Indirect Taxes and Direct Taxes

Indirect Taxes and Direct Taxes

Thomas Allen

In Out of Step: The Autobiography of an Individualist (New York: The Devin-Adair Company, 1962), Frank Chodorov gives a good comparison of indirect taxation with direct taxation, pages 219–227. A summary of that comparison follows.

Taxes fall into two categories: indirect taxes and direct taxes. Indirect taxes are levied on goods and services before they reach the consumer. Examples of indirect taxes are sales taxes, excise taxes, value-added taxes, and tariffs. Direct taxes are mostly levied on the accumulation of wealth. Examples of direct taxes are property taxes, income taxes, social security taxes, inheritance taxes, and poll taxes.

Chodorov describes indirect taxation as “a permission-to-live price.” Numerous indirect taxes are hidden in the price of every good and service that is for sale. People can only avoid these taxes by refusing to buy and, thus, depriving themselves of the meaning of life and even life itself. Consequently, they pay the tax to survive and to give their life meaning. “The inevitability of this charge on existence is expressed in the popular association of death and taxes.” For most products, taxation is the largest single item in the cost.

Indirect taxes impact the poor much more than the rich. Because there are more low-income people than high-income people, low-income people consume more overall and, therefore, pay a greater share of the indirect taxes.

The state prefers indirect taxes to direct taxes because they are usually hidden. “It is taking, so to speak, while the victim is not looking.” About people who justify taxation as moral, Chodorov writes, “Those who strain themselves to give taxation a moral character are under obligation to explain the State’s preoccupation with hiding taxes in the price of goods. Is there a confession of guilt in that?”

Unlike indirect taxes, the taxpayer cannot pass direct taxes onto others. Direct taxation taxes people on what they have instead of something that they buy. It taxes people “on the proceeds of enterprise or the returns from services already rendered, not on anticipated revenue.” Consequently, the taxpayer has no way of shifting the burden of a direct tax.

The envious have always supported direct taxes because they believe the “soak-the-rich propaganda.” Also, among the adherents of direct taxation are the promoters of democracy; they see it, along with universal suffrage, as necessary to the achievement of democracy.

As history has shown, the greed of the state does not stop with taxing the rich. Its direct taxation spreads to cover the lowest-paid workers. Because in the aggregate, the poor generally have more to be taken than the rich; consequently, the state soon goes after the poor. As with indirect taxes, low-income people bear a much higher burden under direct taxation than do the rich. A small tax on the income of a low-income earner causes more hardship than a larger tax on a high-income earner.

Because direct taxes directly deny “the sanctity of private property,” they are more vicious than indirect taxes. “By its very surreptition the indirect tax is a back-handed recognition of the right of the individual to his earnings.” Thus, the state covertly takes what it needs, “but it does not have the temerity to question the right of the owner to his goods.” However, with direct taxation, the state claims, without embarrassment or shame, the right to all property. Thus, with direct taxation, “private ownership becomes a temporary and revocable stewardship.” Direct taxation leads to the Marxist concept of state supremacy replacing the Jeffersonian ideal of inalienable rights.

About taxation, Chodorov writes:

Taxes of all kinds discourage production. Man works to satisfy his desires, not to support the State. When the results of his labors are taken from him, whether by brigands or organized society, his inclination is to limit his production to the amount he can keep and enjoy.

Replacing the Federal Income Tax with a National Sales Tax
Some tax reformers are proposing to replace the federal income tax with a national sales tax. Typically, they propose a rate of 20-some percent to make the revenue from the sales tax to be approximately equal to that from the income tax. Further, they provide an out for war, national emergencies, etc. Congress can use these outs to raise the tax rate, apparently without limit. Most of these proposals do not prevent Congress from reimposing the income tax other than the integrity of Congress.

These proposals are highly flawed and do not improve the tax situation. Worst, most fail to prevent the return of the income tax. Consequently, Americans end up paying the new sales tax along with an income tax.

If a sales tax is to replace the income tax, it needs to be done by a constitutional amendment, which includes repealing the income tax amendment. Moreover, the repeal amendment or the sales tax amendment should specifically prohibit an income tax and any other similar taxes. Also, the tax amendment should cap the sales tax at a low rate, say 2 percent. It should have no outs; Congress could not exceed the cap even because of war or a national emergency. Another provision should prohibit the federal government from borrowing so that it cannot avoid the tax restrictions with the inflation tax. (This provision must also prevent the issuance of government notes, such as US notes, which is borrowing with noninterest paying loans.)

How could the federal government survive under such revenue restraint? It would have to eliminate all unconstitutional programs that it is currently administrating. This would include the elimination of nearly all the programs that the Departments of Agriculture, Commerce, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, and Transportation administer. It would also require ending the undeclared wars that the United States are involved in and ending the American Empire.

Copyright © 2020 by Thomas Coley Allen.

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