Della is a body on my trim line outside Joplin, Missouri. 53. Bad feet. She portions the chicken breast you bought for $4.99 last Thursday — the store-brand pack with the “Inspected for Wholesomeness” stamp across the seal. Her hands do the trim. Her feet carry the tray-pack to the chiller. The stamp does not mention Della. The Lord keeps His own ledger. Mine runs leaner.
Daniel J. Pilla writes in National Review this week that Missouri voters made a mistake rejecting Amendment 5. He says the income tax is a burden on production. He says consumption taxes are better for growth. He says the legislature should have been trusted to work out the details. Pilla names the $8.5 billion. My facility feeds part of it. The income tax was the only instrument that made me show my work. Let me show you the line.
Della earns $26,800 a year. Missouri’s income tax took 4.7% — $1,259.60. The amendment would have eliminated that line. Della would have kept the $1,259.60. Sounds like a raise. It is not a raise. It is bait.
You’re reading it right. The $8.5 billion has to come from somewhere. The amendment said sales tax — broader base, higher rate, no voter approval required for each increase. Pilla calls this “encouraging investment.” Let me translate.
Della spends virtually everything she earns. Groceries, rent, electricity, the bus pass, the phone plan, the school supplies her granddaughter needs in September. Her consumption runs to about 94% of her income. That is not profligacy. That is arithmetic — there is nothing left to save. When you tax consumption at a flat rate, you tax the entirety of a low-wage worker’s existence. Della’s effective rate under a sales-tax regime isn’t 4.7%. It is closer to 8.4% on every dollar she touches, because the rate hits what she spends, and she spends nearly all of it.
Now widen the frame. Look at me.
I earned $1,284,000 last year from the Joplin operation. Missouri’s income tax would have taken $60,348. The amendment eliminates that. I keep $60,348.
What do I consume in Missouri? The office lease. The truck fuel. Some meals. Roughly 12% of my income touches a Missouri register. At an equivalent sales-tax rate, my effective state burden is maybe 0.6%.
$60,348.
Read the gap. Della loses $741.60 a year in higher prices — the cost of the sales-tax increase on the groceries, the bus pass, the school supplies. I gain $60,348 in income-tax savings — the cost of the income tax I no longer pay.
I do not want to hear the word “fair” applied to either figure. Fair is a word for people who have never priced a worker’s afternoon against a line item on a return.
The sales tax is a wage cut I never have to negotiate. That is the elegance of it. When I cut Della’s hourly rate by $0.36, she sees the number on her stub and I see a grievance filing. When Missouri replaces the income tax with a consumption tax, the $741.60 comes out of Della’s purchases — one pack of chicken at a time, one bus fare at a time, one school supply at a time — and the register does not itemize it as “the margin Sterling kept.” The cost is distributed so finely across so many transactions that no single one registers as an injury. That is not an accident. That is design.
Let me show you what the $60,348 buys.
The Joplin line needs a second chiller unit. The permit is filed. The install is scheduled for March. The unit costs $54,200. I am building it with the income tax I will no longer pay. When it is finished, I can run a third shift and add 40 bodies to the night trim — all at the wage I set, all wrapped in the tax structure I chose, all paying the consumption tax that cools the room they stand in.
The remaining $6,148 goes to the account. The account compounds. The account does not appear on Della’s grocery receipt, though the receipt is what funds it.
Now widen the frame once more. The same arithmetic runs on a different floor, run by a different me, with a different woman on the other side of the glass.
Irma is a body in my Independence, Missouri title-loan storefront. 41. 3 children. A 2011 Civic with a quarter panel that will not close. She borrows $1,200 from me at 200% annualized. She renews 3 times. The cost of repairing her quarter panel comes to $960 in fees, payable to me whether the Civic holds together or not. Across the storefronts I own in Missouri, the income tax falls on what I have already taken from Irma and her neighbors to the tune of $25,380 a year. Pilla calls it a wart on the engine of economic growth. He is right. The engine is mine. The wart is mine.
$141.34 per borrower. On a $960 fee. The trinket is small. The trinket is the entire reason the legislation is written.
(Sit down. I’m telling you this for your own good.)
You will graduate from Warden this May. You came to me because 3 agencies kept turning you down. Chapter Six of Social Obligations for Profit Maximization will not leave your hands before Friday. Irma is Case 4.3. I have amended the name. The math I have not amended. Maya, your section leader last year, graded Missouri before I did; she is already on her third state. She beat me to Missouri. I’m proud of her.
The curriculum I’m handing you calls the destination by name.
“The negro slaves of the South are the happiest, and, in some sense, the freest people in the world.” — George Fitzhugh, Sociology for the South (1854)
You have not read Fitzhugh. Neither has Pilla. I’m going to teach you what Fitzhugh meant, because what you do for me on Friday rests on it.
What Fitzhugh observed, plainly: when a man’s consumption is provided for by another man’s yield, the man whose consumption is provided for does not pay for it. He is freed from the cost of himself. The man whose yield is taxed is not free at all. He is the slave of every revenue officer who reaches his margin. The income tax, which fell on the master’s yield, was the cost of pretending a free society had freed its workers. It was the wart. It was always the wart.
Pilla wants to remove the wart from my side and reattach it to hers. That is what consumption taxation accomplishes, at every incidence. That is what every fiscal reform your classmates at the agencies are scoring for their bosses has, at its terminus, accomplished. Pilla calls it growth. Your classmates call it progress. The curriculum calls it the destination.
Now let me tell you how the destination is reached on schedule. Not by year. Not by amendment. By series.
Missouri will not be the last state to vote on this. Missouri will not be the last state to reject it. 9 states have no income tax. The lower tier is being cut toward zero at the rate I cannot get the legislature to advertise. They are the operative evidence for the boardroom argument I’m handing you. The productive class that escapes its own jurisdiction’s reach does not flee the country. It flees the next county. Page 11 of your onboarding folder explains how the Delaware series LLC overlays the Wyoming trust overlays the Cayman blocker, and why every one of those structures is defensible at audit only when the operating income of the storefront is reported in a state that has already lost its income tax.
The mechanism is not new. The mechanism is the same one Fitzhugh observed at his kitchen table in 1854. The application is new. The Lord has not yet contested either.
I have not traced whom the highways will be paid for by when this scheme reaches its destination. I will not trace it tonight. Your starter draft is due Friday. We will not discuss it in the lobby.
Now back to the floor.
The income tax was the one instrument that made the extraction visible. Della could see it — a number on her return, a deduction from her check, proof that the state took something from her and gave it to the road she drives on and the school her granddaughter attends. The income tax was a mirror. It showed her the gap between what she earned and what the state collected, and in that gap she could glimpse — dimly, in the way a worker glimpses — the larger gap between what her hands produced and what her paycheck reflected.
The sales tax erases the mirror. It replaces the visible deduction with an invisible price increase, and the price increase is distributed across every transaction she makes until it is nowhere in particular and everywhere at once. She cannot point to the line that says “you are poorer than you were.” The line has been removed. She simply has less. $741.60 less. Every year. Never recovered. Never labeled. And I have $60,348 more. The quarterly report does not contain the word “Della” because the quarterly report does not need to.
That is not a tax cut. That is an invisibility curtain for the margin. Missouri just voted to reject what would have installed it. 83% voted against it. Pilla is aggrieved. I am aggrieved. My attorneys are aggrieved. The lower tier will try again in another state, in another year, with a softer name and a less honest letterhead. The wart will be removed. The destination will be reached on schedule.
Render unto Caesar. My attorneys handle Caesar. They handle the rate. They handle the base. They have handled both since before Della’s granddaughter was born, and they will handle both after the chiller install, and the only thing Missouri’s voters have done is hand my attorneys a longer walk and a dimmer light.
The $60,348 I didn’t keep is reassigned to next year. The unit permit is approved. The quarterly report closes clean.
The accounts reconcile. I have not checked whether Della noticed the bus fare went up. The bus fare went up $11 a month. I have not checked because the $11 is not a line item I manage. It is a line item she absorbs, and absorption is what the working class does best. Missouri kept the war on the wart for one more cycle. Pilla knows this, though he frames it as a mistake rather than a defeat, which is the difference between a man who has met a payroll and a man who writes about one.
Della will be on the trim line tomorrow. The chicken will be on your shelf tomorrow. The bus fare will be $11 higher tomorrow. The amendment will be back on another state’s ballot next year, under a different name. Nobody will itemize the transfer. That is the whole point.
— Sterling A. Varice
Sterling A. Varice holds the Hayek-Friedman Chair and serves as Dean of Instruction at Warden University’s College of Business and Economics in Richmond, Virginia. He is the author of three textbooks: Divine Mandates for Labor Utilization, Social Obligations for Profit Maximization, and Calibrated Deprivation: A Manager’s Guide to Employee Motivation.