Transcript | |
| April 15, 1997 | |
Presented to the House Committee on Ways and Means
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Perhaps the most urgent reason for tax reform is that we risk a breakdown in the implied contract Americans have with their government, as our system of generally voluntary tax compliance erodes under abuses by, and mistrust of, the Internal Revenue Service. However, my remarks today do not address that point directly, but rather deal with the changing nature of the workplace which will in the not too distant future dramatically increase the difficulty of identifying income, tracking income and collecting a tax on income. The current income tax system relies heavily on employers to collect taxes from employees. Employers receive tax preferences for benefits furnished their employees. But that employer-employee structure is changing in the Information Age:
These trends will intensify and, as they do, the current tax system will become even more cumbersome, intrusive and inefficient than it is today. A consumption tax makes sense today - and it will make even more sense as the decentralization of work becomes more defined. Technological advances portend a time in the not too distant future when governments will be forced to turn to new ways of gathering revenue in a global economy.
In the Information Age, the new source of wealth is not mainly material. It is information. Knowledge extraction, integration and application are replacing the shipment of raw materials from remote locations to manufacturing centers as the dominant world business. Knowledge has become the main source of economic value. Matter matters less and less. Knowledge and ideas matter more and more. Labor in the global economy is highly mobile. What do you need to be in business around the world? Four things: a telephone, a modem, a fax machine, and a brain. It is one thing to rely on an income tax when people work in factories and taxes are deducted monthly. But the income tax was an Industrial Age solution meant for Industrial Age employers and family structure. It will be much more difficult to rely on an income tax when entrepreneurs are multiplying by the millions. Compliance costs are already too high. They will get worse as the society evolves. Not only will it be necessary to enlarge the Internal Revenue Service as people find more and more ways to create wealth, but the IRS will become more intrusive and its procedures more subject to abuse than at present as it struggles to trace income. In a one-family-one-paycheck economy, compliance verification is minimal. But that scenario is disappearing. On the other hand, with a national sales tax there would be no need for the government to know the amount of a person's income. For purposes of taxation, it would be irrelevant. And what of tax deductions and credits granted employers under the present system for their employees' fringe benefits? Congress spends a lot of time proposing legislation - such as the $500 per child tax credit - in an effort to make the current system fair. The decentralizing workplace will exacerbate the problems arising from the tax system's current bias toward working for an employer. By contrast, either a flat tax or a national sales tax would remove these problems, although the sales tax would be preferable. Capital, too, is less likely to be fixed. On the electronic highway, it can instantly go where it is wanted, and stay where it is well treated. As information and knowledge are forged into capital, the world is connected by blips on the computer screen that race across countries and continents in microseconds. The dollar amounts we are talking about are huge; sometimes a hundred times larger than current world trade flows on an annual basis. How does government track transactions that get more complicated and cross many national lines?
The world can no longer be understood as a collection of national economies. Electronic infrastructure is creating a world-wide economy. Products have value added all over the world. The dress you buy in St. Louis may have originated with cloth woven in Korea, finished in Taiwan and cut and sewn in India. Then, there was the brief stop in Milan to pick up its Made in Italy label before the final journey to a store in St. Louis. The principles of freedom, private property and the free market coupled with an intellectual system driven by knowledge and technology will render obsolete the old paradigm of extraction and central control by governments and business. The growing global economy enhances the importance of economic trade while reducing the influence of politics and control. How easy it is to walk through a customs checkpoint declaring "nothing" when a billion dollar software package resides in your head. In the new paradigm, the means of production in capitalism are not chiefly land, labor, and machines which traditionally have been regulated, controlled, and taxed by government, but rather emancipated human intelligence. Under capitalism, the mind-generated production system, the driving force of growth is innovation and discovery. Governments must let go of their paternalistic control over people. So must corporations. The antiquated income tax must give way to the consumption tax just as corporate hierarchies yield to flat, horizontal management controls. A consumption tax can maximize market efficiencies, broaden the tax base, encourage growth, savings and investment and thus promote the economic growth needed to meet the needs of our social and economic system. It is the only type of tax that can meet the needs of workers, whether self-employed or working for an employer, and families in an Information Age. But American workers and families cannot go forward with an Industrial Age behemoth like the Internal Revenue Service grasping at them to hold them back. We need a tax system as innovative and creative as the American worker. A national sales tax can meet that need. |