While I was flipping through the latest issue of Forbes, a particular article caught my eye. It was called "A Tax Even Libertarians Can Love" by Robert H. Frank. Given that I consider myself a libertarian, I could not pass up the chance to take a gander at such an evasive, incredulous creature.

After reading the first sentence of the article, however, I realized this guy really doesn't have a clue what libertarianism is all about. Between making incredulous assertions about libertarian beliefs and then describing a system of taxation that I can't imagine any libertarian actually supporting, it's hard to believe that this is a serious proposal.

Sales vs. income tax

Generally, I think that sales taxes are "better" than income taxes. With a sales tax, you at least can avoid paying the tax to some degree, because you always have the option of not spending a certain portion of your money. If you're hardcore, you can probably even become good at bartering and subsistence backyard gardening, which would reduce your tax burden. But it's probably impossible, or at least absurdly impractical, for most people to avoid spending money completely.

With an income tax, it's simply harder to avoid, especially because of mandatory witholding laws. Sure, there's the barter and subsistence farming solution again, but it's really not practical for most people and would probably be harder to hide from the IRS.

So, if I am forced to choose between the lesser of two evils, I would choose a sales tax over an income tax. Just like I would choose to be shot in the head instead of drowned in a toilet. (A nice, swift bullet to the brain is presumably rather painless, whereas I imagine breathing dung water is very unpleasant.)

May I interject?

I'm going to skip over all of Frank's ignorant premises about libertarianism (such as that J. S. Mill is a "revered saint" or that libertarian philosophy justifies a standing army supported through taxation). However, I feel compelled to address two of his statements before I can berate his proposed tax changes.

First up:

Many object that the income tax discourages work effort. Perhaps, but that doesn't imply it causes harm. Many parents, for example, work longer hours hoping to earn enough to buy a house in the best possible school district, only to discover that when all follow this strategy, they merely bid up housing prices in those school districts. School quality is a relative concept, and half of all students must still attend bottom-half schools. If income taxation encourages people to spend more time with friends and family, that might actually be a good thing.

This example is a red herring, citing a potentially positive outcome for some individuals to divert attention away from the actual and potential negatives. The non-agression principle that he cites specifically rejects this sort of consequentialist, benevolent paternalism. For the slight, potential benefit of some people choosing to spend more time with their friends and families (which is a choice they still would have without a tax), money is taken from every other working person, and that is definitely a harm. Furthermore, being able to spend time with friends is not necessarily a positive social outcome, especially if those friends are violent criminals who now have more time to perform their nefarious deeds.

Secondly:

But the income tax also discourages domestic savings, low levels of which helped precipitate the current economic downturn. That's harm.

This harm could be avoided by replacing the income tax with a progressive tax on spending....

This statement shows again that Frank (and Mill) get the non-aggression principle wrong. They seem to think that inflicting some harm is okay to prevent a greater potential harm. There are two problems with this line of reasoning.

Foremost, it's fallacious for someone who is inflicting harm to turn around and say that they are doing good by inflicting a (slightly) lesser harm. Inflicting any harm is bad; to do good, stop inflicting harm. In this particular case, the harm is caused by taxation – simply rearranging the taxes and payoffs does not erase the harm, it just shifts it around a bit.

Secondly, implementing a tax for the purpose of manipulating individual behavior, such as to encourage or discourage savings, is wrong. The purpose of a legitimate tax – to the extent that there exists such a thing – is to prevent some harm that truly is able to be handled only by a self-imposed monopoly (the older I get, the less I am convinced that such a harm exists). Taxes should not be used to prevent potential harms or harms that individuals have a personal responsibility to prevent or respond to themselves. Ultimately, a legitimate tax should have as little impact to human behavior as possible. This is why I prefer flat taxes over "progressive" taxes and consumption taxes over income taxes.

The problems with a progressive sales tax

Here is the proposal Frank sets forth:

Taxpayers would report their income to the Internal Revenue Service as before, and also their savings, much as we now document contributions to 401(k) accounts. A family's income minus its savings is its consumption, and that amount minus a large standard deduction--say, $30,000 a year for a family of four--would be its taxable consumption.

Rates would start low, perhaps 20%, then rise gradually with total consumption. A family that earned $60,000 and saved $10,000 would have consumption of $50,000. After subtracting the standard deduction, its taxable consumption would be $20,000, for a tax bill of $4,000, about the same as under the current income tax.

I see several problems with this approach.

What is "savings": If by savings Frank means "how much money a person has in a specific type of deposit account at a bank" then this will never work. A small business owner might have purchased inventory, which would be taxed as "consumption" on before it was sold. Individuals might own real estate, or gold bullion, or other forms of investment which are not housed in an account. Even for investments that are trackable within a financial institution, account values may fall, depending how they are handled, this would either cause someone to pay a tax on more than they consumed or give them a way to avoid paying taxes – unless the IRS came up with various complex calculations which would decimate the alleged value of this type of tax scheme.

When does the tax kick in?: Say a person is going on vacation over the end-of-year holiday season. They are travelling outside the country, and they buy a number of travelers checks so that they can avoid carrying cash and paying exhorbitant credit card foreign transaction fees. On vacation, they end up spending much less than they thought they would, so they redeposit their money into their savings account. Would they be taxed on the full amount that they withdrew? Would the amount they redeposited be considered income?

Disincentive on large, planned purchases: Frank claims his plan will encourage savings, and that might be true. But it also could have an affect on large, planned purchases by lower and middle-class people. For example, a person might have the option of buying a television now for $800 or saving for a couple months and buying a little better television for $1,000. However, that $200 difference could potentially mean bumping me up to the next tax bracket. In that case, I might end up buying the less expensive television, which is itself an economic harm. Frank might be okay with this – but why is it his, or the government's, purview to keep me from buying that slightly larger television?

A sane economic policy would do wonders

A low savings rate is certainly not a good thing. But the reality is that changing the tax code probably isn't going to make that much of a difference. It might change payoffs for some people, but the tradeoffs are unlikely to cause a major difference overall.

The bigger problem is monetary policy with regard to setting interest rates and manipulating money supply. By printing money out of thin air (inflation) the government devalues money, which some sane politicians call the "hidden tax." If you know that your money is going to be worth less in a year than it is now, there is simply no incentive to save, and getting taxed on your consumption rather than your income might actually be an incentive to spend now, since you won't have to pay your tax bill until next April – when money is less valuable anyway.

Stopping the silly money manipulations by the Fed and the Treasury will do wonders. One way to get this done is to support H.R. 1207, a bill that would require audits of the Federal Reserve. There are currently more than 130 cosponsors in the House, and more signing on every day. Call your representative to see if he or she supports the bill, and if not, ask them to do so.