better solution. On the whole, I think low barriers to trade is good because it enables more competition. The problem is the competitors have big advantages (for now), like cheap labor and relatively few regulations that prevent externalizing costs.

  2. Dennis says:

    >Certainly everyone can understand that if they spend $100,000 more than they make each year, it won’t be long before they are so far in debt that they can’t repay their loans, will go bankrupt, and will spend the rest of their days unable to get a loan due to poor credit.

    I think you overestimate people’s ability to grok debt.

  3. mike says:

    Adrian – you may well be right that the balance would not shift much. But that would be fine w/ me – neither you nor I would be paying income tax anymore.

    Dennis – Yes, that’s probably true.

    Mark Cuban also had an interesting note this week about taxes. He said just tax luxury items and the insanely rich. Can’t disagree with that!

  4. >>Mark Cuban also had an interesting note this week about taxes. He said just tax luxury items and the insanely rich. Can’t disagree with that!

    We did that in the UK in the seventies, it didn’t work.

  5. Oliver Townshend says:

    Go and read Adam Smith. It only came out over 200 years ago, so it may have been released in the US, and it explains why trade restraints are bad for a nation.

    Balancing the budget isn’t too hard. It just requires the Executive to have willpower. You had it in the 90s. Get it back.

  6. Ralthor says:

    The main problem with that is going to be the WTO and NAFTA and all the other trade agreements we have.

    If the government actually stopped going into debt and focused on repaying it, a combination of the falling dollar and inflation would make it easier and easier (not to mention the more we pay the less interest we are paying).

    In the end the government reflects its people (or the people reflect the government) buy as much as you can and don’t worry about it until you can’t afford the interest any more (at which point don’t cut spending, you just have to find creative ways to get more money).

  7. suresh says:

    The catch is that the importing Americans will lose. And they own the politicians. So ain’t gonna happen.

  8. mike says:

    Good points all; tariffs, as proposed here, are definitely a difficult thing to do and there are historical examples to prove it. I disagree with those that dismiss them out of hand based on historical events; but we shouldn’t ignore history either.

    Ultimately, this solution (import taxes) is not my favorite. My favorite is just to stop spending money. Unfortunately, our political system does not encourage politicians to stop spending; in fact, it does the opposite.

    Bummer for our kids!

  9. Herschel says:

    Tariffs on goods and services are paid for by CONSUMERS, period.

    The answer is what you said Mike, “… stop spending money.”

    And don’t be bummed out for our kids as I think all this will crash around us like ‘29 in less than 20 years. So be prepared to live with your kids and 10 other of your closest relatives.

    But, then, maybe this country (USA) needs a good dose of medicine to learn how to financially run a country correctly.

    Sinners always say they will find Jesus tomorrow and politicians, well, there is no tomorrow for them.

Leave a Reply

You must be logged in to post a comment.