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Non-Tech : INCOME TAX Must GO !!

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To: Mana who wrote (5)7/3/2002 1:30:15 PM
From: Mana  Read Replies (2) of 11
 
First Direct Tax

In 1798, Congress levied its first direct tax. It was in the amount of $2 million and was apportioned among the states on the basis of the current census, which was also the basis for the number of representatives each state had in Congress. The purpose of the tax was to extinguish part of the debt incurred by the Revolutionary War. Reduction of the national debt was viewed as one of those rare emergencies that would justify resorting to the extreme measure of a direct tax. In this case, the tax was levied on dwellings, land, and slaves. It did not provide for any deductions or exemptions, but, sadly, it was progressive in nature, with larger homes paying more per $100 of value than others.

Herein lay one of the hidden flaws in the tax concept of the Founding Fathers. They had inherited the feudal concept of noblesse oblige, the obligation of noblemen to take care of their inferiors and assume greater responsibility of government. By 1776, however, especially in America, this concept had lost its virtue. In a republic such as ours, there is no justification for allowing class distinctions into the law - and that includes tax law. If one class can be exempted from taxes on the basis of class, rank, or wealth, then that same group can be singled out later for extra taxes on the same basis, depending merely on the political majority at the time. The principle of taxing those with wealth at a higher rate than others must have seemed harmless at the time - perhaps even humanitarian - but it was destined to fester into a huge boil that would torment Americans for many generations to come.

All of these issues aside, the fact remains that the first direct tax in the United States was entirely constitutional. Congress had stated the purpose and the amount. It had been debated and passed. Most important, once collected, the tax would expire. In spite of these constraints, however, the tax met with considerable resistance and, in fact, soon led to a second revolt, this one among German settlers along the Eastern Seaboard. Pennsylvania's quota of the $2 million tax was $273,000, which fell mainly on land and houses. The valuation of houses was estimated by counting the number and size of windows, a practice inherited from England. But when the tax assessors arrived, the German residents thought they were reviving the hated European hearth tax. They organized into small bands and set out to assault the assessors and drive them from the district, which they did in short order. When some of the rebels were arrested and put into prison, an auctioneer named John Fries led a march on the courthouse and freed them. President John Adams once again called out the militia. Fries was captured, tried, and convicted of treason, but later received a presidential pardon.

Early Decentralization

By the time Thomas Jefferson became President, the nation had already experienced two uprisings over taxes - small to be sure, but revolts nonetheless. Hamilton and Adams had wanted to forge ahead with a powerful central government, and for this they needed revenue. The political tide now turned back to Jefferson's views of limited government. In his first Annual Message, Jefferson urged repeal of all internal taxation and a return to a reliance on tariffs alone. He said:

Considering the general tendency to multiply offices and dependencies and to increase expense to the ultimate term of burden which the citizen can bear, it behooves us to avail ourselves of every occasion which presents itself for taking off the surcharge; that it may never be seen here that, after leaving to labor the smallest portion of its earning on which it can subsist, government shall itself consume the whole residue of what it was instituted to guard.

Jefferson was not just making a speech to please the voters. He followed through. He cut government spending to the bone and even put much of the Navy into drydock. Meanwhile, Treasury receipts from tariffs were growing rapidly with the expanding nation. Lower taxes left the consumer with more money to buy imported goods. Jefferson proved his point. At the end of his term, the government actually had a surplus and had accelerated repayment of the federal debt - all as a result of tariffs alone.

The second time a direct tax was levied in accordance with the apportionment requirements of the Constitution was in 1813, principally to pay for the War of 1812. Another direct tax was assessed two years later for the same purpose. The first was for $3 million and the second for $6 million. The terms of assessment and proportion among the states were similar to those of the first revenue act. One interesting variation, however, was that the states were given the option of levying the tax entirely on their own according to whatever method of distribution they wished, saving the federal government the expense of administering the project. The states could take a 15 percent discount if they paid within six months, and a ten percent discount if they paid within nine months.

The first part of the 19th century was a period of great growth and prosperity for the United States. Excise taxes had been repealed, and the debts of war had been repaid. By and large, the central government was weak regarding internal affairs, which meant that the people were strong. The bureaucracy stayed out of the way and let Americans get on with their lives. Commerce flourished, wealth was created, and the standard of living for the common man soared. The Old World watched in amazement and envy. Then, with the War Between the States, the long retreat from greatness began.

With the outbreak of war between the northern and southern states, there was urgent need on both sides for massive armies and equally massive funding. In the South, almost the entire amount was raised by fiat money - paper bills with no backing in gold or anything of tangible value. In the North, however, Congress struggled to raise revenue in accordance with the Constitution. War was exactly the kind of "exigency" foreseen by the Founding Fathers when they established the principle of apportionment. So on August 5, 1861, Congress enacted the nation's fourth direct-tax revenue bill for the stated amount of $20 million. It was similar to the previous bills except that this time slaves were no longer taxed as property - only land, "improvements," and dwellings. The big departure, however, was that it also contained a provision to tax incomes. Congress did not like the idea of having to get taxes on a piecemeal basis. It wanted a continual flow of income without having to justify its specific purpose and without stated amounts. It looked for a way to bypass the apportionment process.

But how? All direct taxes had to be apportioned. That is what the Constitution mandated. The solution was easy: Since an excise tax is an indirect tax and does not have to be apportioned, they simply redefined the income tax as an excise tax.

The "excise" tax was a flat three percent of all income over $800 a year. Considering that the per capita income at that time was only about $150, that was a substantial exemption. Putting aside the merits or demerits of an income tax in general, we are dealing here with the concept of exemptions from that tax. This is, once again, the feudal tradition of noblesse oblige, but under a slightly different form. It is directly contrary to the concept of taxation with representation. If some are exempt from the tax, for whatever reason, and if they continue to have representation, then those who do pay it are denied an increment of consent and representation which is in direct proportion to the exemption.

Inflation Tax

In retrospect, the war-emergency income tax proved to be a relatively unimportant source of revenue. By far the greater part came from government debt and fiat money, which, incidentally, also was contrary to clear provisions of the Constitution. The Lincoln Administration raised a total of about $2.7 billion in bonds and "greenbacks." The direct tax on property pulled in about $17 million. The income tax, over the ten-year period it remained in force, raised about $347 million. Wars are seldom financed out of tax revenue alone. Inevitably, they are funded by government debt, the monetization of which causes inflation - a form of taxation few people understand. Americans in the northern states paid, in addition to the property tax, a hidden tax of a full one-half of all their savings as a result of a 50 percent decline in the purchasing power of their money during that period.

America's first income tax was sold to the citizens as a temporary necessity, a wartime emergency. As such, it contained a date for its own termination. As is often the case in such matters, Congress managed to extend it a few years longer, but it finally did expire in 1872. By this time, however, the theories of Karl Marx were sweeping through the intellectual and educational institutions of America, and the populists were capturing political power. Politicians dreamed longingly of a permanent income tax because of the bountiful stream of revenue that would flow from it. But the masses also were fascinated with the progressive - or "graduated" - feature because it gave expression to their envy of the rich and salved their sense of hurt over high protective tariffs. Senator William Peffer of Kansas expressed this prevailing mood:

Wealth is accumulated in New York, and not because those men are more industrious than we are, not because they are wiser and better, but because they trade, because they buy and sell, because they deal in usury, because they reap in what they have never earned, because they take in and live off what other men earn.... The West and the South have made you people rich.

High Court Spike

With pressure from both the public and the politicians for a progressive income tax, who could stand in the way? But five men did do exactly that. They were Justices of the Supreme Court.

In 1893, President Grover Cleveland jumped on the populist bandwagon, asking Congress to lower tariffs and make up for lost revenue by taxing the income of corporations. The bill was expanded to include personal incomes as well and passed through Congress the following year. Before it even went into effect, however, it was declared unconstitutional by the Supreme Court. In the case of Pollack v. Farmer's Loan and Trust Co., the High Court declared that a tax is not lawful if it is levied on income from investments, because that would be the same as a tax on property. As such, it is a direct tax, which according to the Constitution must be levied in accordance with the rule of apportionment.

At the time of this ruling, the populists were in firm control of the Democratic Party and were making inroads into the Republican ranks as well. They castigated the Supreme Court as a tool of the rich and an enemy of the people. President Theodore Roosevelt advocated a progressive inheritance tax in 1906, and in his 1908 message to Congress called for a new income tax, suggesting that it be worded in such a way as to prevent the Supreme Court from striking it down. When William Howard Taft became President, the political winds were at gale force. It was no longer a question of if an income tax was to become law, only of how.

In April 1909, Senator Joseph Bailey, a wealthy Democrat from the South, introduced an income tax bill that he expected to be opposed by the Republicans. But the Republicans decided to steal the show by introducing a plan of their own. Under the leadership of Senator Nelson Aldrich of Rhode Island, and with the help of President Taft himself, they proposed an amendment to the Constitution as a means of circumventing the Supreme Court. It is sometimes claimed that these men were secretly opposed to an income tax and resorted to this stratagem merely to appease populist sentiment, while hoping that the amendment would never be ratified by three-fourths of the states. There is ample reason, however, to believe that they proposed the amendment because they truly wanted it.

Aldrich, in particular, is highly suspect in this role. His daughter, Abbey, was married to John D. Rockefeller Jr., and Aldrich was the man who arranged the secret meeting on Jekyll Island in Georgia in November 1910 that led to the creation of the Federal Reserve System. He also played a pivotal role in making sure that the income tax law did not apply to foundations. This made it possible to shift the tax burden to the middle class by allowing tax-exempt status to the great fortunes of such families as Rockefeller, Morgan, Carnegie, and Aldrich.

A Modern Serfdom

At the very least, it must be concluded that these men, sensing the unstoppable clamor for a soak-the-rich income tax, decided to run to the head of the parade, lead it away from Wall Street, and render the law harmless to themselves and their friends. It is not paranoia, however, to sense that there was more to it than that. It is quite possible that they represented a cabal of monetary and political scientists that planned the entire scenario and even helped create the public clamor that would serve as an excuse for their action. Their objective, in this more sinister view, would have been the creation of a modern serfdom with themselves as lords and masters. The serfs would be convinced of their self-importance by the delusions of representative government and the socialist tax that they honestly believed was to their benefit. The age-old dream of contented serfs would at last be realized.

The Senate approved the 16th Amendment by an astounding vote of 77 to zero! The House followed suit with a roll call of 318 to 14. The measure then went to the states for ratification. On February 12, 1913, the 42nd state voted for approval, and the following words became a part of the United States Constitution:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Casting the Die

The 16th Amendment was sold to the people with solemn assurance that the income tax would be simple to compute, fair to all, and would never apply to any part of a person's income needed to sustain a decent standard of living. It was generally understood that only very large incomes derived from investments would be taxed, not the wages of the working man. That was, of course, a farce. The very first federal tax form issued in 1913 listed wages and salaries as income on which tax was to be paid.

The first tax was delicate by today's standards. After a whopping exemption on the first $4,000 of family income, the government took only one percent of the first $20,000, two percent at $50,000, and the highest rate was seven percent on incomes in excess of $500,000. These were all astronomical incomes in 1913, so it was only the very wealthy who paid any tax at all.

But the die was cast. Now that the federal government had a direct and perpetual access to the wealth of its citizens and no longer had to justify its financial needs through specific revenue acts, its spending began to rise like a hot-air balloon. With each round of spending came a reduction in the amount of exemptions, an increase in the tax rate, and a compounding of the complexity. At first it was the incomes of corporations; then of the very wealthy; then of the well-provided widow and the highly paid worker; and finally the wages of the janitor and the tips of waitresses.

No one in America fully understands the constantly changing Internal Revenue Code. Agents of the IRS do not, judges do not, congressmen do not, and most assuredly taxpayers do not.

When one considers the complexity of the tax code and the astronomical expense of operating the IRS itself, it is obvious that every other tax that has ever been tried in history is easier to compute and more efficient to collect than the income tax. And every time there is a tax "reform" bill rushed through Congress, the tax code always seems to emerge more complex and unfair than before. It is the nature of the beast.

The result of this reality is aptly described in the beginning of Prentice Hall's booklet, Research in Federal Taxation. Under the heading, "Opportunities Unlimited," it says:

Today's tax professionals face the prospect of the most promising future in the history of their profession.... With each passing year the federal tax laws affect American business and the individual taxpayer more and more. No businessperson, however expert in the business practices, can do without a tax advisor. He or she needs help on business transactions that have tax implications, because many daily business decisions are regulated to a degree by the tax consequences and results. And the great majority of taxpayers are becoming increasingly aware of the impact of the federal tax on their income and personal wealth. Their investments, provisions for retirement, wills, and business-connected (or sometimes even personal) expenditures require tax planning.

America has become infested with a swarm of tax professionals who are a drain on every business and private transaction that occurs. A significant part of everything we purchase goes to pay for a vast workforce of bookkeepers and accountants who must maintain reams of records to substantiate every cost of doing business, while producing nothing to expand the physical or cultural well-being of the nation.

Retarding the Economy

In the long run, any income tax, even one that is based on the same percentage for everyone, will serve to lessen the incentive to produce and, thus, will retard the nation's economic growth - which, in turn, will lower everyone's standard of living. One of the most powerful advocates of this idea in 1879 was Henry George, better known for his advocacy of a single tax on land. We do not have to agree with his thesis on the single tax to appreciate the wisdom of his opposition to a direct tax on income or personal property. In his treatise Progress and Poverty, George wrote:

If I have worked harder and built myself a good house while you have been contented to live in a hovel, the taxgatherer now comes annually to make me pay a penalty for my energy and industry by taxing me more than you. If I have saved while you wasted, I am [milked] while you are exempt.

If a man built a ship, we make him pay for his temerity as though he had done an injury to the state; if a railroad be opened, down comes the tax collector upon it as though it were a public nuisance.... We punish with a tax the man who covers barren fields with ripening grain; we fine him who puts up machinery and him who drains a swamp.

To abolish these taxes would be to lift the whole enormous weight of taxation from productive industry.... The state would say to the producer, "Be as industrious, as thrifty, as enterprising as you choose. You shall have your full reward!"

Since the income tax was created in 1913, it has been a long, bumpy ride and the American people have been jarred into a state of annoyance. We no longer are misty-eyed over political rhetoric that promises a utopia to be paid for by someone else. We have learned the hard way that there is no free lunch. Our "lunch," in fact, has cost us a fortune.

It has been necessary to review some history and taxation theory in order to come to an understanding of how we got to where we are and, most important, to learn from the mistakes of the past. Hopefully the information presented here will help crystalize the thinking of those who are opinion leaders. But specific proposals must be constructed in such a way as to have broad, immediate appeal to the American public. With that objective in mind, let us turn, finally, to what now must be done to restore tax sanity to our government.

Presidential candidate Steve Forbes has made his "flat-tax" plan a major campaign issue. A flat-rate income tax is certainly an improvement over a graduated income tax. But if a flat-rate tax were adopted, it still would be a direct tax and would still allow Congress to have continual access to our pocketbooks without ever having to explain or justify why it needed the money. Tax reform will never become a reality until Congress is once again required to live within a modest means - as would automatically happen if it had to depend only on indirect taxes - or, if extraordinary revenue is wanted, to specify the exact amount and to justify it in a specific revenue act.

Eliminate the Income Tax

The flat-tax plan is not the answer. What we need is to follow the greatest proposal for tax reform the world has ever seen, and it is already in our Constitution. What we need is to take the chains off the rule of apportionment and put them back where they belong, on the Congress of the United States. What we need is to repeal the 16th Amendment.

This single act would accomplish almost everything the current proposals for tax reform claim to seek. For the first time since 1913, the federal government would have to prepare a realistic budget, because it would no longer be able to rely on an ongoing, limitless supply of revenue. Like the rest of us, it would have to live within its means, which would be from indirect taxes only. If it exceeded this budget, it would have to face the voters with a specific request for a specific amount on a specific date. It is difficult to conceive of a more effective plan for trimming the scope and reach of the federal bureaucracy. It would be necessary to scrutinize the budget to try to discover the hidden boondoggles and subsidies. Cut back the funds, and these automatically would wither away. The rule of apportionment is the only realistic answer.

Yes, we are talking about the elimination of the income tax. Many people would naturally ask, "But where would the money come from to run the government?" This question presupposes that all the money the federal government now receives is necessary. The reality is that - if we were to cut out the waste, subsidies, foreign giveaways, transfer programs, interest on the national debt, transfusions into the International Monetary Fund, and support for the World Bank, plus the cost of running the IRS itself - the federal government could easily operate, as it was intended to do, on indirect taxes alone. Many important sources of revenue would not be affected by apportionment, most specifically tariffs (for revenue only, not for subsidizing a politically favored industry) and such excises as a gasoline tax for the maintenance of roads, fees for admission to national parks, postage stamps for the operation of the post office, and similar items. It is totally workable.

* Although sometimes referred to as a populist, Patrick Buchanan's position for protectionist tariffs runs contrary to the turn-of-the-century populists, who wanted to replace tariffs with an income tax.

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