Want to make state legislatures and self-government relevant again? How about putting the states in charge of tax policy? It’s not as outlandish as you might think.
We are no longer a self-governing people. The common thread in politics today that should bother both the Right and the Left is that we no longer have a government that is of, by, for or responsive to the people.
There is a reason for that. The entire arrangement of federalism created by the Constitution – the people creating the states and states representing the people at the federal government – has been flipped on its head.
The states have become a joke, a bunch of shleppers doing the bidding of the federal government and groveling for its attention and money. Our founders envisioned the need for localism when America was a relatively homogenous group of just 3 million people. How much more so now with 325 million very diverse individuals and communities.
Both from a liberal and conservative perspective, it’s time to flip the tables and restore the balance of power the founders originally intended. There is perhaps no more effective way of doing this and also solving the enigmatic tax debate at the same time than by abolishing all federal taxes and letting states collect all of the existing baseline of revenue.
The core federal functions will then be funded through a mandatory flat tax on the states’ respective revenues. This will guarantee steady income for the federal government but place the states in the driver’s seat to determine the entirety of the tax structure, rather than the other way around.
By empowering the states, this transformational reform will strengthen the people because it will restore self-governance, making state and local elections relevant again, and making state government more oriented toward the priorities of the people and also keeping the federal government on a shorter leash.
The reason the states (and local governments) have become a joke is because they collect a total of $3 trillion in revenue divided by 50, while the federal government collects $3.6 trillion (using FY 2018 projections) up front in one pot. Then the federal government doles back roughly $700 billion to the states with so many conditions and market distortions that state officials can’t effectively control their own destiny.
Most of what the federal government collects is on the backs of the wealthy, thus half the country doesn’t feel strongly enough to rein in the federal government. And the real wealthy are thankful for their wealth and largely content with paying the bribe.
We as may as well give our money to the Queen of England at this point. The money has no bearings on self-governance and the nature of our communities and is the epitome of “taxation without representation” that catalyzed the war for independence.
Simple. Fair. And flat
The freedom tax, or the “neutral tax,” as its author Tom Ryan, of Americans for Federalism, calls it, would flip this dynamic on its head. States and local governments would collect all $6.6 trillion in revenue.
Then the federal government would simply take, say, 44 percent of that revenue with absolutely no say over how it is produced. Tom Ryan has a brilliant white paper explaining the details and a FAQ page dissecting the practical application of the plan. It’s worth checking out the entire website at NeutralTax.com.
This plan would truly abolish the IRS and end the entire abusive relationship between the federal government and the individual by placing the state as the screen between the two, as was intended by our founders.
Obviously, conservatives would want the federal government to be smaller and liberals would want it to be larger. But the beauty of this plan is that we can devolve this debate to the states.
The plan could start off as neutral, on the face of it, in terms of revenue by granting the federal government the same share of the revenue pie it currently holds. Except it will be the state that structures the entire system on the front end and engages with the people – the way it should be.
For example, if states would collect all $6.6 trillion in revenue and only give back to the feds their current share minus what they dole out to the states anyway (except now states will control it on the front end), a revenue-neutral share to the feds would equal roughly $2.9 trillion.
Thus, the statute would set the federal flat tax on total revenue collected by states along with its local governments at 44 percent. But 100 percent of the tax system would be controlled by the state and local governments.
Now, you in your local community have a much greater say not only over the size of the state tax burden but also how much should be from property, sales, or income, along with the level of progressivity, deductions, credits, and contingencies.
And those decisions would no longer only affect the small state share of the pie but the orientation of the entire tax burden and would directly influence the size and direction of the federal government. It would truly make state legislatures and local elections great again.
Rather than controlling just 45 percent of the pie on a local level, you will control 100 percent of it, while ensuring that ultimately the federal government has a guaranteed source of revenue. All direct federal taxation on individual income, corporations, and investments would then be abolished in favor of the revenue “neutral” flat tax on the state revenue it collects from the same people and corporations who were previously dividing their taxes between the federal and state systems.
As such, if a state had an existing 10 percent sales or income tax, their new state tax would be: 17.9 percent (with $0 paid in direct federal tax). The state would then send the extra 7.9 percent tax (which is 44 percent of 17.9 percent) to the feds until people of the states get smart and start severely limiting the amount their tax dollars get sent to federal government. Or, if they want to structure the entire revenue built more off of corporate taxes or other taxes and fees, that is their choice.
Why this is the only solution from a tax policy standpoint
I believe the greater, more revolutionary benefit of this plan is its potential to restore the entire underpinning of a constitutional republic. But let’s analyze this from the standpoint of tax policy alone.
A reality the latest tax debate has revealed is that it’s impossible to ever achieve a flat or fair tax on a federal level. The entrenchment of the progressive system has created a scenario where so many people pay little or no taxes. As such, any time we push for a tax cut, by definition, the benefits won’t go to those who don’t pay a substantial amount in taxes. We’ve learned that it’s impossible to flatten out the code even partially, much less implement a full flat tax.
Most families earning under $75,000, effectively pay only about 5 percent in income taxes. Thus, even when we seek to drop the rates further but eliminate deductions, we can never lower the rates enough to give these people a substantial cut because the deductions already ensure they don’t pay a lot in taxes.
Then there is the issue of the infamous state and local tax deduction (SALT). Our entire federal tax system is held hostage by high-tax jurisdictions that are blocking any effort to lower the marginal rates in return for flattening out deductions, because no matter how low the rates go, they feel they benefit from the deduction.
Abolishing all federal taxes on the individual and corporations would allow states to tailor their revenue exactly how they want to without any regard for federal policy. Some states will adopt a fair tax or flat tax; others will have a highly progressive income tax or multiple sources of taxation. But either way, the federal government would be guaranteed their target income on the back end.
Other benefits of the neutral/freedom tax
- Over time, this plan would force states to take control of their own destiny and shrink federal government even more and lobby for an even lower flat federal rate. Once they are in the driver’s seat on the revenue issue, the conservative dream of states fully commanding health care, transportation, education, and agriculture will be more of a reality.
- This is the only feasible way of getting rid of the cronyist and progressive tax code. Most states already have a broader-based and non-progressive sales tax or income tax that people are used to. Whereas on a federal level, this will never work.
- Even a flat or fair tax would still require an IRS to collect and enforce compliance. The neutral tax is truly the only simple flat tax that wouldn’t require any IRS, because the entire concept of direct taxation would be abolished.
- This will spawn a revolution of competition between the states. Imagine if states set 100 percent of their tax system? Let the best states win. And unlike in the current system, where although people and businesses hate the tax code, they don’t really know of any other workable system. In this case, the public will see quite evidently which systems are working out.
The founders wanted indirect, not direct, federal taxation
The founders felt that a direct tax at the federal level was an abomination and would lead to tyranny. Although they abolished the Articles of Confederation and gave the federal government the power to tax, they wanted the taxes to be levied indirectly on excise luxuries and import duties.
Unfortunately, at present, direct taxation accounts for 98 percent of the tax revenue collected by the federal government.
The civil society created the states and the states created the federal government. Almost every public policy problem we face today stems from the fact that the pyramid of governance has been flipped on its head. The neutral tax is perhaps the single-most systemic way of fixing not just the tax problem but our entire broken federal government in one shot.
Now we just need elected officials with the courage to pursue this or other innovative ideas to promote localism.
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Author: Daniel Horowitz
Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.