In fact, 47 to 51 percent of people who file income tax returns do not even pay income tax, according to the Tax Foundation in Washington, D.C. They file tax returns to get the generous Earned Income Tax Credit (EITC) and the Child Tax credit for households with children. A worker with three children and an income of $12,750 can get a refund of $8,751 from these credits, and without any payroll withholding.

In essence, the income tax has become one of America’s largest welfare programs.

Bribed with Our Own Money

The payroll withholding system was created in 1942 to make working families pay for the war against Japan and Germany. Milton and Rose Friedman’s autobiography has an excellent story about how “pay as you go” was set up to make sure workers paid the higher war taxes.

Before the war, only wealthy people had to file tax returns, because most people’s incomes were less than their personal exemptions. But Congress and the War Department needed more money, so tax collections expanded. Collecting the money in advance, with payroll withholding, was a quick solution.

Today, since most people live on narrow budget margins, with little surplus from week to week, it can be stressful to owe the IRS a balance due on April 17. To avoid that stress, your paycheck tax withholding can be a bit larger each payday, and the surplus is returned in the form of a tax refund the following February. Some people use this refund as a form of a savings account, by splurging on something they normally wouldn’t with the unexpected money.

However, what many do not realize is that the payroll withholding tables published by the IRS for employers are actually tilted to give workers a refund. So, if a family of four chose four allowances on the W-4 form, which employers use, the formula the payroll department uses will guarantee a surplus, and thus, a refund next February.

This means that the withholding system bribes taxpayers with their own money to file tax forms on time, even early, to get their money back.

The EITC and the Child Tax Credit cause a mania among the lowest income Americans, who come to H&R Block and other tax companies as soon as their W-2 forms are released – because the refunds that include those tax credits are very generous.

The FairTax “Prebate” Is Worse

You might have heard of the FairTax, as its popularity was expanded during the brief presidential campaign of Herman Cain in the Republican debates, when he proposed his “9-9-9” version. Radio talk show host Neal Boortz also wrote on the subject in books that were on the New York Times best-seller list for several months in 2005 and 2008. And there has been legislation introduced in the Senate and House of Representatives to enact such a national sales tax—and many Congressmen are co-sponsors. It is a cheap thing for a member of Congress to co-sponsor such a bill, since it is very unlikely to pass. Boortz is based in Georgia, and the legislation’s chief sponsors are from that state.

FairTax.org and popular writers like Neal Boortz have promoted the FairTax as a way to get rid of the IRS and liberate Americans from the oppressive tyranny of government tax collections. However, take a closer look and you’ll find it is almost exactly the opposite kind of scheme than it claims to be.

If enacted, the FairTax would require every American to be registered with the IRS and keep a current address and bank account information on file with the government to receive regular tax “prebates.”

The FairTax is a national retail sales tax. And a national retail sales tax is a flat tax. Sales tax rates, which most states impose, are flat rates on all transactions subject to the tax. Some states tax goods and services; other states only tax goods sold at retail and exempt wholesale and intermediate products. A value-added tax is a sales tax that does not exempt intermediate products, but allows a rebate on subsequent sales for producers, so the tax is not compounded over many stages of production.

The FairTax is supposed to be a tax only on final sales, although it is sometimes not clear when a sale is “final” and not part of a continuing series of production steps.

The problem with a flat tax, in today’s political society, is that most people believe “the rich” should pay more and “the poor” should get tax credits and exemptions, particularly if they have children.

But a flat tax is the same rate for everyone.

Another problem with a retail sales tax is that it only taxes items purchased for consumption. It does not tax savings. Higher income families have savings for retirement and college funds, while lower income families are always in debt. The sales tax would exempt savings and collect taxes even when a family borrows money to buy a new TV or repair an old car.

So if you believe a family’s “income” is the proper way to think about tax rates, a sales tax is “regressive.”

The solution proposed by advocates of the FairTax is a rebate. They call it a “prebate” because the plan would give a rebate in advance to every American family. The families would be paying the national sales tax every day, at the grocery store and the gas station, so it would be hard for them to wait until next year to get a rebate. Since the “prebate” is paid in advance, Americans will have enough money to give to a cashier for the tax when they go shopping. The “prebate” would be received as a check in the mail, or deposited to a bank account, each month – similar to how Social Security payments are made, or how food stamps are distributed on debit cards.

It’s a frightening thought that every American would depend on the automatic gift of money each month from the government.

It is surprising to me that Neal Boortz, who calls himself a “libertarian,” would promote this idea. Recall that Libertarians are opposed to taxes, and they oppose the idea that people should become dependent on the government. But, clearly, after such a system of “prebate” payments was created, the main issue among voters would be how much political candidates would promise to increase the monthly payments when running for office. If any politician suggested cutting the payments, it would be like getting caught on Twitter with lewd photos. Nobody today proposes cutting Social Security benefits, not even Ron Paul or Gary Johnson.

Sound Familiar?
George McGovern’s “Demogrant” Proposal in 1972

The idea of a “prebate” for the FairTax is very similar to an idea that presidential candidate George McGovern proposed in 1972. He suggested that every American should be given a $1,000 tax credit, which would be refunded to poor people. This idea was widely criticized, not least by Sen. Hubert Humphrey who used it against him in the California primary election. Even liberals in the Democratic Party thought it was too “left wing” for prime time.

The Earned Income Tax credit was then enacted in 1975, and it has increased continually with each new tax law. The Republican administration joined with the Democratic Congress to enact a variation of the McGovern idea, because “fairness” in the tax system is always a political football. “Fairness” is commonly defined as taxing someone else who is not “paying a fair share,” and getting a tax cut for yourself and your friends. The McGovern idea of giving tax credits is at the center of the FairTax idea of a “prebate.” The tax is not “fair” if it is really a flat tax, as most people think about these things.

But the really important question we need to ask is about taxes in general. Is it “fair” to take money from some people, who earn it or receive it by trading with others voluntarily for a profit, and give it to others?

The question is never asked.

Some Thoughts about the Election

Some people have heard about a new political party, “Americans Elect,” that is getting on the ballot in several states. It is on the ballot for the 2012 election in Arizona and California, and 11 other states so far. I understand it is trying for a 50-state presence.

According to their web site, AmericansElect.org, you should join “to pick a president, not a party.” Yet, of course, they have no candidate for president – not until later this year. Who will it be? And why should we care?

It has occurred to me this new political party is some kind of front group for some rich person, like George Soros or Michael Bloomberg or Donald Trump. There is also another possibility – that the whole thing might be hijacked by the Ron Paul movement, which is very active on the Internet. The backers of the Americans Elect party might not expect to be hijacked, but the way they describe themselves, they are spreading their legs for it.

Nominate a candidate on the Internet? This sounds so “pie in the sky” like something a child might believe. Can anyone not really think there are some back office people running the show? Smoke filled rooms in the 19th century had nothing different from this. It is a new Internet version of Tammany Hall, in my opinion, but with a cover story that looks like Bob LaFollette. I don’t believe it. I never believed “the Progressive Movement” was any kind of sincere reform – just another example of the charlitans manipulating the fools, which is a pretty good description of popular democracy, as H.L. Mencken wrote about it.

However, what if the Ron Paul supporters who know how to create “money bombs” were able to take over this new political party? Would that be a good thing? I don’t think so.

The Libertarian Party is a Better Vehicle

I wrote this commentary in reply to a question from a friend who is very active in the Ron Paul “R3VOLution” and who sometimes shows up at meetings with a Guy Fawkes mask (from the movie, “V for Vendetta”). He asked why not support Ron Paul regardless of his party?

I think it is important to have some strategic thinking about elections, what messages they send, as well as the actual opportunity to elect people. I wrote an essay some years ago, “The Purpose of a Libertarian Party.” I believe working for the LP is an honorable way to dissent politically and stand for something idealistic. The alternative is just voting negatively for the lesser of two evils. Even though the LP never elects anyone on its ballot line, it does elect dozens if not hundreds of people on other ballot lines, who are libertarians in every sense except “partisan.” Ron Paul is actually a good example of such a person.

One flawed “strategic” view is that electing Libertarians should be a prime objective. I don’t agree with that; it is flawed. It would be wonderful, of course, to get a true libertarian into office, but if doing so means what often needs to be done to get votes from people who don’t understand the principles of non-initiation of force, then I would not recommend “winning” as a higher priority over “standing clearly for liberty.”

I refer you to the video [here] that my friend produced of me in the 2010 campaign. At the debate with Rep. Ed Pastor, at the handicapped center in Phoenix, the moderator asked me what I was going to do for the handicapped if elected?. (Short answer: not mandates nor tax money.)

Even if a true libertarian were elected, how would he govern if he has to make so many compromises with his fellow members of a legislature or be frustrated as an executive? Gary Johnson actually has a pretty good record as a successful veto-wielding governor.

The LP exists as a beacon. It sends out a clear signal about Right vs. Wrong in political principles and government. It is perfectly understandable that excellent GOPers like Ron Paul do some compromising things, like equivocate about human rights under the excuse of “States Rights,” in order not to answer questions about abortion or marriage, but it is not something I want a truly Libertarian Party to do. Ron Paul has a pretty funny way of explaining why he pushes earmarks for Galveston, and then votes against the appropriation bills that give the city the money anyway.

Ideas and Personality Politics

Ron Paul is an example of “personality politics” even as he does speak out for principles, like Anti-war and Anti-Fed and Cutting Spending and Cutting Taxes. It is the combination of his personality and his principles that has made him the phenomenon he has become. This is good, because most people do not think about ideas at all. They think about people. Humans were ruled by tribal chiefs, pharoahs, and kings long before anyone elected a leader – and even then Caesar was elected.

I believe 76-year-old Ron Paul is on his final campaign. I understand this. I worked with him in 1984, in Washington, DC, when he also was on his “final campaign” and looking for a way to quit the House of Representatives without being “a quitter.” I talked with him in the privacy of his office, as his loyal employee, about how he really felt about coming to Washington every week to run around and put up with the nonsense. He was glad to get out of there, and running against Phil Gramm for Senate in Texas in 1984 gave him an opportunity to be defeated (with 20% of the vote) and go out as “a fighter.”

That is what he is doing again this year. And, I say, good for him. Fight the good fight. Make your good arguments and good points in debate. Then take the defeat gracefully and go home – he will leave the battle to his son, Sen. Rand Paul, who will keep on fighting in the Senate and around the country. Ron Paul is leaving both a legacy and an heir.

But you might want to believe that we live in a democracy and not a republic (remember that slogan?). It is not the number of votes that will be important. It is how the American public opinion will shift over the next several years as a consequence of the campaign, and one candidate’s vote totals will not be what matters. The Electoral College also has an interesting way of making popular vote totals ineffective, like in Florida 2000.

Gary Johnson is going to get the Libertarian Party nomination and will be on the ballot in all 50 states. He is a younger man, with some years ahead of him in politics. I think the GOP has delivered a nasty rebuke to him, just as they did to Ron Paul in 2008. But, like Ron Paul, he will come back and keep on fighting. The Libertarian Party nomination will be exactly such a vehicle for keeping on – just as it was when Ron Paul decided to do it in 1988.

Yet, if Ron Paul’s supporters – I don’t think the man himself would want to do it – decided to seize the Americans Elect Party ballot line, and get him nominated on the Internet (assuming the whole thing is not already rigged for Bloomberg or Trump), all those people who have discovered our good ideas because of Ron Paul truly would “waste their vote.” Gary Johnson on the Libertarian ballot line in 50 states, with votes from Ron Paul supporters who won’t vote for Romney, which could really make a difference sending a message about corruption in politics and the hollow shell of the Republican Party that Romney and Santorum represent. Johnson would do a lot better than Ron Paul in 1988.

I would like very much for Ron Paul to choose graceful retirement, after making a strong showing at the GOP convention in August, and then let Gary Johnson earn the votes from all the diehards in the GOP who will refuse to vote for Romney. The way the Electoral College works, it is very unlikely that any State will fall to Obama on a plurality due to supporters of Ron Paul voting for Gary Johnson. But if they chose to vote for Americans Elect instead of the Libertarian Party in November, it could squander an opportunity to send the libertarian message even if they are voting for Ron Paul in the process. What message was sent by Ross Perot’s voters? Personality politics is a wasted vote.

It is the future of the movement for limited government and the original constitution, not the “horse race” of candidates, that we need to think about strategically. One person is not the point of our movement. We have spokesmen but not “leaders.” AmericansElect.org has it exactly backwards: pick a party, not a personality.

(i) repeal the 16th Amendment (income tax) and
(ii) stop using “imaginary numbers” in government budgeting.
(iii) cut government programs in a tri-bi-partisan way in Congress, with supplemental appropriations and continuting resolutions only after Congressional oversight committee hearings, to review government inefficiency and get rid of waste.
Less-than-full-year appropriations: Continuing Resolutions can become a budgeting tool to cut spending. Kubby supports this idea, to use a “look back” method to determine how much each government program should be INCREASED (adjusted for inflation and/or cut in real terms) annually.
Negative COLA: If a program is not supplemented by new appropriations, it will be cut in real terms; the appropriated dollars buy less – and those programs just have to continue getting the same number of shrinking dollars. [ shed a tear ]

So, I support Steve Kubby’s effort to promote my budget-theory ideas – to use a Gandhi/passive resistance-with-veto technique to cut spending (in real terms).

Back in 1982-84, I am proud to tell you that I worked for Ron Paul, as his staff aide on the Banking Committee. Ron Paul introduced the bill I wrote to begin minting U.S. gold bullion coins, and it did become Public Law 99-185. Ron Paul has become famous for my work on gold coinage, and it makes me happy.

I hope Steve Kubby can become famous for my work on government budget systems, too. Mountains can be moved if you let others take credit for the miracle. Isn’t there a quote about Muhammad and a mountain?
_________________________
Regards, Joe Cobb
Glendale, Arizona
www.JoeCobb.com
.

I have decided to sign on to the Steve Kubby for President candidacy, for the Libertarian Party nomination. I know Steve personally, and I plan to work very hard for his success in getting the LP nomination in Denver, Memorial Day weekend. He will get on the ballot in at least 2/3 of the USA, and if we do as well as in years past, we can be on the ballot in 49-50 states.

Steve Kubby plans to emphasize the economic issues. I am an economist, so I have agreed to become his central advisor in that role. For an introduction to the tax and budget ideas, you can check out my own web site, www.JoeCobb.com, but Steve Kubby’s personal views are for him to tell you as the election campaign moves forward.

Here are two of my own ideas about abolishing the income tax and cutting government spending. If my own ideas are helpful in summarizing what Kubby would do in the first year after Jan.21, 2009, having won election to the Presidency of the United States, enjoy my speculative fiction.

Speculative Fiction

(1) First, Kubby tells America and the world that we will stop “forecasting” revenue and expenditure numbers in the government’s budget. “Imaginary numbers” are what have caused the current crisis, as the politicians try to predict the future and pass laws spending money that will never be collected. (See “Why Do We Need a Government Budget?” on this site.)

(2) Second, Kubby tells America and the world that we will stop attempting to collect the Federal income tax, until such time as the Congress approves a resolution to repeal the 16th Amendment. The income tax is ruining America and it must go! (See my book on this site.)

(3) Third, Kubby tells America and the world that we will balance the Federal budget by cutting spending, but the Congress in 2009 will choose what programs to cut.

Kubby will promise NOT to write up a budget during his first 100 days in office, because that would be a serious time to work with Congress and study what must be done to save the American economy and to cut the size and power of the Federal government.

This is a very significant change

Perhaps the most significant change, the most important detail in the Kubby program, is the budget. The Federal government’s budgetary process is broken and must be changed. This how we purge the forecasted revenues (“imaginary numbers”) out of the budgetary system and use actual tax collections as our basis for planning expenditures.

Nobody can predict the future, and government budgets are importantly different from private budgets, which are useful planning tools. Government budgets are a relic from the old infatuation about government central economic planning, an idea that should have died with the old Soviet Union.

Kubby will use Congressional “continuing resolutions” to pay for government programs and to force Congress to cut spending.

See this Wikipedia reference to understand more about the “continuing resolution” method, by which Congress evades the deadlines to pass annual appropriations bills. Lazy Congress. They should do more “oversight” work and less earmarking. Wikipedia: Continuing Resolution [ link here ]

(4) Fourth, Kubby welcomes your own comments. You can use the comments sections on my own web site to publish your ideas. Thanks for stepping into the arena.

Here are some comments my email received today:

Linda wrote: “Ron Paul makes me nervous in some ways—Washington rumor mill stuff in large part, but some of it has some credence. Then again, most of them make me nervous. Obama is the most interesting new face in the race IMHO—notice I said interesting. I reserve further opinion until after I’ve finished his book. Has Paul written any autobiographical books or other books on how he thinks politically?”

Joe would reply: Ron Paul has written a lot of books and articles.

This list is from Gene:

Ron Paul has written a couple of booklets, mostly about the Gold Standard. Everyone who is backing him is doing so because of his record in Congress:
(a) Voted against the Patriot Act (along with 2 other Republican Congressmen, 75 Dems & 1 Independent)
(b) Voted against authorizing the Iraq War (along with 5 other Republican Congressman, 132 Dems & 1 Independent)
(c) Always votes for tax cuts, votes against most spending bills
(d) Votes against military spending, opposes conscription
(e) Sponsor of the Liberty Amdendment to abolish the income tax
(f) Lead sponsor of Industrial Hemp bill
(g) Co-Sponsor of bill to stop federal government from interfering in states that have passed medical marijuana.

His many columns on various issues can be accessed here:
(A) Anti-war columns
(B) Columns on other issues

He is a life member of The Libertarian Party. Texas does not have party registration, so he is not even a registered Republican.

On two issues at least, he takes stands that I disagree with:
He voted for the Wall at the US/Mexico border. He opposes abortion.

He is also a Christian, and more comfortable with religious displays in the public square than I am.

He is the most ideologically transparent candidate in history. Much of what he has written, of course, has been ghost written. I was a ghost writer for some of his stuff on the gold standard back in the 1980s. But Ron Paul is a clear thinker. He learns from ghost writers like me. It is like being his college professor for one semester. But the teacher writes the paper, and signs the student’s name.

Frank Luntz, in his new book, Words that Work (2007), points out it is most important for the political leader “to be” the message. Ron Paul does that very well.