Tax day is right now, April 18 it turns out, not the 15th as usual. The Internal Revenue Service switched it because Emancipation Day is a holiday in Washington DC. It commemorates Abraham Lincoln’s first stab at an emancipation proclamation made in 1862 on…April 16th. Not that DC is relevant in this context. As income tax filers know, their returns are not to be sent to the nation’s capital on tax day, but to all sorts of far-flung places across the federal pork universe, to IRS offices in Charlotte, NC, Ogden, UT or (if you’re fishing for a politically-inspired audit) Cincinnati, OH. Then there is the matter of IRS cluelessness. Do the chieftains there know that Juneteenth falls not in April? It comes in June.
Why do we have an income tax again? The United States had already become the largest economy in the world and then some, at the very peak of the global industrial revolution, before the income tax came about via Constitutional amendment in 1913. No need for it to assist the economy into prominence. We have it for another reason, to raise revenue for the government—right?
Actually this makes no sense. The United States, since 1913 (when Europe was about to mutilate itself in World War I), has been the issuer the world’s dominant currency, the dollar, for about 100 years now. When you have the world’s dominant currency, it means you can produce it and people will give you non-currency stuff (the goods and services that they produce) for it to quite a degree.
So why do we need a tax system? The government can issue money and get stuff for it, easily. In economics jargon, this curious phenomenon is called “seigniorial privilege.” Some currencies have the monetary function more than others, because of their reliability or whatever, meaning that their issuers can get rich. Not rich in terms of piling up more currency, but specifically in terms of piling up more stuff, of having the ability to issue currency for non-currency things. “Money is that commodity that is readily exchangeable for any other commodity,” as Carl Menger put it over a century ago in his classic definition.
Where’s the tax system supposed to come in here? The yearly seigniorial privilege of the United States probably runs about $1 trillion. The U.S. can produce that much cash every year, and people the globe over will volunteer to take it in exchange for their own products. You see the implication. If the federal government could somehow keep its budget to that level, $1 trillion, all forms of taxation could be wound down and the government kept solvent.
This is the low-end estimate. For if the United States cut tax rates, the after-tax rate of return of all enterprises and investments in the country would go up. This would increase global demand for the dollar, in that the dollar transactions area would be a more profitable place to do business. The level of seigniorial privilege would rise, past $1 trillion.
This virtuous cycle would proceed apace until serial tax-rate cuts brought the marginal rate to zero. In this scenario, the world’s dominant currency would reign in a transactions area so valuable and so growing that its issuer (the government, though it need not be) would be able to purchase new goods and services at some healthy fraction of the new global demand for currency every year, some healthy fraction of world GDP growth. This amount could be upwards of perhaps $5 trillion per year.
You could say that that would be too much money for the government, too big a budget. Hence in this case, we would have the opportunity to consider negative tax rates, in that the seigniorial privilege of the United States would be so great that to spend all the currency issuance on government purchases would be gross. A good part of the money would have to be dished out to the people. Sort of like Alaska does with its oil receipts.