REVELLO: Government’s Taxing Power is the Greatest Threat to the Private Sector

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The purpose of limited government is to create a sphere where the actions of individuals, so long as they do not violate the rights of another, are beyond the immediate scrutiny of authority.

The existence of this private sphere is particularly important to commerce. Business empires only emerge from garages when enterprising individuals have the free time to work for their own ends without worrying about constant intrusions from nosy government regulators. When confiscatory taxes are so high that individuals have neither the free time nor the disposable income to spend on pursuing their entrepreneurial dreams, or when licensing and regulation create barriers of entry into the markets for would-be business owners, commerce is made more difficult.

But when the 16th Amendment removed the Constitution’s ban on direct taxation, ushering in the maddening yearly exercise of trying to determine one’s income tax burden, it gave government tremendous power to control areas of life that formerly would have been considered private. 

Coupled with the necessary and proper clause, which gives the federal government authority to pass any and all laws it thinks are needed to carry out the duties enumerated it by the Constitution, direct taxation frequently works against organizational and philosophical limits put on government power, like states’ rights and the idea that Congress’ power is limited to those enumerated in Article I, Section 8.

Federal taxes require individuals to document just about every aspect of their lives; and they attach a monetary penalty to them, too. And the more one tries to go outside the framework of traditional employment from an employer who files a W-2 on behalf of their workers, the worse those penalties become. Freelancers and the self-employed are taxed just for trying to find alternative working arrangements that best suit their ambitions and their lifestyle. 

And the more the economy adapts to the benefits of modern technology and tries to find workarounds to America’s broken tax system, the more government doubles-down on penalizing anyone who dares try and make a living in one form or another.

Under current law, gig economy companies like Uber and Airbnb don’t have to report those who use their platform to make income unless they pay individuals over 200 times a year, for a minimum of $20,000.

But a last-minute change that was quietly made to the latest coronavirus bill looks to drastically reduce the reporting threshold. Instead, the change would require companies to report tax information on all workers who make at least $600. This would match the current reporting requirements for brick-and-mortar businesses.

It’s estimated this change would cost gig economy businesses $1 billion annually. It’s inevitable these costs would get passed on to the consumer, doubtlessly making them less appealing to workers. That means not only do those looking for a quick job to make a few bucks suffer, but those who benefit from these services would likely suffer, as well.

By lowering the reporting threshold, Congress is looking to treat gig economy companies more like traditional brick-and-mortar employers. And it’s trying to force these companies to treat those who use their platforms as employees, not independent contractors.

The pitfalls of this have already been hashed out at state-level: California’s AB 5 caused an uproar among independent contractors whose preferred work arrangements would have been made illegal in a misguided effort by the nanny state to “protect” workers. 

This reporting change would have the same effect as AB 5, except at a national level. Part of the appeal of the gig economy is its convenience: people with property they don’t utilize can use Airbnb to easily make excess income; Uber drivers can use their cars to do the same. For the most part, there’s little upfront investment required and individuals are in control of how and when they work. There’s also no worry about the hassle of filing out government tax forms, which often slows down the process of beginning a new job. 

The reporting change was motivated by government’s fear that the gig economy was underreporting its income. Because Heaven forbid individuals be able to keep even a portion of the income they earned. But it does a whole lot more than extend government’s oversight of private actions into yet another area of private activity.

In recent years, part of the allure of the gig economy has been that it’s returned some autonomy to individual’s private lives. But changing the reporting requirements in a way that forces companies to treat workers like employees, not independent contractors, also has the power to change behavior. And what is commerce but a pattern of behaviors?

Etsy, the online marketplace for artisans and crafters, is opposed to the reporting change because it says the new rule would force it to collect a would-be shop owners’ Social Security at signup. That move is likely to dissuade a lot more would-be craft sellers to open a shop.

It’s not just entrepreneurs who want the chance to grow a business from their home, free of a lot of the expenses associated with owning a brick-and-mortar store, that lose out here. The number of goods that suddenly don’t have a chance to enter the marketplace means consumers miss out, too. 

Both of these are hidden costs: because entrepreneurs looking to use Etsy to casually sell their knitting or art are scared away by reporting requirements, consumers aren’t exposed to different artisans. And they miss not just products that would enrich their lives, but ideas derived from those products that might inspire someone else to become an entrepreneur.

Lowering the tax filing threshold is a lot more than about the federal government’s greedy desire to squeeze every last penny it possibly can out of the populace. It’s requirements have the power to change behavior: for the worse. By issuing rules that force the gig economy to behave more like the traditional economy, it stifles innovation and creates a de-facto standard of how businesses can operate. Economic behavior loses its diversity. And it’s in diversity that commerce prospers: the ability of people with different ideas to serve different needs and desires in the consumer base is what allows the private sector to prosper.

But, thanks in large part to government’s taxing power, there are very few activities now beyond the reach of the federal government. Government regulations don’t see individuals. In fact, anytime innovation occurs, government uses its power to try and force would-be mold breakers to behave just like everyone else, the better to regulate it. And that leads to a less prosperous and less diverse private sphere, wherein individuals have less control over their lives and their income.

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