|Before the Income Tax |
by G. Edward Griffin
This report is adapted from two earlier articles by G. Edward Griffin appearing in the April 13, 1987 and February 29, 1988 issues of THE NEW AMERICAN. Mr. Griffin, a journalist and film producer, is the author of The Creature From Jekyll Island: A Second Look at the Federal Reserve.
It is a sobering thought that the federal government could operate - even at its current level of spending - without collecting any taxes whatsoever. All it has to do is create new money through the Federal Reserve System, a process called monetizing the debt. As a matter of fact, much of the money it now spends is obtained that way. The politicians who authorize that process know that this is not true debt, because no one in Washington really expects to repay it. It is merely a means of raising money to run the government without increasing taxes. Actually, the inflation that results from monetizing debt is just as much a tax as any other, but, because it is hidden and so few Americans understand how it works, it is far easier to collect than a tax that is out in the open.
So the question arises: Why does the federal government bother with taxes at all? Why not just operate on monetized debt? The answer is twofold. First, if it did, people would begin to wonder where the money is coming from, and that might cause them to wake up to the reality that inflation is a tax. Thus, open taxes, at some level at least, serve to perpetuate public ignorance regarding the reality of deficit spending. But the second reason is more to the point of this report. It is that taxes, particularly progressive taxes, are weapons by which social planners can wage war on one class of citizens for the benefit of another.
Tool for Social Planning
The January 1946 issue of American Affairs carried an article by Beardsley Ruml, who at the time was chairman of the Federal Reserve Bank of New York. Ruml devised the system of automatic withholding during World War II, so he was well qualified to speak on the nature and purpose of the federal income tax. His theme was spelled out in the title of his article: "Taxes for Revenue Are Obsolete."
In the introduction to the article, the magazine's editor summarized that Ruml's "thesis is that, given control of a central banking system and an incontrovertible currency [a currency not backed by gold], a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences."
Ruml explained that, since taxes are no longer needed to raise revenue for the government, there are only two purposes remaining. The first of these is to combat increases in the general price level. When people have money in their pockets they will spend it for goods and services, and this will bid up prices. The solution, wrote Ruml, is to take the money away from them and let the government spend it instead. This, too, will bid up prices, but never mind about that. Ruml explained it this way:
The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.
The other purpose of taxation, according to Ruml, is to redistribute the wealth from one class of citizens to another. This must always be done in the name of social justice or equality, but the real objective is to override the free market and bring society under the control of the master planners. Ruml said:
The second principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.
Ruml's view will not be startling to anyone familiar with how the income tax came into existence. Beginning with the War Between the States, the Marxist philosophy of class conflict became manifest in America. Many people wrongly believe that Marxism is a battle of the poor against the rich. In reality, it is a campaign against the middle class - the class that Karl Marx called the bourgeoisie. In The Communist Manifesto, Marx wrote: "The distinguishing feature of Communism is, not the abolition of private property generally, but the abolition of bourgeois property." In order to accomplish this, he called for a "heavy progressive or graduated income tax."
Soaking the Rich?
Once this concept of class warfare had been transplanted to America, it found nourishment in the labor movement and eventually blossomed into a powerful political movement known as populism. The populists claimed that the farmers and the urban working class were being exploited by rich industrialists, largely through the unfair way in which taxes were levied. At that time, the nation's revenue was drawn primarily from internal excise taxes on the sale of such items as tobacco and liquor, and from tariffs on imports. Today, tariffs are viewed as a means of protecting jobs for American workers, but in the political debates of the 1890s they were seen as subsidies for big business, a means of protecting them from the rigors of foreign competition, thus allowing bloated profits that would not be possible without political protection. Furthermore, since these tariffs were passed along to the consumer in the form of higher prices, they were viewed as nothing but a tax levied against the little man to perpetuate the unearned profits of the rich.*
The populists advocated the elimination of tariffs and the institution in their place of a progressive income tax. The move was perceived as an act of justice and revenge. The rich, at long last, were going to be forced to pay their fair share - and more. In the House of Representatives, Congressman Thomas J. Hudson of Kansas expressed the prevailing populist sentiment: "I know that many wealthy men are generous and charitable.... On the other hand, the majority of the very wealthy are haughty, overbearing, autocratic, mean, and it is that class in particular that the income tax is designed to reach."
Yes, working, middle class Americans were in the firm majority, and any politician who promised to "soak the rich" was assured of victory at the polls. How ironic it was that those same politicians came from some of the wealthiest families in the world. Little did the common voters realize that in their greed to shift the tax burden to others, they were, in fact, placing that burden more heavily on themselves.
Our "progressive" income tax is not progressive at all. In fact, it is not even proportionate. If we had a flat-rate income tax with no exemptions or deductions, a person with 20 times the income of another would pay 20 times as much tax. By contrast, a progressive or graduated income tax may require a person with 20 times the income of another to pay considerably more than 20 times as much tax. But the way it was designed to operate is quite different. The same year that the income tax was adopted, Congress also created the tax-exempt foundation, a device whereby, under cover of charity and education, those family dynasties with great wealth can avoid paying either income tax or inheritance tax, while their fortunes remain under their control and continue to operate for their benefit.
Not far behind the super rich come the very rich, who also share in the spoils system. Over the years, the tax laws have become twisted and turned into a Gordian knot of exemptions, deductions, depreciations, shelters, and credits. Those with sufficient wealth can well afford to hire professionals to trace these convoluted paths, but the common man must be content with "standard" deductions and the crumb of a "simplified" tax return.
The federal income tax was never meant to treat all citizens alike. It will never be fair because it was designed to be unfair. Furthermore, it is difficult to imagine a tax that is more cumbersome and expensive to administer. So that each individual's income may be determined, the taxpayer must produce documentation on every aspect of his financial life. In order to assure compliance, a virtual army of agents, auditors, and computer technicians must be maintained at public expense. In the dust of this roving army are the hordes of camp followers, the accountants and tax attorneys, all of whom consume massive chunks of the national wealth without producing anything except paperwork and procedures just to measure income. In the process, every detail of our lives is recorded and made available to the bureaucracy. The right to privacy and protection against arbitrary search and seizure is trampled underfoot.
The income tax cannot be reformed. Its heart and soul are favoritism. Its muscle is political power. Its nature is waste and tyranny. It must be completely replaced.
But what should replace it? The world has been exposed to just about every kind of tax imaginable at some point in history. Nations have tried property tax, production tax, excise tax, import tax, manufacturing tax, carriage tax, window tax, chimney tax, liquor tax, tobacco tax, income tax, sales tax, value-added tax, and even a tax on death. The results have almost always been the same. The taxes become despised by the people and often lead to revolt or civil war.
Fortunately, in our search for a fair tax that raises sufficient revenue, we do not have to begin from scratch. It may come as a surprise to learn that much of the work has been done and that the bulk of the plan has been drafted. Furthermore, it has actually been tested in America and found to be entirely workable. Where is this plan to be found? It is hidden where it is most unlikely to be discovered by the general public or Congress. It is in the Constitution of the United States.
After the Revolutionary War was won there was no way the colonists were going to create a new centralized government with the power to tax. They had had enough of that with England. So when the Articles of Confederation were finalized, they granted no taxing power at all. Whatever was needed had to be requested from the states, and the states were under no firm obligation to pay. Within a few years the impracticality of this arrangement was painfully obvious. The federal government had almost no funds with which to operate and, in fact, Congress did absolutely nothing for four years.
It is possible that the United States would have disintegrated into 13 separate nations with no way to protect themselves from foreign aggression had it not been for a series of tax revolts within the states. The most famous of these was Shay's Rebellion of 1786-87 in Massachusetts. In protest over excessive taxes levied by the state, a brigade of 2,000 armed insurgents blockaded the Springfield courthouse. The band was eventually dispersed by a few cannon volleys, but the incident served to dramatize the fact that none of the states was really prepared for military action on any sizable scale. The disturbance emphasized the need for a stronger central government, and a convention was called for the purpose of revising the Articles of Confederation.