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3 Reasons to Abolish the Income Tax

08th February 2011
By JohnSmith3000 in Taxes
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It may seem to be impossible now, the income tax was once declared to be unconstitutional and had to be repealed, way back in the 19th century. Of course, it came back in the form of the 16th Amendment to the U.S. Constitution, and now it is so complicated that entire industries have come up in order to comply with the ever-changing nature of the income tax code.

Income tax does not just cause financial harm to everyone who has to pay. It also causes harm in the forgone expansion of businesses and in the increased money in consumer's pockets to save and spend as they see fit. Here are three reasons why the income tax should be abolished.

1. Income Taxes Harm Investment

Unlike a consumption tax, income tax harms an important sector of the economy: investment. Investment drives businesses, who use this money to improve their efficiency, expand services, and/or hire more employees. When a business expands, it increases other business' income and helps raise employment. The source of investment is the savings derived from wages and labor.

When a person's discretionary income is lower, they will have less money to save. Consider this example of a person who makes $100 a year:

If this imaginary person lived in a country with no income tax, and spending on food, water, and shelter amounted to $60, he would have $40 of discretionary income. He can spend this at a store (contributing to sales tax revenue) or he may put it in a bank. Banks are an important component of any economy. The bank will use this deposit of $40 to fund loans (and establish their reserve), which starts the money multiplier effect.

If again, this person instead lives in a country with 10% flat tax on income, he would bring home only $90, with $60 being used on necessities, and now only $30 is available to the bank. With less deposited money, banks are more limited to what is available in loans, making expansion for any business harder. When good businesses cannot access loans, expansion will ultimately harm the worker in terms of lost employment opportunities.

2. Income Taxes Harm Personal Growth

Obviously income tax in the above example is not that simple in real life, but the message is still the same: income tax discourages savings, ultimately harming investments. Notice how America's savings rate has increased as of late, not due to any changes in income tax but due to high consumer debt constraining spending.

The effect of low savings is best seen by the high dependence upon credit in America. Without the incentive to save a considerable sum (or an entire sum) of money to purchase a product, people become tempted by the lure of credit, which can always “be paid off later.” The other effect is slower economic growth, especially after a recession. Burdened by a high debt, consumers will withhold spending money in order to pay down the debt to a manageable level, and though savings are increased, banks are reluctant to lend money due to the higher rate of delinquent payments. This leads to a stagnation until debt is reduced which may be months to years down the road.

Savings are also how a person of low-income can put off current consumption in order to have more money at some point in the future. Even though the U.S. income tax is skewed so that 47% of Americans don't pay income tax, the incentive is to not save, but to keep income low by either reducing savings (which are taxed as well) or by not improving the individual's situation via earning a degree or learning a skill.

3. Eliminating Income Tax Increases Savings and Consumption

As all taxes change behavior, abolishing the income tax will allow people to contribute more to the economy, no matter if they save more or even spend more. Those who save more will allow investment into retirement accounts, bank loans, and the stock market that help a society finance future endeavors. Those who choose to spend more will result in higher profits for companies, allowing for an increase in productivity. This in turn increases expansion opportunities for businesses, which in turn helps unemployed persons find jobs. Consumers then benefit from lower prices and/or increased quality.

Though Objectivists see taxes as immoral, at this point in time it is not favorable to simply end every tax. Eliminating the income tax is only a step, and it should be replaced with a tax that is both equal and fair to all Americans, in order for the government to lower their debt burden. Then in time the taxes can be lowered as government withdraws itself from areas not within it's purpose.

An economy can only benefit from increased consumption and increased savigns, abolishing the income tax will enable both. Read more about taxation and capitalism by visiting us here. Or by visiting
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