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The Confederate Lawyer
October 21, 2008
Can Taxes Ever Be Fair?
by Charles G. Mills
The Framers of our Constitution gave Congress extensive power to levy taxes. Realizing, however, that the power to tax is the power to tax unfairly, they included two provisions in the new Constitution to limit the possible unfairness of the taxes imposed.
Article I, Section 2, and Article I, Section 9 provide that all direct taxes must be apportioned among the states according to their population. Article I, Section 8, provides that all duties, imposts, and excises must be uniform throughout the United States.
Protective Tariffs
Congress soon found a way to use its taxing power unfairly, despite the intent of the Framers, by imposing protective tariffs on the importation of manufactured goods.
Much has been written about how protective tariffs hurt the economy and the average citizens of countries imposing them, but the internal unfairness of such tariffs within the country is less well understood. A tariff on a particular product allows the manufacturer to raise the prices because of the restrictions on foreign competition. This may be highly beneficial to the neighborhood or city where the product is manufactured, but the higher prices harm the areas of the country where the product is bought and consumed. The tariffs cause a transfer of wealth from the consuming region into the manufacturing region.
Congress imposed high tariffs on manufactured goods such as farm machinery, carriages, and firearms. This was a burden on the agricultural South that benefited the manufacturing Northeast. This culminated in the “Tariff of Abominations” of 1828 that almost caused the Civil War to erupt prematurely.
Fortunately, today we have so many “most favored nation” treaties that protective tariffs do not play a large role in our economy.
Estate Taxes
Congress first passed an estate tax law in 1797, which it repealed in 1802; passed a second estate tax law in 1862, which it repealed in 1870; and passed a third estate tax law in 1898, which it repealed in 1902. These did not resemble the modern estate tax. The first two were not even based on the size of the estate but were simply a uniform tax on the privilege of probating a will.The modern estate tax was passed in 1916 and has been with us ever since. This tax is based on simple envy of the wealthy. The wealthy have always found ways to minimize its effect on them, and Congress has responded by making it more complex to close the loopholes. Today the number of estates required to file estate tax returns far exceeds the number of estates actually required to pay a tax. The preparation of these returns, which run to dozens of pages, costs the estates about one percent of their value in useless attorney and accountant fees. The government receives no actual tax payments in most of these estates.
Whenever you hear about “taxing the rich,” you can be sure someone is talking about an unfair and complicated tax.
Income Taxes
In 1913, the Constitution was amended to exempt income taxes from the requirements of fairness in Article I. The result is the complex law we have today, too long for anyone but a dedicated professional to begin to understand. Its complexity does, however, benefit tax lawyers, accountants, and employees of the Internal Revenue System.An income tax that was “flat” or at the same rate for everybody would be fairer, but a lot of the unfairness of the income tax comes from the very idea of taxing income. In order to tax income, one must define income. This is not as easy as it sounds. A gold mine owner and an oil well owner both sell something they extract from their property, and both lose some of the value of the property as this depletion goes on. Would it really be fair to simply apply identical formulae to both? If so, why not apply the same formula to a farmer who impoverishes his soil over the years? Anyone who has run a small business knows how complicated it is to separate the expenses of the business from the benefits to the owner.
Can We Do Better?
It would be utopian to think that we could ever have a completely fair tax system, but we can come a lot closer than we do.Sales taxes are pretty fair, except in extremely small purchases. They are collected stupidly in that they require lots of pennies and would be better collected in increments of 10 cents. They are hard to cheat on and require a lot less auditing and accounting work. They can be unfair, however, if they are not uniform but are, instead, higher on products in disfavor at the moment, as has sometimes happened, for example, in the cases of playing cards, alcohol, perfume, tobacco, and automatic firearms
User fees are quite fair. There is nothing wrong with charging the actual cost of issuing a passport to the holder, or charging a reasonable fee to use as national park. Gasoline taxes were once like a user fee, with the entire tax going to road construction and maintenance. This changed, however, when the politicians decided that some of the gasoline tax should go to building mass transit systems.
We probably will never have much approximation to fairness in our taxes because envy can attract votes and even more because tax-return preparers need complexity in tax laws to keep their jobs — and they know how to influence Congress.
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The Confederate Lawyer column by Charles G. Mills is copyright © 2008 by the Fitzgerald Griffin Foundation, www.fgfBooks.com. All rights reserved.
Charles G. Mills is the Judge Advocate or general counsel for the New York State American Legion. He has forty years of experience in many trial and appellate courts and has published several articles about the law.
See his biographical sketch and additional columns here.
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