THE POWER TO TAX AND SPEND

 

 

 

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                         THE NEED TO SEPARATE THESE TWO EVILS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                BY

                                                Kenneth T. Hern

 

As Presented to the Raleigh Tavern Philosophical Society          

May 27, 1999

 

 

 

 

 

 

 

Perhaps no single phenomenon has had greater impact on the history of nations than the issue of a government extracting money from its people in the form of taxation.   Taxes have been ever present in recorded history, often making a strong impact upon peoples’ lives. The prosperity as well as the decline of nations has all too often been influenced by taxation.   Nations have always needed revenue and without funds, governments have collapsed.  Societies have disappeared and chaos has followed.

Taxes are the fuel that makes civilization run.  There is no known civilization that did not tax.   Taxation played a major role in ancient international politics.  Empires collided and battled for the right to tax the loser.  Peace conferences and treaties centered on the question of how much tax the victors would receive.  The right kind of taxes produced the magnificence of Greece and were at the heart of Rome’s early greatness and even Caesar’s success and popularity.

            However, I believe our current system in the United States threatens our country’s economic power, unfairly and inequitably extracts money from the people and, if not changed, will lead us to personal and national revolts of catastrophic proportions.

My reference to “the right kind of taxes” infers that there can be “the wrong kind of taxes” or even dumb taxes and the first casualty of a dumb tax is usually liberty followed by the loss of wealth and strength of a nation.     Taxes are not debts, in spite of the fact that we carelessly refer to them as such.  The principle of fair value received, which is the basis for a legally enforceable debt, has no place in a tax dispute.  A tax is owed because a government orders it to be paid.  Nothing else is required. 

 

Throughout history human rights have suffered more than nations.   Whatever the taxman has wanted the taxman has gotten, including our liberty when he so desired.   In any conflict between liberty and taxes, liberty has and will give ground. 

 

Five thousand years ago, at the dawn of recorded history, we find the first records of taxes at Lagash in Sumer.  Recovered from beneath the silt of the Tigris and Euphrates are clay cones which record taxes being imposed on the people of Lagash to support a war.  But when the war ended, the taxmen refused to give up their taxing powers.    According to the records, everything was taxed.  Even the dead could not be buried unless a tax was paid.  The story ends when a good king “established the freedom” of the people.

In my research on tax and spending the reference to “freedom” very often referred to those who were exempt from paying taxes and I, for one, find it an interesting if not an accurate derivation of this word. 

Now, as in ancient times, reducing the scope of government is man’s most important single objective and this can only be done by reducing the amount of taxes we pay, the way they are collected and the way these funds are spent. 

"The federal government of the United States of America takes away between a fifth and a quarter of all our money every year,” writes P.J. O’Rourke. “That is eight times the Islamic zakat, it is double the tithe of the medieval church and twice the royal tribute that the prophet Samuel warned the Israelites against when they wanted him to anoint a ruler.

“Our government gets more than thugs in a protection racket demand, more even than discarded first wives of famous rich men receive in divorce court. Then this government, swollen and arrogant with pelf, goes butting into our business. It checks the amount of tropical oils in our snack foods, tells us what kind of gasoline we can buy for our cars and how fast we can drive them, bosses us around about retirement, education and what's on TV; counts our noses and asks fresh questions about who's still living at home and how many bathrooms we have; decides whether the door to our office or shop should have steps or a wheelchair ramp; decrees the gender and complexion of the people to be hired there; lectures us on safe sex; dictates what we can sniff, smoke and swallow; and waylays young men, ships them to distant places and tells them to shoot people they don't even know.   The government is huge, stupid, greedy and makes nosy, officious and dangerous intrusions into the smallest corners of life.”

O’Rourke offers a humorous but insightful opinion of the amount of money extracted from the citizenry, how these funds are wasted and how much the federal government intrudes into our everyday lives. Mr. O’Rourke understands the need for some government and some tax but he, as I, questions the amount taken and the areas into which these funds are spent when he asks, "What is this oozing behemoth, this fibrous tumor, this monster of power and expense hatched from the simple human desire for civic order? How did an allegedly free people spawn a vast, rampant cuttlefish of dominion with its tentacles in every orifice of the body politic?"  

I appreciate the question and suggest that the most unresolved problem of the day is precisely the problem that concerned the founders of this nation: how to limit the scope and power of government. Tyranny and restrictions on human freedom, come primarily from governmental institutions that we ourselves set up.  By allowing those that have the authority to spend be the same as those who can impose taxes is at best not in the interest of those being taxed and at worst, a dangerous intervention upon our freedoms. 

The answer as to how we, a free people, have permitted our elected officials to reach so deeply into our pockets can be divided into several parts.  

First, just as the people of Lagash permitted their king to raise their taxes in time of war, so did we Americans beginning with the World War I.   In 1913, the tax code (the 16th Amendment) was enacted by Congress. It was 14 pages in length and the tax form a mere two pages long.    Only one-half of 1 percent of the population was affected by the tax, and the top tax rate was only 7 percent.  In 1914, the first year income taxes were collected, the average family only had to work until January 30 before earning enough to pay all federal, state and local taxes.    However, the original opponents of the tax were afraid the tax would grow in size, and their fears have been realized.

The current IRS code contains 9,400 pages of tax law, and  4,000 pages of forms which are understood by few – including agents of the IRS.  It is three times the length of the Bible, and requires over 110,000 employees to administer and police at an annual cost of $9.8 billion.

Notwithstanding assurances made in 1913 from supporters that the tax rate would never rise above 10 percent and that the rich would always be the ones to pay, the income tax became a tumor and then a cancer.   Politicians immediately began to increase the rate, using World War I as an excuse to bump the top rate up to 77 percent!   The rate did come down after the war but Herbert Hoover pushed it back up to more than 60 percent in 1930 and Franklin D. Roosevelt increased the rate to more than 90 percent during World War II.  

Second, the desire to do good, to help those in need, to be charitable were probably phrases used by the politicians who came before 1913.   We still hear it today.  It sounds wonderful to offer to be helpful and good and charitable with someone else’s money. But I do not believe the founders of our nation, the drafters of the constitution ever intended for money to be taken from some to be given to others.  They did not permit Congress the power to appropriate money as an act of charity. 

Then as now, Congressmen would have had the right, as individuals, to give away as much of their own money as they pleased to charity; but as members of Congress they had no right to appropriate a dollar of the public money for charity.

What started out as a desire to do good and be charitable has become a perceived debt.

To do good, the earliest “gifts” of other people’s money were, I am certain, very small.   It was and is not the amount, that I complain of or that I am concerned about; rather it is the principle.   The government should have in the Treasury no more than enough for its legitimate purposes.    For me, government has three primary functions. It should provide for military defense of the nation. It should enforce contracts between individuals. It should protect citizens against crimes against themselves or their property.

The power of collecting and disbursing money at pleasure is the most dangerous power that can be intrusted to man, particularly under our system of collecting revenue  which reaches every man in the country, no matter how poor he may be, and the poorer he is the more he pays in proportion to his means. What is worse, it presses upon him without his knowledge where the weight centers, for there is no one in the United States who can ever guess how much he or she pays to all levels of government.  The Congress, while seeking contribution to relieve one or a few, are drawing it from thousands who are or could be even worse off than the recipient(s).

Once Congress ordained that they had the right to give anything, the amount was simply a matter of discretion.  They could and did give thousands, then tens of thousands, followed by hundreds of thousands until the amount of “gift-giving” has reached the level of several billions of dollars. 

Once Congress decided it had the right to give to one, it follows they had the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, they were at liberty to give to any and everything which they believe, or profess to believe, was in need, and to give any amount they think proper.

At this point it is easy to perceive what a wide door this has opened for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other.

Therefore, the need arises to separate the power to spend from the power to tax.

As stated earlier individual members of Congress may give as much of their own money as they please, but they have no right to touch a dollar of the public money for that purpose. A review of congressmen’s tax returns clearly shows they choose to keep their own money, which, if various news reports be true, some of them spend not very creditably.   Money with them is nothing but trash when it is to come out of the pockets of other people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.   Here is yet another reason to separate their ability to tax and spend.

Returning to O’Rourke's question about why and how an allegedly free people would permit a government to use our money to grow into a dangerous behemoth, the answer of “how” is, Beardsley Ruml.

Had I brought up the name Beardsley Ruml in front of any other group, my audience would no doubt be looking at me with blank or confused expressions.   However, in the presence of this august group of historians, I am confident most of you know that Mr. Ruml was a treasurer for the department store, R. H. Macy & Co.  He also served as Chairman of the Board of Directors of the Federal Reserve Bank of New York and was an advisor to President Franklin Roosevelt during World War II.  I will return to Mr. Ruml later.

Following in the steps of the King of Lagash,  FDR raised income taxes radically during a time of war.   The income tax rates were aimed to capture twice as much revenue as the year before.   With the help and support of Congress, FDR imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before.

As the new rates became law and went into effect, most Americans were not “conditioned” to pay a new, giant tax bill.  Their non-preparation is borne out by a Gallup poll taken at that time which showed that of the 34 million people subject to the tax, only 5 million were saving to make their payment.  Remember, in the early 40’s, March 15th was the day of tax filing.

An unintended tax revolt was in the making as it became clear that millions of Americans were not filing their returns.  The Secretary of Treasury, Henry Morgenthau, was faced with the nightmarish prospect of mass tax evasion and the horrors of trying to arrest millions of people.

Henry didn’t sit on his hands.  He got busy with a massive public relations campaign to remind Americans of their patriotic duty.  Walt Disney helped Henry by creating a short animated film showing Donald Duck fretting over his tax preparation as he claimed Huey, Dewey and Louie as dependents.

Enter Ruml, who rides to the rescue.  He, as Macy’s treasurer, knew that customers did not like making large payments.  He had observed they did not seem to mind making small installment payments against a large bill, even if it meant paying an interest on the bill.   Ruml began to explain to anyone who would listen about how the government could get business to do the work of collecting taxes.  Employers would retain a percentage of taxes from workers every week and forward it directly to Washington’s war chest.  This hid the size of the new taxes from the worker and prevented the worker from ever having to look his tax bill square in the eye and write a check for same.  Workers would never even see the money they were forgoing.  Withholding as we know it today was born. 

This was a radical transformation.  Government could now put its hand into the American taxpayer’s pocket and grab its share of tax without asking.

To me, Ruml was a genius, who did not invent withholding, but, who found a way to make its introduction to the American public palatable, which begins to answer the question of “why” American citizens did not resist this radical change . 

His genius was to add a powerful sweetener.  The federal government would offer a tax amnesty for the previous year, allowing confused and indebted citizens to start on new footing.     It was the most ambitious bait-and-switch plan in American history.   

Ruml touted his project as a humane effort to smooth life in time of war.   He stressed that the offer of a tax amnesty was the patriotic thing to do and used the example of a young Macy’s employee who had been making $75 a week and had now been called into the navy at an annual salary of $2,600.   It would not be fair to ask this young man to pay a tax bill on a higher income when he was earning less money in the service of his country.  This, Ruml said, was “an impossible situation”.

There was little doubt in Ruml’s mind that the idea could be sold to the public.  First, as a nation we were smarting from the Japanese attack on Pearl Harbor and would be willing to sacrifice more than at any other time in recent memory.  The second was that the federal government would be able to administer withholding because for six years it had been collecting Social Security without any problems.  The third was how the idea was packaged.  He never called his program anything other than “pay as you go” which he reasoned would be the same as the popular Macy’s installment plan. 

The fourth and most important was the lure of tax amnesty.        

The policy thinkers of the day embraced the Ruml concept.  John Maynard Keynes dominated the world of economics and Keynesians placed enormous faith in government.  The one thing they liked about the war was that it demonstrated to the world all the miracles of Big Government.  The Ruml plan would give them the wherewithal to have their projects even, they reasoned, after the war ended.  

Even the world’s leading free-market economist, Milton Friedman, endorsed the concept.  Decades later,  Friedman would call for the abolition of the withholding system.   He would lament, “we concentrated single-mindedly on promoting the war effort.  We gave next to no consideration to any longer-run consequences.   It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom.  Yet, that was precisely what I was doing.”   He would later say, “There is an important lesson here.  It is far easier to introduce a government program than to get rid of it.”  

I could not agree more with Dr. Friedman.  It is going to be extremely difficult to cause a material change in how our taxes are collected and spent.   And, it will take years to separate the power to tax from the power to spend.   What we need is a modern day William Tell.  

 In 1273 the Hapsburg family in Austria sent in tax gatherers and overlords to collect full feudal taxes from the Swiss. The Swiss were not willing to submit to full Hapsburg taxation, and rebellion followed.  During the struggle the legend of William Tell was born.  William refused to acknowledge the Austrian Hapsburg and their gang of tax collectors.  For this defiance he ordered to shoot an apple from the head of his son with a crossbow.   

The admiration and homage the Swiss have for the legendary William Tell are not for his skill with a crossbow, but for igniting a successful revolt against the oppressive tax policies of King Rudolph of Hapsburg and his successors.

Better yet, let’s bring back the zeal of an ancient people.  The ancient Jews

 

battled for centuries a form of tax terrorism that makes the PLO look like boy scouts.

 

            Why am I so adamant about the need to separate the power to tax from the power to spend?   Over the past 10 years (4 with a Republican President, and 6 with a Democrat), INTEREST on the national DEBT totaled $2,756,000,000,000.00 (that's $trillions). That INTEREST bought us nothing! Think of it this way: That much money could have paid the cost of our Army, Navy, Marines, Air Force and Coast Guard (the entire Defense Department) for almost 11-1/2 years, but it didn't.… It was just your tax money up in smoke! In addition to our $5.4 trillion national DEBT, the government has committed the taxpayers to another $17.0 trillion in unfunded liabilities. The DEBT load to which the politicians have obligated present and future generations is immoral, illegal, shameful, and grossly unjust! ! 

Can anything be done to stop this runaway tax train?  The answer is yes but it going to take decades to effect any material change in the process and find a solution. The solution to our country's problems lies NOT with either of the two major political parties... they A-R-E the problem!   Ultimately I would want to establish constitutional requirement for voter approval or legislative super majority to increase taxes and abolish state income taxes.

In the meantime,  IT'S TIME FOR A CHANGE!  There is a way the federal government could collect revenues while imposing only a fraction of the compliance costs on the economy.   This idea is not new but I would support a flat tax which would reduce compliance costs by 94 percent.  A flat tax would also stop the senseless class warfare and form the basis for a simple, honest, fair tax code.  I would further propose elimination of the social security tax over time and would insist this process begin with the elimination of the tax on the social security tax.

 I personally do not support it but there is another less intrusive, and far more efficient, way to raise the revenue to support the federal government and that would be through a national sales tax.   Most states already collect sales taxes (which I want to abolish) with  less expense and intrusion than results from the income tax. These same state agencies could collect the national sales tax and remit it to Washington.

No matter which change is enacted, we must totally dismantle the IRS and its

income-tax machinery. We can ill afford to run the risk of ending up with two types of taxes.

The downside would be 110,000 unemployed at IRS and thousands of formerly high paid tax lawyers and accountants looking for new careers.

Am I being unrealistic to imagine a change in the tax system?   Former Speaker of the House Newt Gingrich said constitutional amendment on tax hikes were “guaranteed to pass” – eventually.

What Gingrich was “guaranteeing” in what now seems the distant past was a                     measure, sponsored by Rep. Joe Barton (R-Texas), as part of a GOP effort.  The

Barton amendment would require a two-thirds vote in both houses of Congress  to raise federal income taxes. Barton said he had 160 cosponsors for his measure, and was confident he could garner the necessary support to pass the bill. Gingrich further vowed that even if the bill does not pass immediately, saying "this vote will come up again and again until it passes. And the reason is very simple. The American people know that it is too easy for the politicians to raise people's taxes to pay off the politicians' promises."

I genuinely hope the former speaker is correct because if not I fear my children will live to see the predictions made by Friedrich Hayek in his book  The Road to Serfdom.  Hayek wrote of the problems associated when the people of a nation begin to permit their elected officials to abandon freedom in economic affairs without which personal and political freedom have not and cannot exist.

The massive amounts of taxes being collected and then wasted on “aid for all” is a genuine concern for me.  America is, I believe, beginning to embrace socialism, and socialism in the final analysis has led to communism, Nazism and fascism.   Let’s not let this creeping socialism lead to economic slavery.  Let’s find a way to separate the evil to tax from the evil to spend.