Joe Cobb

by Joe Cobb

One of the most desired reforms of the libertarian movement would be to abolish the Internal Revenue Service. The IRS is perhaps the most despised Federal government agency, not only because it symbolizes the hated income tax but also because it is a spy center. Every employer and anyone who pays you more than $600 per year is supposed to “rat you out” to the IRS with a 1099 form (banks and brokerages do it at $10).

Although the IRS is mostly concerned with the collection of personal and business income taxes, the agency was not created in 1913 with the 16th Amendment. It was established during the Civil War and persisted even after the war ended, although the war income tax expired after 1871. The Internal Revenue Service collects revenue from inside the county, while the older Customs Service collects tariffs at the ports of entry. Before the IRS, the Treasury department had been running a bureau since 1791 to collect Alexander Hamilton’s whisky excise tax.

When president Richard Nixon imposed wage and price controls in 1971, the enforcement agency was the IRS. In my 1982 book, “The Income Tax Must Go,” the label that seemed most to fit the agency was America’s Secret Police. Although they like to trumpet the slogan that the filing of income tax returns is voluntary, and failing to file is only a civil violation of law, the force of guns and police are not absent. When you sign a tax return, the criminal penalty for perjury is attached to your signature. The IRS publicizes its enforcement powers every spring, as April comes, to use fear as a stimulant for people to file tax returns.

Misleading Proposals to Abolish the IRS

There are several misleading proposals to abolish the IRS floating in the blogosphere. One of the most prominent is the so-called Fairtax, which would eliminate the personal income tax and replace it with a national sales tax, combined with a socialist proposal first advocated by presidential candidate George McGovern in 1972 – the “prebate” to give money to everyone in advance, so they can pay the sales tax at the grocery store and gas station.

It seems the most popular part of the national sales tax idea is that individuals would be liberated from reporting to the IRS every year. But there are a number of questions about this “magic wand” interpretation of the Fairtax.

One of the questions about a retail sales tax is whether it covers the price paid for services. Many states do not tax services, and it is always a controversy whether their sales taxes, or “retail privilege tax” as in Arizona, should extend to cover the sale of services. One service a typical family might offer would be a yard sale or a garage sale. Would the Fairtax cover those activities? Would a family putting old clothes and used toys or furniture on their driveway in the spring have to register with the (what shall we call it?) the new IRS to collect the national sales tax?

The Fairtax is riddled with gimmicks to answer this question. For example, newly constructed houses would have to pay the national sales tax, but used houses would not? Maybe the yard sales are only selling used stuff, but what about the pottery or the quilting that is sold at local arts and crafts shows? What about the kids who mow lawns in the summer? Would they have to register with the IRS to collect the national sales tax? It seems the issue about collecting the tax is something the advocates of the Fairtax have some problems to explain. A government agency would be asking questions to anyone who creates a product with new labor.

Not least among the victims of the Fairtax revenue enforcement agency would be the retail stores, particularly the small retailers. Mom and pop have a small convenience store franchise. Today they submit monthly reporting tax returns to their local state sales tax agency, in most states, and sometimes they are audited. The national retail sales tax would dramatically increase the amount of money and the importance of auditing these tax collections. With every point-of-sale in the United States becoming the starting point for collecting the trillions of Federal revenue our over-sized government needs, it is hard to believe something as big and powerful as today’s IRS would not exist. The spy agency would still be there in some form, although its victims might be mom and pop instead of wage earners.

The IRS today is also the collection agency for the Social Security Administration. One of my critics from an earlier article critical of the Fairtax idea celebrated the Social Security Administration, saying it would be the agency paying the McGovern “prebate” to citizens. It was not lost on me the emphasis on “citizens,” because many of the supporters of the Fairtax prebate idea want to stress the detail it would not be paid to non-citizens, even if they are legal residents and family members of Americans. Where does this particular concern come from? Maybe from the Ku Klux Klan inspired 1924 immigration quota law? But immigration reform is another topic.

The Only Way to Abolish the IRS

The only way to abolish the IRS for real is to abolish centralized Federal taxation. Now we are getting into serious political issues about the role of federalism in the United States Constitution. The 16th Amendment and the income tax has seriously crippled the relationship between the states and the Federal government, by giving the central government more power to collect more money, and to subdue the state governments with bribery. Barry Goldwater in his famous book, “Conscience of a Conservative” (1960), devoted more pages to the destruction of federalism under the New Deal, and years since, than he devoted to a discussion of the principles of limited government at the state and local level.

As part of the Compromise of 1787, the Founding Fathers set up the House of Representatives on a population-proportional basis. The House of Representatives was the part of Congress that wrote tax and spending laws, and the Senate was only allowed to amend those enactments. This is Article I, Section 2, of the Constitution, which is most famous for setting the tax rate on slaves at 60% of the tax rate on white people. Times have changed, of course, and now the Senate is in the driver’s seat, and deal making in conference committees is where the action happens. But the original idea of the Founding Fathers deserves a new look. There are not supposed to be any slaves any more. The census mandated every 10 years was the original basis for collecting Federal taxes, and the state legislatures were supposed to decide how to collect the money.

The proponents of a national retail sales tax are trying to get rid of the income tax with something that I think is worse, instead of trying to restore federalism and to really, really abolish the IRS. The Fairtax will not abolish some agency in the U.S. Treasury with police powers to collect taxes – if not from you, then from the Mom and Pop grocery or the neighbor boy who mows lawns. There will be no escape from the federal tax police as long as the Feds have the power to tax individuals and businesses. The constitution says “No capitation, or other direct tax” and that should be restored as the general rule. The national retail sales tax is a direct tax on Mom and Pop grocery and the neighbor boy who mows lawns.

Let us stop the deception about the Fairtax and its phony claim about abolishing the IRS. It is hardly a fair tax. It is reshuffling the chairs on the Titanic as the last great hope of mankind drifts on the waters of debt and totalitarianism.

(Published in American Breaking Point, Feb.21, 2012)

by Blake Ellis

NEW YORK (CNNMoney.com) — A growing number of states are seeking shiny new currencies made of silver and gold.

Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which are allowed to create their own currency – as long as it is easily distinguishable from U.S. dollars – the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”

To the state legislators who are proposing state-issued currencies, that means gold and silver are fair game, said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said.

The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins – which include American Gold and Silver Eagles – are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.

Since the face value of some U.S.-minted gold and silver coins – like the one-ounce, $50 American Gold Eagle coin – is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness.

Local Currencies:
In the U.S., We Don’t Trust

“A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C.

South Carolina Republican Representative Mike Pitts proposed a currency system that would allow people to use any kind of silver or gold coin – whether it’s a Philippine Peso or a South African Krugerrand – based on weight and fineness. Pitts said in the bill, which currently has 12 co-sponsors, that the state is facing “an economic crisis of severe magnitude.”

Republican representatives from Washington State followed suit in January, introducing a bill that would also allow any gold and silver coins to be considered legal tender based on metal values. Minnesota, Iowa, Georgia, Idaho and Indiana are also considering similar proposals.

Many of the bills would make it possible for residents to exchange the physical coins for goods and services, so you could use coins to buy anything from groceries to a car as long as the store chooses to accept them.

However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins – especially if they come from different parts of the globe and are of different sizes and shapes – will get tricky.

It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said.

Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals.

Before deciding on a specific form of currency, some states – including Minnesota, Tennessee, Virginia and North Carolina – are considering proposals that would first require a committee to review their alternative currency plan.

The future of U.S. currency: The states’ proposals have been gaining steam among Tea Partyers and Republicans, many of whom also endorse a nationwide return to the gold standard, which would require the U.S. dollar to be backed by gold reserves.

Tea Party “father” Ron Paul is sponsoring the “Free Competition in Currency Act,” which would allow states to introduce their own currencies, and rival Newt Gingrich is calling for a commission to look at how the country can get back to the gold standard.

But it will be the individual states that could really get the ball rolling, said Vieira. Even if several of the current proposals get killed, the introduction of so many bills at the state level is drawing national attention to the issue, he said.

Funny Money: 11 Local Currencies

Of all the state proposals circulating right now, Republican-controlled states including South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year, said American Principles Project’s Danker. If just one or two states implement an alternative currency, it could have a Domino effect, he said.

“I think we could get a couple passed in this legislative session, and that would show this is mainstream, popular and it would be a justification for more of the risk-averse states for doing this,” he said.

There are, of course, many people who think the recent push for alternative state currencies should be stopped in its tracks. David Parsley, a professor of economics and finance at Vanderbilt University, said he thinks state-issued currencies are a “terrible” idea.

“Having 50 Feds” could debase the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine,” said Parsley. “I have no idea why anyone would want to destroy something so successful – unless they actually wanted to destroy the country.” [Or just wanted to destroy the monopoly of the Federal Reserve - Joe Cobb]

Copyright by CNNMoney.com, published February 3, 2012.

by Joe Cobb

Mitt Romney released his tax returns and they showed he paid a lower income tax rate than Warren Buffet’s secretary. What a shame. And he lost the South Carolina primary election, and was challenged in the Florida primary election, as a result of this misleading “fact.”

Romney is a rich man. His wealth is mostly in financial assets, which he trades and sells. He gets the long-term capital gains flat tax rate, 15%, when he sells and has gains from the sale of his property.

Warren Buffet’s secretary sells her labor. She falls into the “progressive income tax” category. The tax on labor is not a flat tax. The more she makes, the higher her tax rates go up. If Warren Buffet paid her more for her work, her tax rates might go up to 35% under current law and up to 39% under President Clinton’s law – not to mention Social Security taxes.

Mitt Romney doesn’t sell his labor. He sells his property, which he acquired with his labor some years ago, and gets the income (gains) from its value. If he doesn’t gain, he just gets some of his money back. The key detail is the “basis” of his property. That is what he paid for it, or originally invested to obtain it. If he sells his property for more than its basis, he has a gain. If he sells for less than he originally invested to obtain it, he has a deductible loss.

The Capital Gains Tax Rate

Back in the early 1920s, the Congress discovered the income tax was unfair to people who invested and held assets for many years, and then sold them for a gain. The income tax took all of the sales price and put it into their highest tax bracket the year they sold. This was especially unfair to people who had held their assets for many years, and for whom the inflation – depreciation of the “dollar” – meant their original basis was an irrelevant valuation in a unit of money that had gotten smaller.

If you paid a silver dollar for an asset in 1901 and sold the asset for $20.00 (paper) in 1946, did you make a real gain or not? The “dollar” had been depreciated to less than half its earlier value, possibly faster than the asset’s real value had gained. In the past 45 years the “dollar” has been reduced to about one-seventh of its value in 1966.

This is called “money illusion” and most people are fooled by it. A yardstick and a scale will measure weights and measures, with honest calibration. A bank account or an asset price, are floating on the sea of uncertainty because nobody knows what a “dollar” will buy next year. The measurement of value in “dollars” is a floating exchange rate with the future.

But the basis of an asset you purchased is fixed in time by the rules of accounting. Your capital “gains” might be fictional, and the real picture is that you lost value. Too bad. The current law is against you. They will tax your imaginary “gain.”

But there is a solution: “indexing” your basis for loss of value, measured in the accounting units of money. The tax code uses indexing each year to adjust for inflation (depreciation of the dollar). The tax brackets for labor are widened and the standard deductions and personal exemptions are numerically increased, which really just keeps them the same. For example, if you earmed $10,000 in 2005 and $12,800 in 2011 you would be earning the same real income, and the income tax recognizes this with indexing.

But the U.S. Treasury opposes putting something like “indexing of basis” into the tax code. They say it would “cost too much revenue.” The government wants to confiscate the phony “gains” from inflation when people sell property. This reminds me of an imaginary conversation between Hitler and Goebbels in 1943. Imagine if one of them had said, “Yes, I know it is wrong; but we need the labor.” When the government uses inflation to confiscate the value of your property, it is just like using phony tax accounting to confiscate your life’s work.

We don’t know if Mitt Romney came out ahead or behind, because we don’t know the inflation-adjusted value of his sales, from which he got his taxable income. But he paid the legal rate, which is 15%. Of course it is smaller than what would be his tax rate if the income was from punching a time clock, like Warren Buffett’s secretary. But is it “unfair”?

Stupid Idea: Flat Capital Gains Tax *

The tax rate on capital gains should be the same as the tax rate on labor, but the way capital gains are measured should be changed.

In the beginning, 1920s, the tax writers in Congress granted capital gains a special 40% tax exclusion as a concession to the idea that holding an asset for several years is a different thing than earning the same amount of income from current labor. It was current labor income, interest and dividends that the income tax was supposed to focus on.

Capital gains were an odd-ball factor that had to be treated differently, since several years were accrued in the capital gain. The tax on income is one year at a time. Congress realized there had been inflation during World War I and the capital gains exclusion was a “fix” for the accounting problems. Whatever your gain from the sale of property, held for more than a year, might be, you would only pay 60% of the top marginal tax rate on your gains.

Today there is not any “exclusion” for capital gains, but there is a special lower tax rate of 15% for that income. As Mitt Romney’s problem illustrates, there should be tax reform to have capital gains pay the same tax rate as labor income, but there should be an adjustment for the money illusion, the accounting value of the basis of the property that is sold. It should be indexed for inflation for all the years it was held.

Since the rate of inflation, the depreciation of the “dollar,” is an uncertain and variable thing, a far better idea would be to allow owners of assets to adjust their bookkeeping. If you purchase something for $100 you should be able to compute the inflation factor on that original amount when you sell it. If you held the asset for 10 years and the dollar shrank to half its value, you should be able to claim a basis deduction from your sales price of $200, and pay tax only on the real gain.

Does the Treasury department really “need” the revenue more than Americans need justice in the tax system?

Published in American Breaking Point, Feb.6, 2012
______
* A flat tax is not stupid, it is smarter than a “progressive” tax, but it is stupid to have a different tax system for labor. It only incites envy. I advocate dividing the issue and having a single tax rate for both labor and capital gains, and then to have a decentralized Federal system for them both. See my book in this web site.