One of the announced candidates to replace Mike Pence in Indiana's 6th Congressional District is Travis Hankins. He is by all accounts a fine man-- if a little young for an office seeker-- but doubtless a person of integrity and forthright character. This alone makes him very appealing to me.
So it is with disappointment that I read the summary of his tax plan. Recently, I commented on his Facebook page that I thought his Freedom tax was seriously flawed. I received a direct message from Travis linking me to a more detailed explication of his Freedom Tax proposal, but noted that my comment had been erased and turned into a link that is a quasi-FAQ based on my criticisms. As it is very difficult to have a serious discussion when one one of the parties can censor the other, I have elected to build in this post (and any follow ups) my assessment of Hankins' tax proposal. He is free to rebut as he wishes (and already sort-of has) but at least I will not be censored in the process.
Hankins's plan is almost certainly better than our current system, but that's not much of an endorsement. The argument for the plan is poorly constructed and doesn't show academic rigor. Finally, there are several ways in which is it inferior to other conservative tax proposals that have been raised, namely the FairTax.
Construction of the Freedom Tax
Hankins's plan consists of these elements: a flat tax on corporate income over $15M, higher excise taxes, a 2% "inflation" tax, and a national sales tax that "should never amount to more than 7%." (btw-- that quote is accurate, so if it sounds like a guess rather than a plan, I can't clarify it for you). Let's examine each of these elements in a little more detail.
The 32% Corporate Income Tax
Hankins introduces his section on the corporate income tax this way:
The free market and capitalism are vital to a free people. Free market based, capitalistic, large corporations are good things. These legit big businesses should earn as much as they can, if you ask me. However, big businesses that team up with big government are not capitalistic. Big corporations that bribe politicians with campaign donations and promises of future lobbying jobs are not free market. In 2012, we have far too many corporations who use their millions and billions of dollars on lawyers, lobbyists and accountants to bribe Washington and receive handouts for themselves. Not only do they receive handouts for themselves, but they use their army of lawyers, lobbyists and accountants to pass laws placing heavy regulations and burdensome taxes upon their small business competition.
This section is confusing to me. Hankins doesn't appear to know if he supports or doesn't support big business. He says that "legit" businesses should earn as much as they can, then proceeds to demonize big businesses for lobbying and advancing their self interests, which they do so they "can earn as much as they can." Big businesses are heroic-- unless they are advancing their self-interests by lobbying to shape laws that affect them. I wonder if Hankins would say the same of an individual voter using their own money to try and shape a local law to their preference. Would they likewise be guilty of bribery? Would the millions of individual voters that "receive handouts for themselves" using their vote likewise be guilty of the same malfeasance? What about a local business that gets a tax abatement from the city council? Hankins doesn't say, but he doesn't bother to explain why the corporate malfeasance is unacceptable but voter malfeasance is. If voter malfeasance is acceptable, why is there no justification for it or some kind of argument that personal and corporate malfeasance are different? If voter malfeasance is not acceptable, then why doesn't Hankins propose to do anything about it? Certainly far more money is spent on personal welfare than on corporate subsidy. Indeed, the personal subsidies in the form of wealth transfers drown out every other category of government spending- including corporate welfare.
Once you get into the details of Hankins' proposal, his argument really starts to fall apart. Let's go through some sections of his initial explanation:
It did not used to be this way. It used to be big business and small business, along with we the people, all standing up together against the big government politicians who threatened to take over private industry. Somewhere along the line, many big businesses decided it was easier to sell out. So they teamed up with the government to put the small guy out of business.
I don't know where Hankins get this construct-- like the entire document, it contains no reference or sources for verification for the claims-- but it appears to be pure fairy tale. Since when were small business and big business partnered against the government? If such a phenomenon occurs, it is recent and not the way it "used to be." For example, draconian new EPA emissions standards can cause businesses (of all sizes) to unite in their opposition to them, at least in theory. Hankins is asking us to believe that once upon a time small business and big business didn't compete with each other, but that they partnered against the all-powerful government. I'd really like to know exactly when Hankins thinks we changed from this patriotic capitalistic solidarity Hankins claims, because even as long ago as the railroads of the 19th century, business was not warring to contain government, but to control it. Human history has never shown the case Hankins outlines here, that businesses sought more to resist the government than control it. What explains Hankins' dubious assertion here?
An answer is that Hankins is weaving a story to sell his tax plan, and has no data with which to back up his assertions. His argument is not only lacking any data to support it, but it is internally inconsistent.
Now, the entire burden of our nation's tax code and regulations fall on small business and individuals and not on big business. Not all big businesses are to blame, but far too many have done everything they can to use government to distort the free market and receive handouts at taxpayers’ expense.
Then we get this a couple lines later:
Yet, big business has created 0 net new jobs since 1977, but yet they are the ones who pay the least amount in taxes. Why? Because they can afford to pay for all the accountants, lawyers and lobbyists in Washington. They are the ones who write the tax loopholes and government regulations that exempt them from complying, all while the small company gets taxed to death and regulated right out of business. This is all by design, as big business does not want free market competition from small business.
The top corporate tax rate in America is 35%, yet the effective rate corporations pay is 12.4%. The net effect of all the loopholes corporations enjoy is the complete shift of our nation’s tax burden directly to individuals and small business. Again, not all corporations take advantage of all the loopholes available to them trying to game the system. According to CNN Money, Walmart’s effective tax rate in 2010 was 32.4%. Obviously, Walmart proves that corporations can thrive without taxpayer handouts and using government politicians to wipe out the competition.
Really? Big business (whatever that means--there's no definition) hasn't created a single net job since 1977? Apple managed to grow into a $600B company without creating a SINGLE new job? The huge new headquarters they are building will not employ anyone, nor require any jobs to build it? If big business is spending all its money on accountants, lawyers and lobbyists, isn't it creating new jobs in accounting, law, and lobbying?
So big business is heroic-- except when it's not because it lobbies the government. Big Business only pays 12.4% in income taxes-- except when they don't because Wal-Mart paid 32.4%. Are we to believe that Wal-Mart doesn't have any lobbyists? Or are to we believe merely that its lobbyists are grossly incompetent? Perhaps Wal-Mart got to be the largest retailer by paying higher tax rates than its competitors?
Finally we come to the weakest part of Hankins's already weak argument: the idea that "the net effect of all the loopholes corporations enjoy is the complete shift of our nation’s tax burden directly to individuals and small business." If the burden is shifted completely, then wouldn't the effective corporate tax rate be ZERO? Yet, Hankins already stated a rate of 12.4%, which is clearly not zero. So the burden is not shifted completely. The burden is shifted only partially. Those rascally businesses are pawning off a portion of their tax liabilities on small business and the people. This is a bad thing, right? That's why we need to close the loopholes, right?
Actually, no-- according to Hankins:
Please do not misunderstand. These corporations will never pay any taxes. They will always pass the costs on to individuals and sometimes to the consumer. It is certainly worth it, because this small indirect tax is far preferable to the large direct income tax we have now. Shifting revenue burdens this way eliminates any power the IRS has over any American citizen.
Transferring the burden to the people is now a *feature* not a bug, because it eliminates the IRS and prevents reduces the power of the government. Now, we can all agree that getting rid of the IRS would be a great thing. We should get this corporate income tax thing enacted as soon as possible.
Or maybe we shouldn't, according to Hankins:
If it were up to me, we would not have a corporate flat tax. I am not trying to punish big business for their big government partnerships. Simply enough, somebody has to pay taxes and the corporate flat tax is far preferable to any income tax on individuals and any income tax on small business.
OK, so why doesn't Mr. Hankins want to get rid of the IRS? Didn't he just tell us that the corporate tax would be great? Didn't he just tell us that big business partnering with big government is ruining our economy and our freedom? Why the heck would you not want to punish them if they are so bad, Mr. Hankins? He says "if it were up to me"-- but isn't this plan *his* idea? If you are the one coming up with the plan, isn't it assumed to be "up to you" as to what is in that plan?
Our economic boom will be based on a backbone of production and growth from individuals and small business. Large corporations will greatly benefit as their revenue and profits will soar, but their market share percentage will decrease now that we have a level playing field.
This is over the top. He will single out large businesses for taxation, and they will "benefit greatly as their revenue and profits soar." This even as their market share will decrease. Hmm. That must be some super fast economic growth if you can lose market share and still have revenues and profits soar.
Hankins' also shows that he really isn't Conservative, because Conservatives don't talk about using the tax code to pick favorites and "level the playing field." Yes, eliminating all tax loopholes is definitely Conservative, but picking out business income over some arbitrary level as needing to be "leveled" is not. Hankins would punish a company merely for being big-- like an oil company. Everything in the oil business is big-- the profits, the losses, the risks and the rewards. Hankins' proposal sees a huge company at 8% profit margin as an evil "big business" to be taxed, but a smaller company at 50% profit margin is the entrepreneurial hero.
These are just the philosophical problems with Hankins' corporate flate tax plan. Now let's look at the numerical estimates.
Hankins thinks his corporate tax will raise 4% of GDP (roughly $600 Billion). That seems fairly reasonable. The only problem is the currently corporate income taxes average a little less than 2% of GDP. Hankins apparently thinks that we can double the income taxation of business without negatively affecting them. Perhaps so, but not all taxes can be passed on to consumers completely. I suspect the tax burden on business would create incentive to relocate to other countries that are known tax havens. That said, corporate income taxes were in the 4%+ range throughout the 1950s and businesses seemed to do OK, but we live in a very different world now.
We haven't yet covered the other portions of Hankins' plan, but please note that the projected total revenue is less than 15% of GDP. With spending currently hovering around 24% of GDP, that means Hankins' plan would result in deficits even worse than the $1.4T that we currently have. The revenue Hankins' expects to raise is lower than any tax year since WW2 and would make our deficits loom even larger without spending cuts.
While I've spent a lot of words picking apart the flaws firstly in Hankins' argument for his policy and secondly in the actual policy itself, I do see some things about it that I like a lot. First, the elimination of all loopholes helps business a lot. No longer do they have to plan around depreciation schedules and amortization and worry about what is or is not a write-off. The reduction in compliance costs is a huge boon to business, and partially offsets the nominal tax rate increase they would see.
Second, it actually would level the playing field among businesses to some degree. With no tax credits (subsidies) or write-offs, businesses would be more equal with each other. We'd no longer have the situation where one industry with so many loopholes attracts more capital than another with fewer-- which creates malinvestment and market distortion.
Finally, the tax could be implemented in a way that mitigate the damage of such an approach. You could just simply tax all business profit at 32%, and give every business a standard deduction of $15 million. This would result in a a company making $30million being effectively taxed at a rate of 16%. This would help soften the blow a little, and a business would have to be truly huge to pay anything near the stated amount. Unfortunately, you're still left with 1) the arbitrary tax threshold and 2) the discrimination against pure size.
In summary, Hankins' corporate tax proposal is a basically sound idea that could work, but it is argued by fallacy, demagoguery, and sloppy thinking. There might be a good argument to make for Hankins' corporate income tax plan, but that argument will not be found in any of his documentation.
The second aspect of Hankins' tax plan is an increase in excise taxes. Excise taxes are basically taxes on particular goods or services rather than a sales tax that taxes all good or services. Hankins begins this section as follows:
Now that we have used a 1950s level of corporate taxation system to eliminate two thirds of the federal income tax, we are now going to use a 1950s level excise tax system to eliminate the other third of the individual income tax. We currently have an excise tax system that places taxes on tobacco, alcohol, airport use and gasoline sales. These indirect taxes are constitutional taxes and this is the type of system our founders had in mind when they wrote the Constitution. Under the Freedom Tax, we do get enhanced revenue from current existing excise taxes. We also place excise taxes on other voluntary luxuries of life, like telephone land lines, cell phone bills, cable or satellite television and the Internet.
Would you rather pay $10 a month excise taxes for your cell phone? Or pay tens of thousands to the IRS in income taxes? Would you rather pay eight dollars a month in Internet excise taxes? Or spend hundreds of hours of your life filing taxes, dating receipts and worrying about an IRS audit?
Let's temporarily ignore the comments on direct vs indirect taxes for the moment and focus on the effects of an excise tax. The most significant aspect of this tax approach it is not Conservative. Conservatism generally objects to the government picking winners and losers. For example, we Conservatives generally have a problem with the government favoring one competitor over another in a given industry, or even one industry over another. We believe in "equal protection under the law" and generally want the gov't to be the referee in the market, not a participant.
Hankins' proposal has the government picking winners and losers in what we will consume. The myriad of taxes on fuel, cell phones, cable, and such necessarily creates two classes of goods: the winners (things that are untaxed) and the losers (things that are taxed). Is this not a powerful incentive to lobby Congress to make sure the good or service you provide is a winner and not a loser? For all Hankins's complaints about lobbying, this proposal would create even more of it. Taxing a telephone land line is sort of novel, since a third of houses are now completely without a landline. That one is almost irrelevant.
Hankins offers no clear definition of what a "voluntary luxury of life" is, and is therefore subject to his increased tax. But we don't have to know this to know it is a bad idea. In addition to the government picking winners and losers, the tax is inherently regressive. Conservatives often fight to make taxes flatter, but most Conservatives do NOT think the those of lower income should pay more of their income in tax than the upper income earners.
Let's say Hankins levies a $10/mo cell phone tax. People of all income ranges have cell phones, from cheaper plans in the $60/month range to expensive plans that are $200 per month. But adding ten dollars to each of these can be very regressive. If someone earning $40K/yr with the $60 plan gets taxed an additional $10, it is a much heavier burden for them than the same $10 applied to a $200 plan for someone making a high income.
If the excise tax is structured more like a rate than a fee then this problem goes away, and it's just a glorified sales tax. But it still distorts the markets and favors one form of consumption over another.
The final line of Hankins' intro is fallacious demogoguery on parade. It cannot be that the options are paying tens of dollars (cell phone tax) or tens of thousands of dollars (income tax). That would be so far from revenue neutral that the government would shut down. If the choice was paying $10 in income tax or a thousand in excise tax, everyone would choose income. People will choose to pay lower taxes if they get a choice, and the form of the tax matters far less than the amount if they are comparable. The levels must be comparable or there's no way Hankins' plan could fund the government.
Finally, Hankins closes his appeal for excise taxes by playing on people's fear of the IRS. But most people never get audited, and the fear of the IRS is simply used here to get people to consider his plan with their emotions, not with their brains. Again, this is a false dichotomy as well, as there are ways to collect revenue that abolish the IRS; for example, the FairTax does this.
The excise tax portion of Hankins' Freedom Tax stands at odds with the corporate income tax portion. The corporate tax tries to level the field and reduce lobbying, while the excise portion invites special privileges, lobbying, and all kinds of kickbacks to favor one product or industry over another, and because it will be baked into the price of several items, people won't even know they are paying it. By comparison, a sales tax like the Fair Tax picks no winners or losers, as every single form of consumption is taxed at the same rate-- as it should be.
A Tax on Inflation
How does one tax inflation? Hankins thinks he has a way. Let me quote his proposal first:
As destructive and un-American as the income tax and payroll taxes are, the most un-American and destructive tax in America is and always has been inflation. Inflation lowers the standard of living for every American. Inflation punishes savings. Inflation is particularly hard on those living in poverty and the elderly living on fixed incomes. Inflation is caused by banks participating in fractional reserve banking. Fractional reserve banking increases the money supply as banks are able to give out loans using money they created out of thin air. This loan money created by fractional reserve banking has no reserves and is backed by nothing. If you or I tried to create money out of thin air we would be put in prison for counterfeiting. Yet, the bankers and the politicians team up routinely to engage in fractional reserve banking because it means more money for the bankers and more revenue for the politicians. My inflation tax is a tax on bankers who engage in fractional reserve banking. This will help end inflation, lower taxes, save the dollar, protect our standard of living, protect our savings and promote good government.
This bankers’ tax on inflation will essentially be a tax against debt. This tax will be approximately 2% of GDP
This proposal has a number of problems. First, it would damage our economy. Second, it doesn't achieve what it claims it would achieve. Thirdly, it's marketed using the same Democrat-style demogoguery (kill those evil bankers!) that he uses for his corporate income tax. Note that the cabal of politicians and "big business" has now been replaced by a cabal of politicians and "big bankers" teaming up to rip off all of us.
Hankins is wrong that inflation lowers the standard of living of every American. Inflation actually raises the standard of living of those who have a lot of debt because it allows you to buy a good or service with stronger dollars and pay for it with weaker dollars. Since inflation punishes savings and rewards debt, it is simply wrong to say that it is the "most un-American and destructive tax." This is the kind of rhetoric you expect to hear from a Ron Paul supporter, and while it has some emotional appeal, it has the unfortunate handicap of being completely and utterly false.
Moreover, it reveals a rather disconcerting level of economic ignorance for someone who is a candidate for national office. Hankins argues that bankers create inflation through fractional reserve lending. But ANY CREDIT creates inflation in this sense.
Let's say you go out to eat. At the end of your $20 meal you hand the server a credit card. The server then runs the card and you leave. Congratulations, evil banker! You just created money out of thin air, backed by nothing. What, you say? Well, did the restaurant get paid? Certainly. But you, dear friend have not lost a single dime in money. Your checking and savings accounts are intact, and all the money you had when you walked into the restaurant is the same as when you left-- they have not seen any of the $20 you just spent. In a sense, the $20 exists in two places at the same time-- at the restaurant (because they got paid) AND in your checking account. This can only happen because you created other $20 from thin air by the use of credit. According to Hankins, you would be put into prison for such counterfeiting if you didn't have the special connections the evil bankers have.
Likewise, when you get a loan from the banker, money is created in the form of credit. As you pay off that loan, the money created by the credit is destroyed in a deflationary transaction. Hankins' assertion that the bankers are singlehandedly creating evil inflation is just a cynical, blame-game ploy for angry votes. This is not Conservative, in my view.
Hankins' plan can't fix inflation because Hankins doesn't appear to understand what causes inflation. He thinks it is the result of fractional reserve lending, but that practice is only a tiny fraction of what drives inflation. Inflation is simply the ratio of dollars to the size of all the goods and services they represent. If the money supply grows but the economy doesn't, you get inflation. On the other hand, if the economy shrinks but the money supply doesn't, you get inflation. I'll spare you, patient reader, all the macroeconomic theory, but suffice it to say that Hankins straw-man presentation of inflation here is way off the mark.
National Sales Tax
Finally, the best part of Hankins' plan: the national sales tax. It is unfortunately the only real good part of his plan. He seems to dislike it though, pointing to how limited it will be and downplaying this aspect of his plan:
Part two of getting rid of the payroll tax is only a small, limited and contained national sales tax to help pay the rest of the promises of Social Security and Medicare in lieu of a payroll tax. This tax will never be allowed to be higher than 4.5% of GDP. It should never amount to more than 7% sales tax. This is only a retail sales tax, so things like doctor visits, etc. will not be taxed. The inflation tax and sales tax will remain constant as a % of GDP until we can meet our obligations to our disabled and those currently 58 and older for Social Security and Medicare.
Seniors will not have to pay any taxes on their IRAs under my plan and inflation will be stopped.
Presumably those under the age of 58 get something other than Social Security and Medicare? What things would be taxed? If you create exceptions for doctor visits, how can you justify not making other exceptions (ahem, lobbying!). I've already demonstrated that Hankins cannot stop inflation.
By not making it all-or-nothing, Hankins undermines the one part of his plan that really could work rather well. By picking winners and losers (based on what will or won't be taxed) he invites the very lobbying he claims to be ending.
Hankins' tax plan is rooted in a misunderstanding of how people respond to incentives and of how our system works. He milks bogey-men for all they are worth, using bankers and big business as the whipping boys for poorly conceived policy. His tax on corporate profits could be workable, but the excise taxes needed to provide the revenue shortfall will hit lots of people really hard in a completely arbitrary fashion. His tax on "inflation" is poorly conceived and betrays a real misunderstanding of economics. Finally, his sales tax is relegated to a top-off role to provide some additional revenue, but it should be made front and center.