The Elements of a Fair Tax System of Taxation; R. K. Foley, Jr.

Ridgway K. Foley, Jr. The Elements of a Fair System of Taxation THE current mania for tax limita tion, tax reform or tax protest pro vokes the more intense inquiry into the rationale and justification for any system of taxation and the proper structure of a fair conceptual frame work for exercise of this state power. This essay presents a brief analysis of the issue and poses a simple solu tion much more in harmony with the idea of individual freedom than any existing dogma. The·Basis and Uses of Taxation The ideological roots of taxation rest in the good earth of sovereignty, that compelling state power over the rights of individuals.! Traditionally, the three common attributes of sovMr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. 52R ereignty consisted of the power of police,2 of taxation, and of eminent domain. From tribute paid involun tarily to the most evil or cunning or powerful by members of the tribe, to the king in his counting-house, to the modern exchequer and internal revenue agents and audits, the the ory of taxation has changed little: those in control of the apparatus of the state exact assets and value from serf or citizen in order to pay for governmental obligations and ser vices.

It becomes possible to identify three uses of the sovereign power to tax: the raising of revenue, the loot ing of citizens, and the implementa tion of social policies. Reason would suggest that only the first rationale deserves support, although one could THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 529 cogently urge that the appropriate analysis of that concept does indeed implement a social policy, the policy of nonintervention in voluntary hu man action. Taxation of persons as a means of raising revenue probably pre-exists recorded history. Operating on the assumption that all mankind within a given perimeter benefit from the existence of the order of the state, princes and their modern counter parts have long demanded tribute under force of law. Simply stated, taxation supports the state by sup plying necessary revenue. Like collecting revenue, the em ployment of taxation as a means of systematic looting and banditry an tedates the dawn of history. Derived.

from the sinister side of the human. actor, taxation can be enlisted as a handy label to obscure outright thievery. By its very nature, taxa·· tion requires coercion, not voluntary action, on the part of the subject; therefore, the master can appeal to law or theology or some other strat agem to justify his confiscation of the wealth created by another. History is replete with examples of the pow erful and banal invoking "law" to line their pocketbooks and purses. The practice of taxing to encour age or induce "social" policy appears of more recent origin, yet it is quite as wicked as the habits of the pick. pockets of yore. The tactics are siro. ilar: those in power determine a "good" or "just": end and rob the pro ductive to pay for that goal. For ex ample, the popiulists in power may perceive that tlJ-e wealthy individu als in society <ilo not deserve all of the assets which they have secured through hones~ trade; therefore, by the means of progressive tax laws, the more wealth created and em ployed, the higher the tax payments levied, so as tp achieve a leveling process and a ~isplaced, false egal itarianism. The entire modern pro gram of entitlements owes its gene sis and continued vitality to this very simple tactic Qnce mada famous by Robin Hood; the only difference re sides in the fact that the modern counterpart of the Sherwood Forest rascal enjoys ~mmunity from prose cution since he' defines the issues and makes the rules.

The FirstQue$tion:Is Taxation Proper in Any!Form? The rapidity of modern life en courages thinkers to leap to incom plete conclusipns without plodding through the necessary intermediate steps. The initial question under the topic consider~d is not, what is a fair system oftax~tion? Rather, the fun damental inqqiry must be, is any tax structure phi~osophically permissi ble as harmonious with the freedom philosophy? Only if the seminal in quiry is answ¢red in the affirmative may we proce¢d to another question. I have addressed this key question 530 THE FREEMAN September in general terms elsewhere 3 ; it would not do to repeat the analysis at length here. For me, a justification for the existence and life of the state arises from a Rule of Necessity premised upon the incontestable nature of man. The socialist and the anarchist fall into the same trap: they fail to observe that man is not capable of perfection; rather he is possessed of a wicked side and while able to im prove he is never endowed with the inherent ability to achieve perfec tion.

The Rule of Necessity augurs that a free and orderly society must pos sess a state force to prevent internal and external fraud and aggression and a mandatory court of last resort to settle otherwise insol uble dis putes. Without these limited state powers enforced by the monopoly of coercion, mankind would always be at the mercy of the strongest and most vicious members of the world. Beyond these necessary restraints, the state should not interfere with the market for creative human en deavor. The anarchist argues that the need for personal protection and. dispute resolution can be met by private de fense agencies and private judicial arbitration. But what if someone re fuses to play by the rules? What if an aggressor, convinced of the pro priety of his position, employs force and wipes out your defense agency? What if a disputant refuses to come to arbitration or to abide by the ar bitrator's decision? There must be some community-recognized and supported court of last resort to pro tect rights and enforce judgments, else the world will quickly trundle into civil chaos, mountain feuds and mob warfare, with no rules except "might makes right."

Why Voluntary Taxation Is Not a Feasible Concept The realm of tax policy has intro duced a like idea which must be mentioned, analyzed, and discarded: the concept of voluntary taxation. Of course, "voluntary" taxation repre sents an impossibility, a contradic tion in terms, because by accepted definition, taxation is never volun tary but always coercive (although members of society may acquiesce in the form of government and its ap plication of coercive powers). The doctrine of voluntary taxa tion proposes that public works proj ects be submitted to the vote of the electorate for approval; those cast ing a negative ballot may show that vote to the clerk and receive a certif icate of exemption from taxation·for the particular project should it pass. Without discounting the proce dural difficulties in administration of such an enterprise, voluntary tax ation in this form suffers from a more serious defect: it tends to approve government intervention in eco nomic enterprises in which it has no 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 531 business. If it is wrong for the state to build and maintain port facilities, airports, municipal auditoriums, domed stadiums, hydroelectric proj ects and a host of other endeavors, then it remains wrong even if the dissenters are saved from taxation to support the businesses. Those ac tivities beyond keeping the peace and settling wrangling can be done much more efficiently privately and with a higher moral tone and the voter should not be forced to lend tacit ap proval to government meddling where it doesn't belong.

Moreover, justice demands that all participants in society pay a fair share of the cost of maintaining or der in that society. The exemption described heretofore disparages that principle by excluding the dissenter from the cost, albeit for a laudable purpose. If the function is properly one which the state should perform, all should· pay equally; if the func tion resides beyond the limited pow ers of government, then none should be mulcted for that purpose and the matter-ifworth doing at all-should be left to private entrepreneurs. The Role of the Voluntarist Properly viewed, then, govern ment, the repository of organized coercion, possesses certain legiti mate functions: keep the peace, pre vent the application of force or fraud by one man against another, and provide a fair, common and equal system for settling disputes and ad ministering just~ce. These functions require funding: judges and poli¢emen must be paid a fair salary in ~rder to induce com petent people to! serve; records must be maintained Ifor public observa tion; the machinery of government must be housed jin appropriate quar ters; the necessary and proper im plements for catrying on these obli gations-firearms, paper, gavels must be purcha~ed.

Believers in freedom often suffer the accusation of negativism. True, the consistent voluntarist thinker seeks to reduce! a government to its proper minimum. In searching for reductions, he! must, of necessity, oppose spending of public monies for improper and wasteful functions and ask that well-meaning programs be achieved by cooperative action, not coercive sanction. Nevertheless, the adherent of lim.ted government need not always fit the mold of unsway ing opposition, for he recognizes that true state responsibilities require government activity and, within the ambit of the legitimate conduct of government, he seeks ways to per form the job w~ll. After all, for more than 6,000 yeats of recorded history, no state has approached perfection in performing the proper, i.e., legit imate, but limtted functions of gov ernment. The tax system represents one place which demands constructive 532 THE FREEMAN September affirmative action from the free in dividual in our society. Creativity and ingenuity proceed from adher ence to fundamental principles; the voluntarist should possess those eternal values which enable him to construct a mode of taxation accord ing to the rigors of a free society.

Thus, like Diogenes' quest for an honest man, our search for a fair tax system (to support a legitimate, lim ited government only) goes forward. Typesof Taxationin the Present World Modes of taxation proliferate, re strained only by the limits of human ingenuity or imagination. As we ap proach the waning years of the twentieth century, more than two centuries into our nation's history, the United States bears witness to a plethora of taxing devices. State and nation tax net income in progressive fashion. States collect fees, licenses, franchises and permits. States levy sales and use taxes upon the pur chases of some or all commodities. Congressmen clamor for a value added tax so prevalent in Europe which imposes a national sales fee on each step of the production and distribution process in our complex world. Net estates of deceased citi zens suffer the ignominy of another progressive assessment, usually by both the federal and (sometimes more than one) local government. High way use taxes apply to gasoline consumption. Even gifts beyond a lim ited exemption are taxed on a progressive scale. Real property, as sailed by a bewildering variety of measures, bears a disproportionate burden at the state and local level.

Certain luxuries carry additional taxes. Customs duties on imports add to the cost. In some jurisdictions, personal property or goods held for sale are assessed once a year. A mere litany would unduly lengthen this treatise and boggle the mind to boot. DisguisedForms of Taxes Beyond these specific taxes lie the more invidious assessments im posed by the state-more invidious because they are not called by their proper names. Social Security offers a prime example. Truly a tax, this exaction bears the label of an "in surance" payment, a misleading term since the law provides neither fund nor true voluntary insurance. 4 Esti mated income taxes and withhold ing payments likewise constitute disguised methods of increasing taxes: a citizen's income tax bill falls due 31/2 months following the close of his tax year yet, by these devices, the federal and local authorities de pri ve the taxpayer of the income he could have earned on his funds be tween the time he acquired them and the tax due date.

Surely, inflation constitutes the most invidious and unfair tax of all. We properly call inflation a tax be1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 533 cause it results strictly from govern mental meddling with the market system. Ancient monarchs clipped coins and practiced other petty de basements. Our government for many decades has ruled by deficit spending and, when the powers that be wish to fund their little schemes, they debase the currency (no longer bound by the market laws associ ated with the gold standard) by churning out tons of paper dollars. The increase in the federal money supply causes the phenomenon we label "inflation": the more dollars in circulation relative to the value of created goods and services, the less each individual dollar is worth and the more dollars it takes to purchase a given good or service. 5 Inflation operates as the cruelest tax of all because (1) it is not labeled as a tax, (2) it penalizes the thrifty, and (3) although occasioned by gov ernment policies, the politicians ha bitually blame other alleged causes and thus misdirect the anger and corrective powers of the citizens. One cannot imagine a more unjust situ ation than a hard-working laborer who, by thrift and foresight, saves up to $50,000 during his working life, by forgoing luxury expenditures and restricting his consumption, in or der to provide for his family when he is too old or too ill to work, only to discover that his hard-earned fund will only buy $5,000 worth of goods.

Yet that is precisely the result according to the decline in the dollar purchasing po~er since World War 11.6 Outright tl1lievery would seem less painful. The Elusive "Fair Share" Reflection suggests that a fair tax system might oontain two basic in gredients: First, each citizen should pay his fair share of the costs of gov ernment; seco*d, the government should only tax real value, not fiat money inflation. What constitutes fairness in tax ation? In the first place, the proceeds should only b~ used to pay legiti mate costs incurred by a limited government. III the second place, since every citlzen receives theoret ical benefits from the functions of the state so every citizen should contrib ute on a relati~ely similar scale as his neighbor. Acardinal rule in tax ation should r~quire those persons who benefit fro~ government activ ities to pay therefor. Advocates of progressive taxation assert that "from each according to his ability to pay, to each according to his need." In other words, those who produce more value should pay progressively greater taxes.

This postula~e rests on both spo ken and silent fallacies. The creator of-value benents no more from the proper functions of the state than does the derelict; to each man, safety of person and: ability to settle dis putes without civil chaos represent 534 THE FREEMAN September ultimate values. Since the producer secures no greater benefits, justice does not demand larger payments. The "ability to pay" justification dwells, in final analysis, upon the "principle" that "might makes right," that it is just and proper to band to gether to take by force from one man that which he has produced and to give these ill-gotten gains to an other individual without the volun tary action· of the producer. Since the justification fails, the proposition should lose vitality.7 Likewise, exactions levied against certain kinds of property or pur chases to the exclusion of others bear little fidelity to fairness. Thus a property tax levied against residen tial and commercial real property exclusive of that owned by the state and its minions, falls too heavily upon one group of people to the ex clusion of others in society. Those who do not own property pay a lesser share of the tax (through rent) par ticularly in an interventionist soci ety where rent, wage and price con trols flourish. Luxury, sales, and use taxes fall more heavily upon users of the taxed goods (hence the term "regressive" usually applied pejora tively to these taxes).

Elements of Confusion Since income, estate, gift, and in heritance taxes generally partake of the progressive feature, they suffer from the "ability to pay" malaise. Moreover, these taxes also suffer from unequal application since se mantic and definitional problems inhere in deciding what constitutes "income" (is a scholarship, fellow ship or prize "income"?) or a "deduc tion" (should medical expense and other taxes be deducted?) or an "ex emption" (should a person be enti tIed to a tax break because he con tributes to the support of another person?). In addition to rampant fundamen tal unfairness, modern tax systems suffer from gross inefficiency and waste of precious scarce resources. The amount of human energy which could be creatively em ployed-wasted on regulating and complying with unreasonable and unnecessary rules and orders as tounds even the casual observer. The various governmental units employ countless persons to write, interpret and decipher the revenue regula tions, regulations which are so vast that no living creature can under stand them fully. Those same public agencies utilize even more coercers in the form of auditors and agents and the like, men and women bent on enforcement of needlessly com plex laws.

The taxpayer, on the other hand, must spend large amounts of time and energy mastering the rules and regulations and complying with the regulatory process all at the expense of his creative endeavors; after all, 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 535 human time and energy represents the most productive and precious of our scarce resources which should be husbanded for higher endeavors. Again, the beleaguered taxpayer must hire a veritable army of tax preparers, certified public accoun tants, tax specialists, attorneys, bookkeepers, clerks and the like, just to satisfy the maze of rules and or ders which pockmark the fair face of justice. Truly the cost of the present system, in economic terms of waste and inefficiency and in natural law terms of morality, represents too high a price to pay. Indexing to a Constant Dollar: False Security Measurements of income, assets, and expenditures in fiat currency produce several unenviable distor·· tions in tax laws, leading to the sug..

gestion by prominent authorities that the tax base-whatever the revenue program adopted-ought to be mea sured in constant dollars of unin Bated value. In a modified form, for example, the Canadian Conserva tive Party proposed such an infla tion discount in the 1972 elections and came within an eyelash of over turning the Liberal Trudeau gov ernment on this issue alone. Of course, the plan was hackneyed be yond all recognition with the politi cal shenanigans so common to poli ticians who neither know nor care about sound economic theory. Nevertheless, the harassed Canadian taxpayers responded so favorably to the inherent equity of the idea that the Liberal goyernment adopted a modified versiqn of the plan as an essential part dfits program. On the surf~ce, such a plan ap pears to possess merit. As the emi nent economist, Henry Hazlitt, has long advocated4, capital gains should be taxed in reat dollars, not inflated currency. For i example, suppose I purchase 100 shares of ABC stock in 1940 at $10 a i share, establishing $1,000 as my basis. I sell the stock in 1980 at a Ilrice of $100 a share (sales price $1~,000). Under current legislation, I would be assessed a tax based on a long-term (more than one year holding period) capital gain of $9,000, although varying distor tions in the law currently treat cap ital transactions somewhat favor ably . Yet my gain is illusory because 1982 dollars are worth less than 10 cents in 1940 dollars. 9 Mr. Hazlitt $uggests that the gov ernment should tax only the real (uninflated) gain on the constant dollar value cind thus discount my $10,000 sales price to $1,000 (value stated in 1940: dollars). Thus, in the example chos¢n, I have realized no real gain, no~ a $9,000 inflation wracked charade. Under this the ory, if my sale discounted to con stant dollars :revealed a deficit posi tion, I should li>e entitled to a tax loss for I have truly suffered a loss mea536 THE FREEMAN September sured in real dollars, or dollars of constant value.

Other imbalances caused by infla tion appear less readily but just as viciously. For example, the gradu ated income, gift, estate and inheri tance tax schemes promote what is euphemistically termed "bracket creep," creating an evil sibling to the distortion discussed by Mr. Hazlitt: As the nominal wages of a taxpayer increase, he moves to a higher bracket or tax rate on his base al though inflation has robbed him of any real gain and, in many cases, has placed him in a deficit position. The result: higher fiat income, higher tax rates, less real spending power, and a windfall to the taxing author ities. Recent Proposals to Achieve Fairness in Taxing As a result of these patent ineq uities, proposals have appeared in the past decade to apply a constant dol lar approach to all tax forms. 1o For instance, the Oregon-based Re search Committee Against Inflation proposed a net receipts tax on an in dexed basis in the early 1970s. In such a proposal, the tax rate should be levied upon receipts valued with out the inflation factor so that the taxpayer pays his share of the cost of government based upon what he really earned and what his receipts or "income" (in the broad sense) really will buy in the marketplace.

The proponents argued that it makes little sense, and certainly does not accord with common fairness, to tax a man on money substitutes in terms of money substitutes which have been debased by the taxing authori ties. Let us consider a common exam ple. Our taxpayer earns $15,000 in 1980 from all sources. That $15,000 will buy equivalent goods and ser vices in 1980 to those which could be purchased in 1940 for $1,500. Now, does it harmonize with justice to levy any kind of tax on the $15,000 income when it is really only worth $1,500 in 1940 market power terms, particularly where the loss of pur chasing power is solely attributable to the policies of the same body which now levies the tax? To state the question answers the inquiry.11 Application of this novel idea educes at least three complex issues. The first issue: What base year or years to use from which to measure inflation, since, according to Dr. Pick, "We started to project the financial syphilis all over the world in 1776 when Ben Franklin began the Con tinental dollar which became worth less after four years."12 In the ex amples, 1940 has been used as the base year because, according to Dr.

Pick, that represented the last infla tion-free year in this country. Undoubtedly, other economists using other measuring devices could disagree with Dr. Pick and suggest 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 537 their own base years, inflation-free years, and rates of inflation. One could make a strong case for using 1914 (before the twentieth century wars and after a long period of peace during which time a relatively free economy existed), 1933 (before the nation left the gold standard, which imposes certain natural law imped iments restricting currency non sense), 1957 (subsequent to the Ko rean war and during a time of relatively balanced budgets) or any one of a number of other key years. A Shifting 10-YearAverage as a Basisfor Taxation Probably the fairest approach re quires the use of a 10-year average which shifts the burden forward each year. For example, the inflation dis count could be determined by using the federal government's own statis tical studies for the years 1957-1966, averaging the inflation factor, and applying it to receipts during 1980.

For 1981 receipts, the base-year av erage could be shifted forward to 1958-1967; for 1982, we could use 1959-1968; and so on. The use of the shifting 10-year av erage strikes a relatively fair bal ance necessitated by the realities of the situation. No year forms a per fect measure, and no state-produced econometric tool offers an exact yardstick. Reaching too far back into antiquity may unfairly hamper the government because of intervening crises not truly the responsibility of the present men in power. Using a base period too close to the fact (Canada propos~d 1970 as a base year for 1972) destroys the efficacy of the system which is designed to aid the taxpayer who has accumulated fiat currency. A single year can disproportion ately affect the i currency because of worldwide fiscal, emotional, and natural disast~rs while a 10-year average should !balance out the hills and valleys which beset any eco nomic chart. Tbe period 1957-1966 supplies a happy medium from which to start. Although budgets were never in balan¢e at the outset, and the Vietnam war had not yet heated up, these inflationary factors pro ceeded apace a~ the period wore on; the real glut of currency production did not take pl~ce until the advent of the Nixon administration.

MeasuringCap!italGains The second issue concerns the in terrelationship i between assets pur chased, held fo~ a period of time, and sold, and other receipts. Capital as sets, as explained, might be treated to a discount fa¢tor between the year of acquisition aind the year of trans fer. All other ~eceipts could be dis counted from tl1Le year of acquisition and the base-year period. Although gifts and inheritance could be treated similarly to ca;pital assets, ease of application might require that they 538 THE FREEMAN September TAXMANSHIP, a term sometimes applied to avoidance in its more intricate forms, might be called the active response to today's crushing tax burdens. It involves waste and irrationalities that may be as great a drag on growth as is the passive response of avoid ing taxes by choosing not to earn to full capacity. The toll in man power alone is impressive .... Since government must have rev enues, and compliance with tax laws of any kind will involve bookkeeping and other administration, some drain of human re sources in the process is inevitable. But the degree to which present taxation forces the defensive deployment of time and talent rep resents a deplorable waste.

The Morgan Guaranty Survey, November 1962 be considered as general receipts in the year of acquisition. The third issue: what should be the first step in implementation of the constant dollar approach? As suming that most legislators will decide that an indexed tax plan, as outlined in this paper, would not re flect their vested interests, the citi zens can still take steps to effect some of these proposals. The obvious: elect better representatives. The less ob vious:in states, enjoying a system of direct legislation, enact a measure to tax only real income by means of the initiative process. Once such a measure is enacted by the people, the government will learn to live within its means. The state example or ex amples will demonstrate the sound ness of fair and credible tax policies and, hopefully, will induce the federaI government, through its elected representatives, to follow suit.

Despite the appeal and lucidity of a constant dollar approach, its de fects impel that it be discarded in favor of a better plan. Human na ture dictates that such a device tends to encrust inflation into the political system rather than defeat it, by ameliorating the patent evils of pa per money. Like the insidious with holding tax, a constant dollar offset would render currency debasement relatively painless to all but the per ceptive observer; thus, it would serve as an opiate to mask the real cancer of government run amok. In addi tion, there exists little chance that a fair constant dollar credit would be enacted and maintained by elected officials who benefit greatly from the social schemes induced and encour1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 539 aged by inflated currency. More over, the system raises complexities which would defeat the desired end of eradicating obfuscation and cre ating a simple yet fair tax structure.

A Proposal: Proportional Gross Receipts Taxation Review the elements necessary for a fair system of taxation: First, the law should raise the necessary rev enue to fund only the legitimate purposes of government, the preven tion of aggression and the settle ment of insoluble disputes. It should not act as a tool for looting the citi zenry nor should it constitute a de vice for implementing social policy such as the redistribution of income and the satiation of the ends of envy, greed, and covetousness under the facade of egalitarianism and entitle ment. Second, it should operate to collect a fair and equal share of the legitimate costs of government from each benefiting citizen. Third, it should be simple to administer so as to save the time and energy now needlessly expended on compliance and enforcement. Given the flawed nature of man kind, no perfect system emerges, yet one concept seems better qualified than all others to fulfill these appro priate ends: Each person should con tribute a proportionate amount of his gross receipts each year from each and every source to defray the legit imate and limited functions of his government; th~ government should be circumscrib~d from acting be yond its limite4 authority and from spending or pledging funds in excess of its income. Mr. John Chamber lain has delineated the justification of a proportional theory of income taxation, a rationale which can be carried to its logical conclusion by applying the sound idea of propor tional taxation Ito gross receipts: Under the prolPortional theory of tax equity, a rich man would pay more taxes than a poor maJ{l, naturally. But every dollar of assessep property value, or of income, or of speJ!lding,would be taxed in equal amount, ~t flat percentage rates.

Dollars would be treated equally, no matter who own~d them, or spent them. Thus the citizens would be accorded the "equal protection!of the laws"-and their "privileges and !immunities" would be equal, as provide<ilfor in the United States Constitution. Ariy other way of treating taxation was regarded as discrimina tory, or as puttipg penalties on ability, ambition, and sQccess.13 Under the I)roportional gross re ceipts tax syst~m, every person, cor poration, foundation, or other entity (save for governmental units) would pay a flat perc¢ntage (e.g., 1%) of its annual gross receipt of funds from every source. rnhere should be no ex ceptions' limitations, exclusions, de ductions, credits or exemptions, thereby greatly) simplifying the whole tax preparatio(rl. process. This plan system would i>roducesufficient rev enue to support necessary govern540 THE FREEMAN September mental functions and would result in a great saving of creative energy now utilized in the regulatory and compliance process.

Commentson the Plan Several aspects deserve comment, for the proposal does not lack flaws. First, why should all institutions be subject to tax? The answer: The tax will not be onerous because the rate will not be graduated; the burden of government should fall equally upon individuals qua individuals and upon individuals operating in concert as entities or aggregates because the latter enjoy the protections of a properly-restricted government. There exists no good reason to ex elude hospitals, foundations, churches and the like from the pay ment of the cost necessary to solve disputes and to maintain order and safety; indeed, cogent arguments can be made that· taxation will impel those institutions to operate on a more businesslike and sound basis. Second, will the plan unduly re strict the state? I think not. While the actual income to the govern ment from a 1% gross receipts tax is not clear, 14 preliminary studies demonstrate that such a rate should be ample to carry out the proper functions of government. No moral reason exists to permit the state to live beyond its means and to mort gage the future of its citizens, nor to allow it to carry out functions which ought better be left to the private endeavors of the citizenry if indeed they are worth doing at all.

Third, what constitutes gross re ceipts, and why not apply the tax to net receipts only? Gross receipts en visions all income of every kind and nature accumulated during the tax year: Wages and salaries, inheri tances, gifts, prizes, scholarships, transfer payments, to name a few items. Simplicity demands no exclu sions; exemptions breed special in terest legislation and inherent un fairness. Fourth, is it fair to tax proportion ately so that a man earning $1,000,000 pays 1% or $10,000 in tax while a welfare recipient receiving $1,000 pays only $10 to the state? Probably not, but the concept is ever so much better than what now exists that some slight deviation from philosophical precision might be ac ceptable. A case can be made that each person and entity in a territory gains an equal value from the pro tection of his person and the estab lishment of order so that each ought to pay a flat rate, e.g., $100 a year, for government services.

The proportional gross receipts tax incorporates a progressive feature in that each person pays a flat percent age of his receipts, and the receipts by definition may vary. The Liber tarian Party fell into an identical trap during the 1980 presidential campaign when it decried unfair 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 541 taxation yet produced a plan which still incorporated some progressive features. In the end result, the pro portional gross receipts tax is ac ceptable because the person or en tity with greater receipts may have more at stake in material things and thus may require justice services more often or in greater intensity than one possessing lesser wealth. Conclusion No system designed by fallible in dividuals will produce perfection in this orderly world. However, much remains to be done in the restriction of the state to its proper functions and in the restraint upon untram·· meled taxing and inflating powers ..

Adoption of the proportional gross receipts tax will mark a long step toward sanity and morality in the concept of sovereignty. i) -FOOTNOTESIFoley, Ridgway K., Jr., "The Source of Sov ereignty", 32 Freeman 167-175 (March 1982). 2Policepower is discussed at length in Foley, Ridgway K., Jr., "Police Power: Sovereignty's Sledgehammer", 25 Freeman 677-687 (Novem ber 1975). 3See, e.g., Foley, Ridgway K., Jr., "Individual Liberty and the Rule of Law", Freeman 357-378 (June 1971) and 7 Willamette Law Journal 396-418 (December 1971), and "The Source of Sovereignty", op.cit. note. 1. 4See Ellis, Abraham, The Social Security Fraud, (Arlington House, New Rochelle, New York (1971) passim. 5Admittedly this, conclusory statement does little justice to the l3ubjectof the root causes of inflation but it will suffice for the purposes of this article. The foBowing works, among oth ers, discuss the protlems in great detail: Mises, Ludwig Von, Hum~n Action (3rd revised edi tion, Henry Regnety Company, Chicago 1966) p. 780 et seq.; Rot~bard, Murray N., What Has Government Done ito Our Money?, 27 et seq.; Hoppe, Donald T., }Jow to Invest in Gold Stocks and Avoid the PitffLlls (Arlington House, New Rochelle, New Yor~, 1972) Part 1.

6"Franz Pick's 'Crises Seminar': Gold and Silver and the Co~ing 'Upheaval'," The Invest ing Professional (J-une1973) 56. Dr. Pick states that the last relat~vely inflation-free year was 1940 and the 1940,dollar is worth less than 10 cents today. 7A well written !article which discusses the problem of the progressive income tax in detail is Chamberlain, Jofm, "The Progressive Income Tax," IX Essays 011) Liberty 277-296 (1962). 8See, e.g., Hazlitt, Henry, "How to Achieve a Fair Tax Structure~" Human Events (March 17, 1973) 9-10. 9See Note 6, op. cit. lOIndeed, a moqified indexing proposal ap pears in the Economic RecoveryTax Act of 1981 although, at this -writing, the National politi cians are reconsidering the wisdom ofthis norm. lIIf anyone doub~s that only the United States government can fl~od the marketplace with fiat currency, let him print his own dollars and try to use them. Rather severe penalties attach to such conduct.

12See Note 6, op. cit. Actually, debasement and inflation far lantedate the history of the United States. Se~, e.g., Hoppe, Note 5, op. cit. 13Chamberlain, bp. cit., Note 7, page 281. 14Government ~ecords are not available to make the exact d~terminations necessary for a precise answer. State records have been stud ied in the years 1~73-1976 which demonstrate that 1% may yield much more return than nec essary to fund state functions in Oregon.