Thursday, May 16, 2013

The Localist Solution for IRS and Taxation Abuse

It is of course outrageous that the IRS selectively targeted groups liable to be hostile to the administration for special scrutiny.  But this is by no means the only such incident of its kind.   As this article reminds us, almost all administrations since the 1970s have done something similar.  The right wing media tries to convince people the problem is Obama, just as the left wing media in the 1970s tried to convince people that the problem was Nixon.

They are both wrong. The problem is not merely the man, the problem is that the very purpose the tax system was designed for is abusive.   It is designed to allow for the federal government to reach its tentacles into the lives of each and every citizen to either reward them with favors or hassle and punish them.   Where as most political commentary today does not even correctly describe the problem, localism provides the answer.

Consider that we have a fiat currency.  Localists are opposed to fiat currency, but if a nation has one, there is no need whatsoever to tax either the income or the purchases of its citizens.   They could simply print the money they needed every year.   So long as the growth in the economy matched the spending, the value of the currency would not even necessarily fall any faster than ours has.   Income taxes are not needed to fund the national government.  They were not needed prior to 1913, when tariffs did the job, and they surely have not been needed since we severed the last link with the gold standard in the early 1970s and we could print fiat at will.  We this do right now for forty cents of every federal dollar we spend.

Income taxes on individuals are not needed to fund the federal government and I believe that they are not even intended to do so.  Instead, the purpose of an income tax is to give the central government power over each individual citizen, so that its minions can reward who they wish and punish who they wish.   Congressmen will have favors to sell with tax breaks.  The executive branch can instill fear and silence people who get too far out of line.    It is a tool of control rather than a necessary tool for funding the government.  It is a way for them to put their finger on you.

Some people think the solution is the so-called "Fair Tax."  It isn't.   It would just turn the IRS from an agency which audited your income to one which audited your spending. There are other problems with it as well.  For a more through deconstruction of the tax, there is the last half of this audio.

Given that taxation is necessary, and I know there are some who disagree but that is a different discussion, what system of taxation is least prone to abuse?     In localism, individuals cannot be directly taxed by the federal government, whether via income or sales taxes.   Nor can corporations which do business in only one state.  The Federal government can only be funded by taxes on multi-state corporations, tariffs, and contributions from the states, who would pay for their share of the excess costs.

Naturally this arrangement will hold spending down, and turn the states from lap dogs for the federal government to watch dogs over them.   But the best thing about the arrangement is that individual and small business is thus shielded by the state from the federal government.   The relationship between the federal government and the individual becomes much more like it was prior to 1913- they did not even know you existed unless you sought them out for something, or engaged in interstate commerce.

The astute reader may then ask what will keep state governments from abusing income tax laws or sales tax laws?  Isn't it strange how even now we don't hear about the same magnitude of abuses and problems on state sales or income taxes as we do federal taxes?   This is particularly true of small states. California has had some problems, but the Localist opinion is that California for one example, is too large and diverse to be run effectively from a single capital and should be split up.  
The truth is that the individual has much more power to resist abuse by state tax agencies than they do federal ones.   The government officials are closer, one's elected representatives are more accessible and easier to un-elect on a budget, and most of all the magic of the market place is at work.   As a last resort, you can simply leave the jurisdiction of a state which abuses its taxation system.   It is much more difficult to leave a country.   Basically localism lowers the transaction costs of escaping bad government, which sets the market place to work producing better government.

Changing who runs a system that is designed to mete out rewards and abuse won't stop the abuse.   Nor will shifting the abuse channel from oversight of income to oversight of expenditures.   The closest we can get in this imperfect world to fixing it is shielding individual citizens from taxes by the federal government and making all such taxes subject to the market place by collecting them at the state, or even local, level.  That's the localist answer. 


  1. I have read the Achbani's book and it sounds reasonable. It reminds me of State in the third millennium by Hans Adam, Prince of Liechtenstein. Btw. Liechtenstein has constituion built (in a way) on principle of decentralization of power - probably the most localist country I know about.
    Philosophy of localism is (at least after the first reading) more sound than libertarianism. Also it seems to be close to principle of subsidiarity emphasised by popes. Only the applicability in current world... very difficult :-)

  2. OK, I am impressed. You read a book in another language, that was written with repeated references to the history of another country, and appear to "get it." I have heard references to "subsidiary" before and will have to check it out. Maybe I will see if an English version of "State" is available too.

    The difficulty with applicability is in part because we have a world run by central bankers and fiat money. I think most of us feel this is heading into crisis, and when they system collapses there will be a chance to rebuild, and that these are the principles we ought to rebuild on to prevent the current excesses from ever happening again.

  3. Thanks but everybody speaks English today and US is not an unknown rock in the middle of Pacific so I believe that at least superficial knowledge of american history is not rare ;-)
    This is the book I was talking about:
    Perhaps it can be found on the internet as well.
    I agree that fiat money is one of the most dangerous weapons today. We can only hope that the collapse will be rather less than more painful. I mean there will be no big war...

  4. I am excited to hear about that book. Localism is not really a "new thing", it is more like a list of "lessons learned" and "best practices" for all the best governments in human history. That is what I think, and if that is right, one would expect to find a few jewels in the literature where people came close, maybe not so systematically as in Localism, but parts of it anyway.