(From the Ask Dr. Ruwart section in Volume 19, No. 7 of the Liberator Online. Subscribe here!)
Question: I have read about proposals to eliminate the income tax and replace it 
with a consumption tax (national sales tax). This seems like a very good idea. First, it would mean foreign manufacturers would pay almost the same tax as domestic ones. Second. it would remove the need for large accounting and legal departments in corporations, and would certainly simplify the paperwork of small businesses. Third, it would eliminate the ability of the wealthy to utilize loopholes in the present tax system. There are many more benefits I can see, and I can’t see a downside. Am I missing something? Do libertarians support this idea?
My Short Answer: Libertarians recognize that taxation of any kind is theft and therefore do not support taxation. However, some dedicated libertarians have been working to replace the income tax with a consumption tax, like the one you’ve outlined.
Among other things, they believe that people would feel the bite much more if everything they bought came with a double-digit sales tax. Tax increases would be more visible — and more unpopular for politicians to propose. The abuses perpetrated by the IRS would also end. Public support for abolishing taxes altogether would increase.
However, one danger many libertarians see in proposing this switch is the possibility that we would end up with a national sales tax AND an income tax.
Why not simply get rid of the income tax and replace it with nothing, as libertarian presidential candidates like Ron Paul and Harry Browne have proposed?
As Ron Paul told the New York Times in 2008: “I see a consumption tax as being a little better than the personal income tax, and I would vote for the Fair Tax if it came up in the House of Representatives, but it is not my goal. We can do better. … We could eliminate the income tax, replace it with nothing, and still fund the same level of big government we had in the late 1990s. We don’t need to ‘replace’ the income tax at all.”
Ron Paul is right. If all we did was to restrict government to its constitutional limits, we could provide for defense and other necessary functions with constitutionally-permitted excise taxes.
Then, libertarians could start working on getting rid of those, too!
LEARN MORE: Suggestions for further reading on this topic, pro and con, from Liberator Online editor James W. Harris:
* Fairtax.org is the website of Americans For Fair Taxation, a non-profit organization that argues for the Fair Tax. Their site includes an extensive FAQ that answers common questions about the proposal.
* “There Is No Such Thing as a Fair Tax” by Laurence M. Vance, Mises Daily, December 12, 2005. Vance says advocates of the Fair Tax are right on the evils of the income tax, but the Fair Tax isn’t the solution. He lists 17 problems with the Fair Tax from a libertarian perspective.
* “Against the FairTax Proposal” by Jim Cox, LewRockwell.com, March 29, 2005. Additional criticisms of the Fair Tax from the author of The Concise Guide to Economics, Minimum Wage Maximum Damage, and The Haiku Economist, the latter two published by the Advocates.
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