Archive for the Taxation Category

Progress Means Respecting People’s Rights

The following article by Linn and Ari Armstrong originally was published April 27 by Grand Junction Free Press.

Last week self-proclaimed “progressives” rallied at the state capitol for higher taxes. But there’s nothing progressive about forcibly confiscating other people’s wealth. Real progress comes from respecting people’s rights and banning coercion—the initiation of force—from social relationships.

The tax-hikers build their case on obfuscation. Consider an email distributed on Tax Day by the absurdly named ProgressNow Colorado, more accurately identified as CoercionNow. This group led a “proud to pay” taxes campaign, claiming that taxes produce “smart, educated kids,” fix “potholes and shaky bridges,” leave the state better than we found it, and affirm that “we’re all in this together.”

Somehow CoercionNow failed to mention that its members are “proud to pay” taxes to finance corporate welfare, bail out banks and auto unions, finance “nation building” exercises around the world at fantastic cost to U.S. life and productivity, incarcerate fellow citizens for actions that violate nobody’s rights, persecute ebook publishers, enforce wage controls that devastate employment opportunities for the poor, stop grocery stores from selling regular-strength beer (and enforce thousands of similarly absurd “regulations”), and create widespread dependency.

But let us focus on the more positive tax expenditures that CoercionNow cherry picks. The idea that government-run schools produce especially “smart, educated kids” is laughable, especially in relation to the enormous cost. What we’re really producing are rich, politically powerful “public” unions that back the “progressive” agenda.

True, some teachers in government schools are excellent, and some classes help students learn what they need. But U.S. schools regularly lag behind those of other nations, and often they utterly fail the poorest students. If we want to see education thrive and effectively serve the needs of students, we must introduce free markets in education. Then parents, who normally will finance their own children’s education (rather than pay a lifetime of taxes to educate other people’s children), will have both the ability and incentive to ensure their children end up in great schools. And individuals can contribute to voluntary charity programs to expand the opportunities available to the poor.

As for roads, the gasoline tax is supposed to link use of the roads with their financing. Insofar as the government operates various services (and the matter of whether it should operate roads lies outside the scope of today’s column), it should finance them through use taxes. Those are far different from the redistributionist schemes of the “progressives.” CoercionNow’s reference to roads is merely a bait-and-switch: the group advertises the paving of roads for the purpose of expanding the welfare state.

Beyond education and roads, CoercionNow turns to bromides and vague generalities. “I want to leave Colorado better than I found it.” Who doesn’t? The best way to do that is to expand liberty. “We’re all in this together.” Does the “this” refer to a free republic or to the Greek-style socialist hellhole the “progressives” wish to create?

Notice CoercionNow’s biggest lie: they claim to be “proud” to pay their own taxes, but what they’re really after is to force others to pay more taxes. After all, nothing is stopping members of CoercionNow from paying as much of their own money as they want to the government. Nor is anything stopping them from financing any private charity.

Let us return to fundamentals. The source of all significant human progress has been the growing recognition of the rights of the individual, however sporadic that has been. Unfortunately, no government anywhere on earth has ever fully protected individual rights—though the United States, grounded on the individual’s “unalienable rights” of “life, liberty, and the pursuit of happiness,” has come the closest. It is time for us to complete the task our Founders started.

The protection of individual rights and the banishment of coercion are flip sides of the same coin. In order to protect individual rights, we must keep the individual safe from the initiatory force of others. In a proper society, no one may murder another, rob from another, claim the property of another through fraud or broken contract, bind or restrict anyone except to lawfully protect others’ rights, or damage another’s property.

When government protects individual rights, prosperous civil society can thrive. Individuals can live their own lives by their own judgment. They can remain alone when they want and join others when they want. They can work and produce as they deem best, using their own resources and those others grant them through voluntary contract. They can keep the fruits of their labor to spend, save, invest, or give away as they deem best. The only legal restriction is that no individual may initiate force against another.

We’ll know we’ve made real progress when no one dares express “pride” in calling for the initiation of force against others. True champions of progress, prosperity, and peaceful human relations proudly advocate the abolition of coercion and the consistent protection of individual rights.

Amazon Considering Renewal of Colorado Associates Program

I was furious when Colorado’s idiot legislators imposed the so-called “Amazon tax” in 2010, forcing the company to drop the Associates program for all Colorado residents. The basic problem is that the Associates program, which incentivizes people to link to Amazon products by paying out a percentage of the resulting sales, arguably created a “nexus” that expanded the state’s power to impose tax-collection obligations on out-of-state companies.

Now that a district court has tossed Colorado’s “Amazon Tax,” what does that mean for the Associates program? I just received the following correspondence from Amazon: “Thank you for contacting us regarding rejoining the Associates program. At this point, we’re evaluating the decision from the United States District Court for the District of Colorado. We’d welcome the opportunity to re-open our Associates Program to Colorado residents. We’ll contact you if we are able to re-open the program in the future.”

Hopefully, the Associates program will again become available. Now will the legislature kindly leave us the hell alone to earn money?

Suit Seeks to Lobato-mize Colorado’s Constitution

The following article by Linn and Ari Armstrong originally was published March 2 by Grand Junction Free Press.

Do “we the people” have a say in how politicians spend our money, or not? That is the basic issue at stake in a legal case currently winding its way through the courts.

Lobato vs. State of Colorado seeks to overturn Constitutional restraints on government spending so that judges can compel legislators to spend tax dollars on government schools to the teachers unions’ satisfaction.

First some context: In 1992, the majority of Colorado voters passed the Taxpayer’s Bill of Rights (TABOR) to restrain government spending and better protect people’s rights to keep and use the fruits of their labor. Last fall, an astounding 64 percent of voters rejected Prop. 103, a tax hike loosely tied to education funding.

On December 9 of last year, Denver District Judge Sheila Rappaport spit in the faces of Colorado voters by essentially throwing out the fall vote and reinterpreting the state Constitution—throwing out the parts she doesn’t like—to suit her own political agenda.

Colorado’s Constitution (Article IX, Section 2) states: “The general assembly shall . . . provide for the establishment and maintenance of a thorough and uniform system of free public schools throughout the state. . . . One or more public schools shall be maintained in each school district within the state, at least three months in each year. . . .”

Judge Rappaport fixated on the phrase “thorough and uniform” and ruled she gets to unilaterally decide what that means, the rest of the Constitution be damned. Of course she decided that the legislature must spend more tax dollars on education, regardless of what the people earning that money may think about it, and regardless of the fact that Colorado’s government schools already spent $8.7 billion in 2009-10 for over $10,000 per student (as Ben DeGrow reports for the Independence Institute).

Obviously the context of the phrase grants wide latitude to the legislature to decide what constitutes a “thorough and uniform” education. The language explicitly says three months of school each year would be perfectly fine; obviously the legislature provides far more than that.

But of course the Constitution contains not just that one section, but many others as well, including TABOR and other spending restraints. As is obvious to everyone except, apparently, Judge Rappaport, one must interpret each Constitutional provision in the light of the others.

For example, while the U.S. Constitution grants Congress the power to “regulate commerce . . . among the several states,” the First Amendment explicitly prohibits Congress from doing so in a way that abridges “the freedom of speech, or of the press.” Likewise, Colorado’s Constitutional language regarding education must be interpreted in light of the provisions concerning other legislative responsibilities and spending restraints.

Judge Rappaport’s biases showed through clearly in her viciously dishonest attack on John Andrews, the former state senator and now the director of the Centennial Institute. Andrews testified as to the meaning of the Constitutional language; Rappaport’s decision summarizes that Andrews believes “a ‘uniform’ education means that any child in Colorado, regardless of his or her family background or geographic location, receives the same learning opportunities and is within reach of the same educational outcomes as any other child in the state.” Fair enough, so far.

But then consider Rappaport’s snarky editorializing: “Some of the State’s witnesses hold extreme views on education. . . . Senator Andrews’ vision for the future is a separation of schools and state similar to the separation of church and state in our nation. . . . He reveres the educational system we had in this country in the 1700s because there were few government operated schools. He fails to mention that our schools did not educate whole segments of the population, including women and people of color, at that time.”

It is true that Andrews advocates the ultimate separation of school and state. So do we (and the comparison to the separation of church and state is apt). But that has no bearing on the meaning of the Constitutional phrase in question. Obviously Andrews recognizes that the Constitution imposes particular requirements that the legislature and the courts must meet. Obviously he wants every child to enjoy a superb education. For Rappaport to essentially call Andrews a sexist and a racist, despite his explicit comments to the contrary, is quite contemptible—and it illustrates the tenor of her politicized ruling.

Thankfully, on January 23, Colorado Attorney General John Suthers announced his office’s intent to appeal the ruling. He correctly said “the constitution, including TABOR, really is under attack in this case” (as DeGrow reports). He further said, “We are going to suggest… the question of what’s thorough and uniform has to be looked at in the context of subsequent constitutional amendments.”

Let us hope that the next judge to hear the case puts Colorado’s voters and Constitution ahead of the judge’s personal political agenda.

Linn Armstrong is a local political activist and firearms instructor with the Grand Valley Training Club. His son, Ari, edits FreeColorado.com from the Denver area.

See also Spending Limits Protect Against Factions, regarding Kerr vs. State of Colorado.

What About Colorado’s Millions of Other Tax Scofflaws?

Today the Denver Post lambasted Douglas Bruce, citing his “reckless and brazen” evasion of state taxes. Recently Bruce was convicted on multiple charges.

I have no doubt that Bruce a) organized his finances in ridiculously convoluted ways (as he seems to be able to do nothing simply), b) agitated virtually every politician, bureaucrat, and leftist ideologue in the state, and c) gravely erred by representing himself in court. Whether he’s actually technically guilty of violating the state’s tax laws, I could not say definitively without studying his case more carefully. What is obvious is that, on the moral level, what’s he’s actually “guilty” of is daring to spend his own money in politically unapproved ways.

But there’s a deeper point here that practically everybody else seems to be ignoring: the large majority of Colorado residents are likely in violation of the state’s use-tax laws. I wrote about this matter earlier in the year. My guess is that millions of Coloradans are tax scofflaws. So, in the broader sense, obviously Bruce’s prosecution is selective; the state simply ignores millions (or at least hundreds of thousands) of cases of (generally unwitting) tax evasion every year.

Here’s the comment I sent over to a couple members of the Post‘s editorial board: “Fair enough regarding Doug Bruce, though the prosecution still smells of political retribution. However, my guess is that well over 80 percent of those currently piling on Doug Bruce are in violation of the state’s use-tax requirements. I’d actually be curious to learn what fraction of the Denver Post editorial board is in compliance with the use-tax laws. I personally think it’s a problem that probably the overwhelming majority of Colorado residents are in violation of the tax law, but apparently this is not the sort of story the Post regards as interesting.”

Update: Curtis Hubbard, the editorial page editor of the Denver Post, informs me that he did in fact address the use tax less than two weeks ago! Somehow I missed that article. He correctly points out that most people don’t pay it and that the state doesn’t enforce it. However, his solution to the problem is to force out-of-state online retailers to collect the tax and remit it to the state. I have a rather different idea for how to equalize the treatment between in-state and out-of-state businesses:repeal the sales tax for in-state businesses (even if done in a revenue-neutral way by increasing other tax rates).

The Student Loan Bailout

The Objective Standard has published my latest article, “Student Loan Scheme Just Another Rights-Violating Bailout.”

I review the basics of President Obama’s plans for student loans and point out they would put taxpayers on the hook for part of the debt. I also found some interesting statistics about the skyrocketing costs of higher education — caused predominantly by federal meddling.

I write, “[A]t issue is not the size of the bailout, but the fact that it forcibly transfers wealth from some people to others, violating the rights of the first group and turning the second into parasites. The more government acts on the notion that it is acceptable to bail out some at the expense of others, the more we will see injustices enacted into law.”

Check out the entire article!

Yes, A National Sales Tax is Constitutional

Some have questioned whether a national sales tax is Constitutionally permissible (without an amendment). The answer is yes.

Milton Wolf is among those who question this: “Mr. [Herman] Cain’s 9 percent national sales tax [and by extension any other national sales tax] simply isn’t constitutional. Among the enumerated powers in our Constitution, there is no federal jurisdiction over the purchases you make at your local stores, aside from those involving interstate transactions.”

But it turns out I looked this up in the course of researching my article forThe Objective Standard“‘Fair Tax’ Looks Ugly in the Details.” (See also my more detailed follow-up article on the same topic.)

While I am no expert on the Constitution, thankfully we in Colorado have just such an expert now working in the state: Rob Natelson. (Recently Natelson delivered a seminar on the Constitution with Dave Kopel.)

In his book The Original Constitution (Second Edition), Natelson discusses the types of taxation permitted under the Constitution (see pages 158-161). He mentions the two relevant sections of the Constitution (as originally written):

Article I, Section 2, Clause 3

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons [etc.; this section was modified by the Fourteenth Amendment].

Article I, Section 9, Clause 4

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken. [This section was modified by the Sixteenth Amendment.]

Of course, the other obviously relevant section is Article I, Section 8: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises…”

The question is whether a national sales tax constitutes a “direct” or an “indirect” tax. Based on Natelson’s remarks, I counted it as an “indirect” one:

Direct taxes included capitations and levies on real property, business assets, and other capital items, on the ownership of basic household necessities, and on wages, rents, and other income. Probably taxes on wealth (such as inheritance and estate taxes) were direct. Indirect taxes were exactions on imports and on consumable goods and services. This line of division was not flawless, for an import duty probably was indirect even if imposed on an item destined to serve as a capital good. (p. 161)

I wasn’t entirely sure of my interpretation, so I asked Natelson whether a “sales tax [is] an ‘indirect’ tax and therefore constitutionally allowed.”

He replied, “Yes. A national sales tax is clearly constitutional, so long as uniform throughout the country.”

He was quick to point out that his evaluation of the Constitutional matter did not reflect his opinion of a national sales tax.

I will state flatly: even though a national sales tax is Constitutionally allowed, it is still a really, truly, horrendously stupid idea, at least if enacted without repealing the Sixteenth Amendment (which permits the income tax). The worst situation we could possibly end up with (in terms of taxation) would be a national sales tax added to a national income tax. One or the other is bad enough, but both would cripple the economy and severely infringe our liberty.

The Great “Fair Tax” Debate

The Objective Standard has posted a three-part debate on the “Fair Tax,” a national sales tax intended to replace the income tax.

In my opening salvo, “‘Fair Tax’ Looks Ugly In the Details,” I point out that the “Fair Tax” is still relatively complex, and it would require many Americans to submit the tax. I also discuss the tax’s “prebate” and its potential for corruption. I conclude, “Yes, advocates of liberty should look at strategies to make tax collection less burdensome. But fundamental tax reform, which must include serious cuts in net taxes collected, becomes possible only with significant cuts to federal spending.”

John Keel wrote a lengthy reply, “Concerning ‘Fair Tax Looks Ugly in the Details.’” He argues that the tax is simple, it would impose low compliance costs, and it would reduce rather than expand the black market.

In my reply to Keel, “‘Fair Tax’ Offers Neither Fairness Nor Simplicity,” I expand my criticisms of the tax. I point out that, yes, the tax would require extensive paperwork for compliance. The so-called “prebate” not only adds another layer of bureaucracy, but it poses the risk of expanding into another welfare program. The “Fair Tax” would become easily corrupted, and it would in fact promote an extensive black market. The tax could also lead to a dual system of federal taxation, complimenting rather than replacing the income tax, and it could morph into a Value Added Tax.

However, I point out, if a sales tax actually followed the repeal of the Sixteenth Amendment, that would be a lot better. But still the major goal of the liberty activist should be to reduce federal spending and restore individual rights.

Read the first, second, and third articles in their entirety!

Would Prop. 103 Let Legislature Spend However It Wants?

A couple days ago “Brian” wrote about Proposition 103, ”The legislature is under no obligation to spend the money on education. Prop 103 is a law, and it is only valid until it is superseded by another law.” I heard a similar claim yesterday from Justin Everett and the hosts of Grassroots Radio on 560 am.

While I think it’s possible that the legislature could try to overwrite Prop. 103 and redirect the funds to other ends, I think that’s very unlikely.

A couple weeks ago I reviewed Prop. 103 and pointed out its language adding the tax hike to the education budget of 2011-12. So, as written, Prop. 103 definitely increases the budget for education. (The budget might have increased anyway, but probably not nearly as much.)

If the legislature tried to spend the Prop. 103 money on other ends, that would undoubtedly draw a legal challenge, though I doubt Colorado’s absurdly biased courts would welcome it. But the political heat for failing to budget in accordance with Prop. 103 would be overwhelming.

I can’t recall who suggested a more plausible alternative: the money could go to shore up the pensions of those working in government “education” (broadly defined). Prop. 103 says nothing about spending the money on actually teaching children.

It’s not like critics of Prop. 103 need to reach for strained arguments about the legislature “spending the money however it wants”; as it is written the measure is terrible.

As my dad and I wrote recently, “Prop. 103. Would Hurt Working Families, Kill Jobs.”

A new paper from the Independence Institute amplifies these concerns:

The higher tax will reduce job opportunities in Colorado. The total loss in jobs from the Prop 103 tax increase is estimated between 7,400 and 11,600. The higher tax will also reduce the tax base, partially offsetting the revenue generated by the tax. Prop. 103 will exacerbate a $1 billion structural deficit in the state budget.

This is an important argument. By further weakening the Colorado economy, Prop. 103 would reduce the amount of taxes flowing into the rest of the budget. So, while education spending would skyrocket, spending elsewhere would fall relative to where it otherwise would have been.

That Prop. 103 would harm the economy is the first major reason to oppose it; the second is that the tax hike would probably have little to no effect on the actual quality of education. (My dad and I review this point as well.) Yes, the money would go to enrich administrators and the teachers’ unions, but would it actually improve kids’ education? We seriously doubt it.

Further enriching the teachers’ unions and entrenching their power is hardly the way to improve education. Instead, we need to move toward free markets to give educators and families the freedom they need to best educate the children in their care.

Income Tax Stinks, but the “Fair Tax” Doesn’t Look Much Better

The Objective Standard published my latest article, “‘Fair Tax’ Looks Ugly in the Details.”

I point out that, not only would the “Fair Tax” (a type of national sales tax) increase the cost of items by (at least) 30 percent, but it would also tax consumable services. While usually sellers must remit the tax, sometimes consumers must do so. The worst possible outcome is a sales tax added to the income tax.

I argue:

To a large degree, the debate over the sales tax versus the income tax misses the more fundamental issue of spending levels. How the federal government collects our money matters, but how much the government forcibly confiscates matters far more. So long as the federal government spends massive amounts of the citizens’ wealth on “bailouts,” corporate welfare, and handouts to individuals, any resulting tax necessarily grows onerous.

Check out the entire article!

Prop. 103. Would Hurt Working Families, Kill Jobs

The following article by Linn and Ari Armstrong originally was published September 30 by Grand Junction Free Press.

They’re ba-a-ck, and they want to raise your taxes, again. They always do. Yes, it’s “for the children.” It usually is.

But Proposition 103, the tax hike brought to this fall’s ballot by Boulder Democrat Rollie Heath and the teachers’ unions, is really about taking more money out of the pockets of working families to enrich those unions. Throwing more tax dollars at government-run schools hardly would improve the quality of education.

If you really want to help “the children” (and everyone else), you will vote no on the job killer Prop. 103. Taking even more money out of the voluntary economy would only make it harder for working families to put food on the table and afford other necessities.

Perhaps you’ve noticed that the economy remains weak, with unemployment nationally hovering at around nine percent and Colorado not far behind. The mortgage bust and the bipartisan political bungling that followed hit Grand Junction especially hard. Politicians have already burdened the economy with myriad taxes and reams of controls — how much more can it take?

Taking more money from working families for taxes would dry up private-sector jobs. While the cost of the tax hike would depend on the state of the economy, Legislative Council estimates the measure would suck around $2.9 billion out of the voluntary economy by raising sales and income taxes for five years. Think about how many salaries that represents.

Prop. 103 devotes the money to “public education” from preschool through college, taking the 2011-12 budget as the base level. Legislative Council estimates that base at about $4.3 billion (which includes only state funding, not local and federal). Thus, the added taxes would raise state spending by around 12 to 15 percent per year. Of course, how the legislature would adjust education spending absent the tax hike remains anybody’s guess.

Even those who want to raise taxes may question a hike specifically for education. If you think state government should spend relatively more on roads and criminal investigations instead, you may not like Prop. 103 so much. On the other hand, those with particular ideas about how the state should fund education may not see the measure as specific enough.

We think state legislators should prioritize better, cut spending, and lower tax rates so people can keep more of the money they earn. Then people could spend their own money on what they find most important, whether education, a new business, health care, or whatever.

Would spending more tax dollars on education even improve the quality of education? We think not. The Joint Budget Committee notes total Colorado spending on education has jumped from just over $5 billion in 2004-05 to $7.2 billion in 2011-12, a 44 percent increase, while student enrollment has climbed 10 percent. Has education gotten proportionately better over that period? Hardly.

Taking a longer view, Ben DeGrow of the Independence Institute notes, “Since 1970 per-pupil spending in Colorado and the U.S. have more than doubled after counting inflationary changes — even given the real modest freezes and cuts many Colorado K-12 schools have experienced over the past two years.” (Note: Ari has written for the Institute, in one case on a contract basis.)

Coloradans already spend tons of money on education. The NEA recently estimated per-pupil spending here at over $9,500. Education spending already consumes around 37 percent of the state’s total operating budget of $19.6 billion, dwarfing spending for corrections and transportation combined.

What do we get for all that spending? “Adding more tax dollars to K-12 systems on a large scale has no connection to improving academic results,” DeGrow summarizes. As Andrew Coulson reviews for the Cato Institute, as U.S. per-pupil funding has skyrocketed over the last few decades, reading, math, and science scores have virtually flatlined.

Rather than throw more tax dollars at the teachers’ unions and the political cronies they finance, we need to instead find better value for our education dollars. Schools need greater ability to fire dud teachers without incurring union lawsuits. Most districts can get by with fewer administrative paper-shufflers. Schools should stop following the latest expensive fads and get back to teaching the basics.

Over the longer term, we should look at ways to reduce political involvement in education, not expand it. We are heartened by the success of various charter schools throughout the state. Ultimately we’d like to see real choice in education. We prefer universal tax credits over vouchers. Eventually we’d like to see truly free markets emerge in education, with parents, educators, and voluntary charities assuming the basic responsibility for organizing and financing education. Get politicians and bureaucrats out of it.

This fall, though, we face an immediate choice. Should we divert even more money from the hard-pressed voluntary economy to the teachers’ unions, or should we demand greater accountability and better prioritization for the tax dollars we already turn over? Only the latter option comports with economic sanity and your liberty to spend your money as you choose.

Pajamas Reply to Elizabeth Warren

Pajamas Media has published my latest article, “Elizabeth Warren’s ‘Social Contract’ an Ideological Fantasy.” (The editors picked the great title.)

The article replies to a popular video of Warren in which she argues the “social contract” justifies hefty taxes on the wealthy.

I decimate her arguments, if I do say so. First, I point out, “Productive business leaders create the wealth that enables us to thrive, seek employment, and on the side pay for governmental services.” Then I argue the proper function of government is to protect people’s rights. I conclude:

The notion that the likes of Nancy Pelosi can spend the money of Amazon’s Jeff Bezos better than Bezos can is laughable on its face.

Warren contends “there is nobody in this country who got rich on his own.” In a sense she’s right: people get rich by providing enormously valuable goods and services to others who willingly pay for them. Warren and other politicians should not be able to dictate what “hunk” of the earnings of others they forcibly seize. …[L]egitimate government does not loot “the rich” (or anyone else) but instead protects people’s rights, including their rights to their earnings.

Check out the entire piece!

Let’s Eliminate the Sales Tax

As my dad and I argued last year, Colorado should eliminate the sales tax (along with the use tax) even if done in a revenue-neutral way by increasing the income tax rate.

Consider a few of the many problems with the tax:

Interstate commerce has created huge problems for collecting and administering sales and use taxes.

* Paying the sales tax over small-scale intrastate commerce is incredibly difficult. For example, I can directly sell my book, Values of Harry Potter,practically anywhere in the world, but I cannot afford the paperwork nightmare of selling it directly in Colorado. (You can still buy it on Amazon!) In my experience, many small businesses simply ignore the sales tax laws.

Paying the use tax is an absolute nightmare, and the fact that hardly anybody does it turns most Coloradans into criminals.

* Sales taxes disadvantage local stores, yet forcing out-of-state businesses to collect sales taxes would create “as many as 15,000 tax rates to administer” — a bureaucratic nightmare.

The obvious solution to all these problems is to simply eliminate the sales tax.

Thankfully, the Joint Budget Committee has placed the Colorado budgetonline starting with 2004-05. Looking at the budget for fiscal year 2011-12, we can learn what eliminating the sales tax would mean.

Page 6 of that document reveals that total “excise taxes” (sales, use, and related taxes) bring in $2,184,400,000 (let’s say $2.2 billion). Income taxes bring in $4,692,200,000 (let’s say $4.7 billion). So, very roughly, eliminating the sales tax in a revenue-neutral way would require an increase in the income tax of somewhere less than fifty percent. Of course I’d rather see net taxes decline, but I could live with a revenue-neutral shift in order to get rid of the onerous sales tax.

Prop. 103 and Fungibility

Proposition 103 is the sole state-wide measure, a tax hike, for the November 1 Colorado ballot. I will have more to say about this elsewhere. For now, I want to investigate one particular aspect of the measure; the potential fungibility of funds under it.

Here’s an analogy to introduce the fungibility issue. Let’s say your daughter has $100. She wants to go to a concert, but she doesn’t want to spend the $30 on a ticket. She also wants to buy a $30 book to help her get into college, and she wants to spend the other $70 on a trip to the mall. She comes to you and says, “Mom, I really, REALLY need this $30 book, because it’s really REALLY important for me to get into college. Can, I can I, can I have $30 for the book, please please PLEASE?! I promise I’ll use that $30 only for the book.”

You say sure. So she spends $30 on the book, $30 on a ticket, and $70 at the mall. Otherwise, she would have forgone the concert ticket and spent $100 total. True to her promise, she spent your $30 on the book. But that’s where the fungibility issue comes up: your gift allowed her to divert another $30 to the concert ticket. So even though you officially gave her the money for the book, you might as well have given it to her for the concert ticket. The result is the same.

So the question is, even though Prop. 103 raises taxes “to be spent only to fund public education,” does that really mean it will require the legislature to spend more on education that it would have done otherwise?

The answer is yes. Consider the change to the statutory language, which is the primary thing that matters in court; see page 10 of the Blue Book.(I’d like to thank Carolyn Kampman of the Joint Budget Committee and Chris Ward of the Legislative Council for helping me understand this.)

All revenues raised by the increase in taxes imposed pursuant to this measure… shall be appropriated by the general assembly only for the costs of public education from preschool through twelfth grade and public postsecondary education and shall be in addition to and not a substitute for moneys otherwise appropriated by the general assembly for the costs of public education from preschool through twelfth grade and public postsecondary education the amount of which appropriation shall be not less than the amount appropriated for such purposes for fiscal year 2011-12.

The key line is the last one, which requires that the legislature spend whatever it spends in 2011-12, plus the proceeds of the tax hike. Legislative Council estimates that will be about $515 million the first year and progressively more after that, for a five-year total of $2.9 billion.

The question, though, is what the legislature otherwise would spend on education. If it otherwise would spend (say) $500 million more on education, and the tax hike brings in $600 million, then the legislature has $500 million to devote to other purposes.

Based on my conversations with Kampman and Ward, I conclude it is basically impossible to predict how the legislature otherwise would act, though I confess the intricacies of school finance surpass my mastery. It seems reasonable to assume, though, that Prop. 103 would add substantially to the education budget for the five-year period.

I think Prop. 103 is nevertheless a really horrible idea, but I’ll present the reasoning for that conclusion elsewhere.

Aurora’s Gaylord Vote Illustrates Politicization of Property

A story from today’s Denver Post illustrates the politicization of property in America: “The Aurora City Council on Monday voted unanimously to designate as ‘blighted’ 125 acres of vacant land near Denver International Airport.” The vote paves the way for Gaylord Entertainment to build a hotel without paying the same property taxes as everyone else.

Of course the “blight” designation is a complete fraud. By the same standards, most any property in Colorado could be declared “blighted.” And yet the statutes encourage local politicians to flagrantly lie for political gain.

When local politicians may arbitrarily declare property “blighted,” that gives them an trump on private property rights. True, all levels of government have substantially eroded property rights in America, but local governments have done perhaps the most damage.

The “blight” designation is tied into a discriminatory tax scheme. Under Colorado law, some taxpayers are more equal that others. If you run a long-established family business, you get screwed with the highest possible tax rates. If you are a flashy out-of-state (or out-of-country) corporation, you can finagle special tax breaks. Not only do discriminatory taxes violate basic standards of fairness and equality under the law, they promote bureaucratic ass-kissing as the standard method of conducting business.

Politicians ought not be in the “business” of violating private property rights or playing tax favorites. Instead, they should protect property rights for everyone, establish low, even taxes for all comers, and then let businesses succeed or fail on a free market.

***
Geoff Granfield posted the following comment onJune 29, 2012 at 3:23 PM:
There is not a single policy I’ve heard of changing the tax code which wasn’t greeted with strong amount of resistance, establishing that issue among the most difficult difficulties struggling with United States now. It can be unfair, it doesn’t matter what facet on the controversy you land on. And while people in politics show they have kept our income taxes small federally, state government legislatures (from either side) have been acquiring unique methods to make up the reduction in revenue. Precisely how imaginative is your current state? http://www.tax-defense-network-tax-laws.com/tax-defense-network-top-10-silly-tax-laws

Polis Promotes, Decries Tax Loopholes

Yes, I’m used to members of Congress talking nonsense; that’s practically their job description. But a comment that just came through from Jared Polis is so ludicrous it’s worth a mention:

In this session, I have sponsored bills to help create jobs by encouraging private investment in critical sectors through tax incentives. I also strongly support tax reform to eliminate special interest loopholes, which will help balance the budget while reducing tax rates for families who don’t have high-paid Washington lobbyists rigging the tax code in their favor.

The bit about “tax incentives” links to a release about waving certain taxes for private real-estate investments “in high foreclosure areas.”

So, in the same paragraph, and apparently written with a straight face, Polis simultaneously says he wants “special interest loopholes” for some, but he wants to eliminate “tax incentives” for others, depending on who has the most political sway for the moment. Only he switched the euphemisms around to fit his purposes.

Unfortunately, Polis’s remark typifies the state of the American political discourse.

Corporations Aren’t People, So Stop Taxing Them

The following article by Linn and Ari Armstrong originally was published August 5, 2011, by Grand Junction Free Press.

Imagine if you and your spouse individually paid income tax, then you had to pay a separate tax on the same income as a family unit. That would be insanely unjust double-taxation, right?

It is equally unjust to tax corporations. If governments must resort to taxation (and frankly we’re not even persuaded on that point), they should tax only individuals, not groups. Notably, eliminating corporate taxes would jumpstart the struggling economy, something none of Obama’s tax-and-spend interventions has done.

We readily concede the left’s tireless mantra: “Corporations aren’t people.” Families aren’t people, either. However, both are composed of people, of individuals with rights.

In a family, two adults voluntarily agree to live together (usually), join their resources (at least partly), support each other, and possibly raise children. In a corporation, many individuals voluntarily pool some of their resources for some productive venture. You don’t lose your rights (or gain new ones) by joining a corporation any more than you do by getting married.

Ironically, it is the left that actually tends to treat corporations as though they were people. According to the typical leftist smears, a corporation is some soulless monster, a will unto its own, symbolized by a sinister cigar-smoking exploiter in a black hat. The left reifies the corporation — treats it as a concrete entity under its own motive power.

In reality, a corporation is an abstraction describing an organization of people who come together for a specific purpose. Within a business corporation, many individuals invest in a large-scale operation and hire directors to run it.

Here our focus is on the competitive business corporation. There are many other sorts of corporations; for example, the City of Grand Junction is a type of corporation. Historically, English law granted corporations the political power to forcibly block competitors, but that’s not the common meaning today.

Obviously we oppose all political favoritism that lets corporations (or individuals) forcibly damage competitors, gain tax subsidies and “bailouts,” or otherwise violate individual rights. (We’re talking about real rights, not the made-up “rights” promoted by the left to seize or control other people’s resources.)

With that background, we can turn to matters of taxation. Title 39, Article 22 of the Colorado statutes imposes a 4.63 percent tax on “C corporations,” the most common type. And the federal government imposes taxes as high as 35 percent, “the world’s highest corporate-tax rate,” Cato’s Richard Rahn recently lamented.

Among the many benefits that would result from eliminating all corporate income taxes, the most important would be to spur the American economy. Chris Edwards, another writer for Cato, summarizes, “A lower corporate rate would boost domestic investment, which in turn would generate more jobs and higher wages and incomes.”

Why? Without burdensome taxes, businesses would flock to the United States and pour more money into the economy. Today U.S. politicians drive companies offshore, then demonize them for fleeing political oppression. Without politicians siphoning off their profits, businesses would invest more in building up and expanding their productive capabilities, creating more and better jobs.

And consider the resources saved in compliance costs. Today, corporations must navigate the conflicting and inherently ambiguous state tax laws, then hire lobbyists to try to protect themselves from federal tax abuse. Through so-called “loopholes,” different businesses pay different net tax rates. The result is massive productive potential squandered appeasing and dodging politicians and tax bureaucrats.

Eliminating taxes on groups would hardly eliminate them on the individuals in those groups. Corporate executives would still pay income tax on their earnings, as would all the individual employees of the business and all shareholders earning dividends. The difference is they wouldn’t be subject to unjust and economically damaging double-taxation.

Another benefit to eliminating corporate taxes would be to end the social engineering of the Internal Revenue Service. Today, politically favored corporations pay no income taxes. They’re called 501(C)(3) corporations, or nonprofits. The problem is that politicians and tax bureaucrats get to decide which groups qualify and which do not.

The result is the absurd spectacle of partisan “nonprofit” groups, including many churches and think-tanks, pretending to be “nonpartisan” for tax purposes. The tax code promotes rampant dishonesty and political gaming within the nonprofit world. Much better would be to tax individual employees of all groups at the same rates.

The government should not be in the businesses of punishing some groups more than others with higher tax burdens. Instead, the government should treat all individuals, and all groups of individuals, equally under the law. Eliminating corporate taxes would substantially promote that goal.

Corporations aren’t people. Politicians should stop taxing them as if they were. Eliminate corporate taxes to promote economic growth and basic legal fairness.

***

Anonymous commented January 25, 2012 at 4:40 PM:
This is a very nice article. I would add, as an example of unfairness, the fact that some health insurance organizations, such as Blue-Cross/Blue-Shield are treated as non-profits, while others are treated as for-profits when there is scarcely a hairs width of difference between them. The result is that BCBS has been very successful in dominating the insurance marketplace, reducing choice and competition.
– Darrell

Ari Armstrong commented January 25, 2012 at 4:42 PM:
The entire distinction between “profit” and “nonprofit” is largely a creation of the federal income tax. In a free market, there could be a nonprofit designation, but that would be a contract between an organization’s leaders and its contributors. There would be no artificial political favoritism of some organizations over others.

CA Assaults Amazon Affiliates

Investors Business Daily published a good editorial July 1 supportive of Amazon in the wake of California’s passage of its so-called “Amazon Tax.” See also my backgrounder focusing on Colorado’s version of the tax. (And of course see my Disclosures Unjustly Compelled by the FTC.)

I sent the following notes to the paper:

Dear IBD,

Thank you for your July 1 editorial against California’s so-called “Amazon Tax.” I offer two corrections.

First, your list of states attempting to impose the tax omits Colorado, my home state, where the legislature has also driven Amazon and other companies to drop their affiliates (including me).

Second, you incorrectly state that, if online retailers do not pay the sales taxes, that leaves “consumers free to buy without paying them.” Not so. According to “California Use Tax Information,” ”Generally, if sales tax would apply when you buy physical merchandise in California, use tax applies when you make a similar purchase without tax from a business located outside the state.”

I imagine that the typical Californian, like the typical Coloradan, has never heard of the “use tax,” meaning that huge portions of the states’ populations are in violation of the tax law — a significant problem. [See also my article on Colorado's use tax.]

In-state companies that must collect the tax have a legitimate beef. But an alternative to expanding the tax to out-of-state companies is to repeal all sales and use taxes, even if offset by increases in other taxes.

My ‘Use Tax’ Case Resolved, Tax Remains a Problem

The good news is that the Colorado Department of Revenue is no longer threatening to seize my property over “use tax” allegedly due. An agent told me over the phone today that the Department would accept the original payment of $436.93 from my wife and me as payment in full for the past seven years of use taxes.

This, then, concludes my case, which I discussed in an article last monthand in a June 15 follow-up.

But the problems I had with the tax only underscore its broader problems — problems the legislature should address.

To back up, what is the “use tax?” If you buy something from out of state without paying state sales tax on it, you’re supposed to track such sales and cut the state a check for an equivalent amount.

Of course, hardly anyone actually pays this tax, and most people I’ve talked with have never even heard of it. But this exposes most Coloradans to potential criminal charges, property seizure, and arbitrary enforcement. That’s wrong.

So you can imagine why, after my wife and I actually paid the tax, we were frustrated to suffer further harassment and intimidation at the hands of the Department of Revenue. Specifically, the Department sent us three letters, all of which claimed we still owed the entire use tax for last year. Two of the letters also claimed we owed an additional amount for 2009. The final letter threatened to seize our property if we didn’t pay the 2009 amount. That’s more than a little irritating, given that we had already paid the entire 2010 tax, plus the 2009 tax with an 18 percent penalty.

But apparently the Department of Revenue’s idea of generating tax revenue is to relentlessly harass and threaten people who actually pay the damned tax, and totally ignore everyone else who doesn’t pay it. (I’m talking about consumers; I’ve heard anecdotally that the state makes some effort to enforce the “use tax” among businesses.)

The other major problem with the tax, beyond the problem of enforcement, is that it’s an extreme hassle to pay. Seriously, we’re supposed to track all our out-of-state purchases and then calculate the tax ourselves? That’s obviously ludicrous, which is why few do it.

Just to calculate and pay the initial tax, my wife and I spent 6.5 hours combined. Then we spent around two more hours responding to the Department of Revenue’s first two erroneous letters. We spent an additional 98 minutes (combined) on June 15 responding to the Department’s third letter. Yesterday I spent an additional 14 minutes further reviewing the matter. (I also had trouble sleeping and spent most of the day worrying about it.) Today I spent just over an hour on the phone with the Department of Revenue. Combined, my wife and I spent about 11.4 hours dealing with the tax, which transfered to the state $436.93. In addition, the Department of Revenue devoted who knows how much more time to the matter. In sum, a huge portion of the value of the tax was eaten up in the paying of the tax. And that hardly accounts for our emotional distress.

(This is aside from the obvious point that we are out the $436.93, which I am quite confident I could have spent better than the state’s bureaucrats will manage.)

Thankfully, the Department’s agent I reached today by phone was quite helpful and friendly, and she resolved the matter within a few hours.

What happened in our case, she explained, was that the Department’s “system actually calculated penalty, interest, and penalty-interest, which is double interest.” The agent said she waived all penalty and interest beyond the 18 percent we already paid, so now “there is nothing due.” (I still have no idea how a person is actually supposed to calculate all the penalties and interest according to the formal rules, but apparently just paying the extra 18 percent does not necessarily cut it.)

So why did the Department claim we owed the entire 2010 tax? The agent further explained that the Department had reallocated the portion of our payment intended for that year to the additional penalties for previous years.

I do want to state publicly that I sincerely appreciate the Department’s agent for working quickly to resolve the issue. (I only wish her efforts had not been necessary.)

So how should the tax be legislatively modified? At minimum, the legislature should clarify an easy-to-calculate penalty for late payments, adjusted for the degree of lateness. In my experience the existing rules are impenetrable.

However, I believe the legislature should go far beyond that and repeal the “use tax” altogether. It is a nuisance tax, inherently difficult to pay and enforce, and so it turns vast numbers of Coloradans into scofflaws, typically without their knowledge.

But, local retailers would complain, that would unfairly advantage out-of-state sellers. Therefore, as my dad and I argued last year, the legislature should simply abolish all sales and use taxes, even if done in a revenue-neutral way by increasing the income tax rate. (This would require voter approval.) Obviously that would eliminate all the problems associated with paying and enforcing sales and use taxes (including the state’s malicious campaign against Amazon and other online retailers).

The fewer the types of taxes, the better.

Use Tax Nightmare Continues

Legislative spending plus depressed tax revenues have generated a budget crunch in Colorado. So you’d expect state government to encourage people to pay taxes, maybe even seem grateful for it, wouldn’t you?

But consider the incentive structure for the “use tax.” If, like most Coloradans, you’ve never heard of the use tax (or if you pretend you haven’t heard of it), then the state does nothing to you, and you go on your merry way.

Because my wife and I paid the use tax, not only for last year but for the past seven years, the Colorado Department of Revenue has sent us three erroneous letters harassing us about paying the use tax. Which we already paid. Here I continue the chronicle from my write up last month.

The last letter is dated June 13 (but received, ironically on June 15, the anniversary of the Magna Carta, which recognizes rights of due process among others). In this letter, Roxanne Huber, Executive Director of the Colorado Department of Revenue, goes so far as to threaten “seizure and sale of your [my!] personal property.”

I did learn from this letter that I made a minor mistake in paying the use tax for the 2009 period. You see, according to Form “DR 0252 Web (12/03/10″ (and who hasn’t perused that one for a little pleasure reading), late payments carry a penalty “not to exceed 18% of the tax due, and interest.” I didn’t understand the “and interest” clause. I thought we just owed an 18 percent maximum penalty, so that’s what we paid. But that’s not the end of it.

Form DR 0252 Web refers the reader to www.TaxColorado.com (lovely domain) for additional information. I tried “Common Questions,” which contains a section, “Internet Sales — Tax Paid by Purchaser.”

THIS page says that for more information I should see Form DR 0252 (which, you may recall, is where I started), or 39-26-106 C.R.S. and 39-26-202 C.R.S. Luckily, I know how to look up Colorado statutes online. So I went to Title 39, “Specific Taxes,” “Sales and Use Tax,” “Part 2 Use Tax.” But section 202 is “Authorization of tax,” so I turned instead to 39-26-207, “Penalty interest on unpaid tax.”

So what does this statute say? And I quote: “Any tax due and unpaid under this part 2 shall be a debt to the state, and shall draw interest at the rate imposed under section 39-21-110.5, in addition to the interest provided by section 39-21-109…”

In other words, this is not something that any actual human being can follow.

But, according to the Department of Revenue’s June 13 letter, there are actually three different sorts of penalties: “Sales tax – Late filing penalty,” “Penalty-interest,” and “Interest.” In my case these things totaled $28, but for some reason we had received “credit” for an apparently arbitrary portion of this, making our alleged amount due $20.07.

But, as I explained to the Department, we had already paid the full tax plus an 18 percent penalty of $20.61, so we owe (at most) $8 for “Penalty-interest” and “Interest,” for which we wrote a check.

To collect that $8 in “Penalty-interest” and “Interest,” the Colorado Department of Revenue sent and posted a letter, and my wife and I spent a combined 98 minutes responding and then posting our own letter.

The June 13 letter also claims we still owe the entire tax for 2010 (which we already paid), plus a penalty (which we do not owe, because we paid it on time). But for whatever reason, the June 13 letter did not add that amount to the “Amount Due with This Statement.”

Previously I wrote that I feel “a bit like a minor character in Franz Kafka’s novel The Trial.” While I do not wish to compare the seriousness of my situation with that in the dystopian film Brazil, I cannot help also comparing Form “DR 0252 Web” to Form “Twenty-Seven B Stroke Six.” Or, as my wife put it, “I feel like I’m in the Twilight Zone.”

In other words, the use tax is absolutely crazy.

***

Tony Bubb commented June 16, 2011 at 7:56 AM
Ari,
Yeah, I’m not surprised. I’ve more or less given up on doing my own income taxes, not because I can’t… I did for almost 20 years…
But the Colorado “Fair Share Division” ends up writing me to tell me that my taxes were incorrectly done in vague and confusing language.
This requires time to unravel that and determine that they have had it wrong, not me, and that I don’t owe anything more.
When you get your taxes done professionally, that service is covered.
Nobody should have to be motivated in this way, but I am. So much for the folks there.

Spending Limits Protect Against Factions

The following article by Linn and Ari Armstrong originally was published June 10 by Grand Junction Free Press.

“Democracy is two wolves and a sheep voting on what’s for dinner.” It’s mob rule; fifty-one percent of the population voting to enslave the rest. “Democracy is a form of government in which you can vote for a living instead of working for one,” adds Lawrence Reed.

America’s Founders feared the inherent pitfalls of direct democracy, which is why they established a constitutional republic. The U.S. Constitution and its Bill of Rights (in its text, if usually not in its modern interpretation) tightly controls and limits the powers of the federal government.

The Constitution establishes a purely representative government at the federal level. We vote on elected officials, and (as outlined in Article V) congress or state legislatures must initiate constitutional amendments. Moreover, Article IV, Section 4 states, “The United States shall guarantee to every state in this union a republican form of government.” So, for instance, Colorado could not impose a hereditary line of state kings.

Does the federal guarantee of republican government render state-level popular votes void? Specifically, does it clash with the Taxpayer’s Bill of Rights (TABOR), passed by voters in 1992? That’s the claim of a lawsuitfiled in district court and signed mostly by elected officials. The suit hopes to overthrow TABOR and allow state and local governments to tax and spend more without voter approval.

The suit favorably quotes James Madison, who argued against pure democracy in the tenth Federalist paper. However, in an article for theColorado Springs Gazette, legal scholar Rob Natelson notes that republican governments easily accommodate some direct participation by the people.

Natelson explains, “What Madison actually was saying was that a type of mob rule identified by Aristotle (and called, in English translation, ‘pure democracy’) was not republican. Madison clearly thought a republic could feature direct citizen lawmaking, since in Federalist No. 63 he referred to ancient Athens, Sparta, and Carthage as ‘republics.’”

In other words, TABOR, as part of Colorado’s constitution, remains fully compatible with the U.S. Constitution. The politically motivated lawsuit presents a sham.

Moreover, TABOR actually helps protect against the sort of factionalism that Madison warned against. The lawsuit quotes Madison, “It may well happen that the public voice, pronounced by the representatives of the people, will be more consonant to the public good than if pronounced by the people themselves, convened for the purpose.”

The lawsuit conveniently omits Madison’s next line: “On the other hand, the effect may be inverted. Men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests, of the people.”

This describes precisely the state of the modern Colorado legislature. “Factious tempers,” “local prejudices,” and “sinister designs” often rule the day at the state capitol.

For example, the legislature continues to finance corporate welfare, despite the explicit prohibition against doing so in the state constitution. And the legislature continues to impose protectionist legislation, as with the beer laws, rewarding interest groups at the expense of consumers and entrepreneurs. Most modern legislative functions involve forcibly seizing money from those who earn it to give it to those who do not.

Thus, the state legislature epitomizes the evils of faction. While Madison clearly saw the dangers of mob rule, he also warned against the comparable threat of an unrestrained legislature.

The essential characteristic of republican government becomes, then, its constitutional form, which limits the powers of government and protects the rights of the individual from abuse by factions, whether democratic or legislative. A legislature unbound by constitutional rule becomes the rapacious tool of special-interest factions.

The individual rightly claims among his essential rights his ability to work for a living, in voluntary association with others, and to dispose of the fruits of his labor by his own judgment. This is the fundamental human right most often threatened and abused by legislators, many of whom essentially institute legalized theft in exchange for political bribes.

TABOR helps to mitigate precisely this danger. Far from undermining a republican form of government, TABOR augments the constitutional protections of the individual and limits the threat of unruly factions. In requiring voter approval for new taxes, TABOR does not impose mob rule; it checks legislative abuses by the approval of the people. TABOR does not free the majority to abuse the rights of the minority; it allows the voters to stop the legislature from abusing people’s rights.

We can argue about whether Colorado voters too easily amend the state constitution. We can debate whether proposed constitutional changes should first meet a test of conformity to federal and state bills of rights. But as to the status of TABOR, far from undermining our republican form of government, clearly TABOR helps to protect it.