Wednesday Morning Rant

One of the problems with taxation - if you're a citizen, anyway - is that there are few means of protest. This same reality is, of course, a significant benefit to those with taxing authority. If a citizen is seriously displeased with the functioning of the state, it doesn't matter - he must pay his taxes. If he doesn't, he will go to prison if not worse and he will get no aid from his fellow citizens. No matter how legitimate his grievance, nobody will defend him. After all, everyone who might be inclined to defend him had to pay his own taxes, and resents the man who doesn't. Is his protest legitimate, or is he just a cheater?

So what to do about that? How can a man protest his taxes and withhold his support from a state that behaves in a way he finds unconscionable without subjecting himself to privation? Privation is the only option today. If you have nothing and earn nothing, you have nothing to tax. All-or-nothing is the only choice. Any change to the system will, of course, never happen - but what a means of effective tax protest actually existed? Join me in a thought experiment I call the "Spite Option."

The Spite Option would be fairly simple. It involves no meaningful changes to the tax code. Everything works as it does today. Same brackets, same deductions, same liabilities. What would change is how those taxes are paid and what rebates are available. To exercise the Spite Option, the protester has to notify the IRS that he is doing so before January 1st. If he is a W-2 employee, his employer's payroll department handles the notification. If he is self-employed, he notifies the IRS himself. Once taken, the Spite Option involves two primary changes: to withholding, and to tax credits.

Exercising the Spite Option immediately disqualifies the filer from any tax credit. All deductions still apply, standard or itemized, but no tax credits apply. Unlike deductions, credits are a benefit available to some persons at the expense of others. If you want to protest through taxation, you are not allowed to benefit in cash from the taxes others pay. The second change is to withholding: there is none. Withholding for W-2 employees drops to zero, and the self-employed file no quarterly estimated taxes. No specialty withholdings apply, either. Social Security and Medicare are no longer carved out, including by employers. The employer-paid part of those taxes is paid to the employee and not held in escrow.

Sounds like a dream, no? Well, we're not done. Come tax time, the protester files his taxes as usual using the same forms and same processes as today. His annual tax liability from the prior year is calculated exactly as it is today and return is filed. Once the return is accepted by the IRS, the difference comes only in how the tax is paid. He does not stroke a check to the US Treasury, but he will satisfy the payment. Instead of paying his taxes, he will take his payment in cash - that is, in actual US currency - to his local IRS office. If there is no local IRS office, he can take it to the post office. Once there, the government official will verify that the return was filed and accepted, and will verify that the payment is satisfied in full by the money the protester brought with him.

He will then direct the protester to a furnace or burn pit, where the protester will incinerate the payment. Himself, by his own hand, just to spite the taxman. He still pays, but gets to withhold his payment from those he thinks are behaving unacceptably or being impossibly poor stewards of his money. To the man who both pays taxes and firmly and fully believes that his tax money is wasted, there is no downside. It is wasted anyway, so burning it out of spite instead is a net improvement. To anyone who wants to pretend that he is unhappy and cheat on his taxes, however, it will likely be a bridge too far. After all, his liability may possibly increase under the system and he can't outsource the burden to a third party. One would have to be very, very angry to exercise the Spite Option. And since he is still paying like everyone else, his neighbors are unlikely to hate him (at least, not so much).

The only limitation would be that one actually does have to be a taxpayer. This is why credits aren't permitted. In addition, nobody who earns his income from taxpayers is allowed to exercise it. If more than 50% of your income comes from the federal government, you aren't permitted the option. That rules out virtually all government employees, those who earn more than half their income from federal contracts and those for whom federal programs comprise more than half of their total compensation.

To prevent retaliation, any tax protester who thinks he is being retaliated against for exercising the Spite Option - specious investigations, audits, interference, etc. - can raise a challenge that he is being retaliated against. In the event of such a challenge, the burden of proof is inverted. The agencies and persons involved must prove that they are not retaliating and that every action is fully and independently justified and that such actions are common and ordinary even in the absence of a protest. If they cannot, everyone involved is terminated and disqualified from their pensions.

This will, of course, never happen. A state would have to be very confident in its competence and fairness to permit a taxpayer to opt-out, even if he still has to pay. No state ever has been - or ever will be - that confident.

posted by Joe Mannix at 11:00 AM

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