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Rebate – Prebate – Cut – Credit – Deduction – Refund. These are among the most potent tools in a politician's arsenal of political jargon. This is because few issues can speak as clearly to the heart of the voter as does tax policy. This is understandable. When you earn money, whether in return for work, as dividend on a wise investment, or from some lucky windfall, you inevitably will give some of it up as tax. For most voters, paying taxes is a miserable reality with little evident reward that reliably invokes impassioned tirades from even the least politically-minded among us. Why then do we seem to tolerate so well paying so much in tax, and why do we feel so helpless to change things? To answer these questions, we will have to go back to the roots of the tax system as we know it, beginning with the fundamental (and very conservative) question: why do we have taxes at all?
Government, at its most basic, is explained with brilliant clarity in Thomas Paine's Common Sense. I would suggest as your first homework assignment that you read through it (it's short!), as it is one of the foundational documents of America. Essentially, the founders of our country understood that people, by nature, will tend to come together into groups. This is natural, because you can get more done as a group than as an individual. As long as your work is altruistic, no government will be needed, because everybody will act in the best interests of everyone else (including themselves), because they recognize the interdependence of the group. But after awhile, conflicts of interest may arise, even among the most altruistic individuals. This is because utility cannot be reliably measured, so it is impossible to determine how best to allocate the resources (materials, labor, ingenuity, etc) available to the group. This is where an economy must develop. The individuals make decisions about what, to them, is the most important use of the asset. If everyone was altruistic (and aware of their situation), there would still be no need for government, nor even law. Every transaction would be as fair as possible, and everyone would rest easy knowing that society as a whole was providing them with exactly as much or as little as they deserved. Alas, humans are not perfect.
Fortunately, our founders, for all their apparent idealism, were often harsh, even cynical pragmatists. So it was that they recognized that sometimes people would not be altruistic in their decisions, they might be entirely selfish, willfully harming others to advance their own ends. Other people might feel they have been wronged when, really, they haven't. This conflict is at the root of law. Laws exist because we can either fight with each other when one party in an exchange feels wronged (whether they are or not), or we can come to some sort of an accord through civil means. Sometimes we can reach these accords of our own (this is negotiation), other times we need some impartial advice (this is arbitration). At times though, we have an irreconcilable conflict. The only solution then is to have some codified standard that we can point to as a fair solution. Not fair because it is absolutely equitable, but fair because it can be applied equally to anyone (this is adjudication). Congratulations, now we have a civilization. Notice, there is still absolutely no need for tax...but...
We'll need people now to make decisions as to what standards are fair, and probably people to enforce those standards, and other people to apply the standards to each situation. We could achieve this through a collective screaming match, but that would probably devolve into war long before we came to an accord. As such, we have to make a decision: do we give up civilization and go back to isolation (where we are maximally free, but less prosperous because we are alone), or do we give up some of our freedom in exchange for security (and maybe greater prosperity). Our founders, in their wisdom, begrudgingly acknowledged the necessity of giving up some measure of freedom in order to ensure that there was some sort of civilization at all. However, they believed strongly (well, most of them) in limiting the power of the authority that creates and enforces the law – namely, government. In particular, they wanted to limit the national (federal) government, because they knew that each community was unique, and would have different needs better served by different laws. But here's the rub, and you've certainly figured this out already: you aren't going to get people to create, apply, and enforce the laws for free. And that's not to mention the need for an army to protect our civilization from others that might attack us for whatever reason - even our militia might want to be paid while they're away from their normal jobs, fighting on our behalf. So what now?
As you have surely guessed the answer is to grant the lawmaking body of government the authority to levy a fee on certain transactions between entities (groups or individuals) in order to raise revenue to fund the activities of government (which themselves were to be grossly limited, but that's a different rant). These levies, or taxes, or capitations (there are many words for what boil down to very similar things) could be executed in only a few ways. One would be to tax goods when they change hands. These are tariffs, sales taxes, duties, and the like. Another way is to tax goods when they are produced. These are excise taxes. The third way would be to tax entities based on their apportionment of property, income, or changes in net worth. These are property taxes, income taxes, and capital gains taxes.
In order to grant the federal government the power to levy taxes, a power lacking in the failed Articles of Confederation, the founders drafted Article I, Section 8, Clause 1 of the United States Constitution to say: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
Notice that Duties and Excises are all trade-related taxes. The founders did not believe that the federal government had any business taxing individuals or businesses based on their worth or income. This was in line with the conception of the federal government held by the founders: namely one which was present as a necessary evil, limited in its authority, and subject to the will of the people (as voters in the several States of the Republic) as a servile entity that provided the minimum necessary legal and military support to ensure the freedom of the people be best preserved. The inclusion of the word impost, meaning simply something levied, left some room for maneuvering with regards to the nature of other taxes that might be levied. The built in defense against Imposts becoming individual taxes, however, was the requirement of uniformity. Because all taxes must be uniform, it is impossible to fairly apportion equal amounts to states with unequal distributions of population and wealth. Therefore Article I includes Section 9, Clause 4, stating: No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken. This says that direct taxes on individuals may only be levied in proportion to the population in the states where the taxes are levied.
These were inconvenient realities, however, when the Civil War came around, and a whopping 3% income tax on incomes over $800 (a tremendous sum in that time) was levied against the American people to fund the war effort in 1861 (nearly ninety years after the founding of the nation). The tax was rescinded in 1872 as reconstruction progressed and the federal government found themselves no longer needing wartime funds. In 1894 tariffs on trade were reduced, and a peacetime income tax of 2% on income over $4000 was imposed. This lasted only one year before the Supreme Court ruled that apportionment of direct taxes was impractical and was for all effective purposes banned by the US Constitution.
Queue the Sixteenth Amendment, ratified in 1913, which explicitly revokes the apportionment requirement for direct taxes on incomes from any source by reclassifying them as indirect taxes that need only be applied uniformly to all citizens – this is the root of virtually all modern taxation. In 1939, in the wake of the Great Depression, the Congress made the final stroke that would ensure far-reaching tax authority by defining income as: gains, profits, and income derived from salaries, wages or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. [phew!]
So there you have it. Government is a necessary evil that protects otherwise good and cooperative people from unjust treatment by creating and enforcing laws. The government of the United States is [was] peculiar in that the people elect each other to the government, allowing those laws to be changed as necessary on an ongoing basis to best serve the needs and desires of the constituent voters. Government, however, requires funding to function effectively, even in its most limited form. Therefore, the government was permitted to enforce uniform taxation on commerce, as oversight of interstate and international commerce was already part of the federal government's role. Slowly, as government grew ever larger (a phenomenon the founders warned us of) it required greater and greater funding, particularly as post-Depression America learned to depend ever more on the federal government as a source of social welfare programs (charity by coercion, as the cynics might call it). Once the government had wrestled away the authority to tax “all income from whatever source derived”, all bets were off. So now we have a tax system that taxes you any time you:
Government, at its most basic, is explained with brilliant clarity in Thomas Paine's Common Sense. I would suggest as your first homework assignment that you read through it (it's short!), as it is one of the foundational documents of America. Essentially, the founders of our country understood that people, by nature, will tend to come together into groups. This is natural, because you can get more done as a group than as an individual. As long as your work is altruistic, no government will be needed, because everybody will act in the best interests of everyone else (including themselves), because they recognize the interdependence of the group. But after awhile, conflicts of interest may arise, even among the most altruistic individuals. This is because utility cannot be reliably measured, so it is impossible to determine how best to allocate the resources (materials, labor, ingenuity, etc) available to the group. This is where an economy must develop. The individuals make decisions about what, to them, is the most important use of the asset. If everyone was altruistic (and aware of their situation), there would still be no need for government, nor even law. Every transaction would be as fair as possible, and everyone would rest easy knowing that society as a whole was providing them with exactly as much or as little as they deserved. Alas, humans are not perfect.
Fortunately, our founders, for all their apparent idealism, were often harsh, even cynical pragmatists. So it was that they recognized that sometimes people would not be altruistic in their decisions, they might be entirely selfish, willfully harming others to advance their own ends. Other people might feel they have been wronged when, really, they haven't. This conflict is at the root of law. Laws exist because we can either fight with each other when one party in an exchange feels wronged (whether they are or not), or we can come to some sort of an accord through civil means. Sometimes we can reach these accords of our own (this is negotiation), other times we need some impartial advice (this is arbitration). At times though, we have an irreconcilable conflict. The only solution then is to have some codified standard that we can point to as a fair solution. Not fair because it is absolutely equitable, but fair because it can be applied equally to anyone (this is adjudication). Congratulations, now we have a civilization. Notice, there is still absolutely no need for tax...but...
We'll need people now to make decisions as to what standards are fair, and probably people to enforce those standards, and other people to apply the standards to each situation. We could achieve this through a collective screaming match, but that would probably devolve into war long before we came to an accord. As such, we have to make a decision: do we give up civilization and go back to isolation (where we are maximally free, but less prosperous because we are alone), or do we give up some of our freedom in exchange for security (and maybe greater prosperity). Our founders, in their wisdom, begrudgingly acknowledged the necessity of giving up some measure of freedom in order to ensure that there was some sort of civilization at all. However, they believed strongly (well, most of them) in limiting the power of the authority that creates and enforces the law – namely, government. In particular, they wanted to limit the national (federal) government, because they knew that each community was unique, and would have different needs better served by different laws. But here's the rub, and you've certainly figured this out already: you aren't going to get people to create, apply, and enforce the laws for free. And that's not to mention the need for an army to protect our civilization from others that might attack us for whatever reason - even our militia might want to be paid while they're away from their normal jobs, fighting on our behalf. So what now?
As you have surely guessed the answer is to grant the lawmaking body of government the authority to levy a fee on certain transactions between entities (groups or individuals) in order to raise revenue to fund the activities of government (which themselves were to be grossly limited, but that's a different rant). These levies, or taxes, or capitations (there are many words for what boil down to very similar things) could be executed in only a few ways. One would be to tax goods when they change hands. These are tariffs, sales taxes, duties, and the like. Another way is to tax goods when they are produced. These are excise taxes. The third way would be to tax entities based on their apportionment of property, income, or changes in net worth. These are property taxes, income taxes, and capital gains taxes.
In order to grant the federal government the power to levy taxes, a power lacking in the failed Articles of Confederation, the founders drafted Article I, Section 8, Clause 1 of the United States Constitution to say: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
Notice that Duties and Excises are all trade-related taxes. The founders did not believe that the federal government had any business taxing individuals or businesses based on their worth or income. This was in line with the conception of the federal government held by the founders: namely one which was present as a necessary evil, limited in its authority, and subject to the will of the people (as voters in the several States of the Republic) as a servile entity that provided the minimum necessary legal and military support to ensure the freedom of the people be best preserved. The inclusion of the word impost, meaning simply something levied, left some room for maneuvering with regards to the nature of other taxes that might be levied. The built in defense against Imposts becoming individual taxes, however, was the requirement of uniformity. Because all taxes must be uniform, it is impossible to fairly apportion equal amounts to states with unequal distributions of population and wealth. Therefore Article I includes Section 9, Clause 4, stating: No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken. This says that direct taxes on individuals may only be levied in proportion to the population in the states where the taxes are levied.
These were inconvenient realities, however, when the Civil War came around, and a whopping 3% income tax on incomes over $800 (a tremendous sum in that time) was levied against the American people to fund the war effort in 1861 (nearly ninety years after the founding of the nation). The tax was rescinded in 1872 as reconstruction progressed and the federal government found themselves no longer needing wartime funds. In 1894 tariffs on trade were reduced, and a peacetime income tax of 2% on income over $4000 was imposed. This lasted only one year before the Supreme Court ruled that apportionment of direct taxes was impractical and was for all effective purposes banned by the US Constitution.
Queue the Sixteenth Amendment, ratified in 1913, which explicitly revokes the apportionment requirement for direct taxes on incomes from any source by reclassifying them as indirect taxes that need only be applied uniformly to all citizens – this is the root of virtually all modern taxation. In 1939, in the wake of the Great Depression, the Congress made the final stroke that would ensure far-reaching tax authority by defining income as: gains, profits, and income derived from salaries, wages or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. [phew!]
So there you have it. Government is a necessary evil that protects otherwise good and cooperative people from unjust treatment by creating and enforcing laws. The government of the United States is [was] peculiar in that the people elect each other to the government, allowing those laws to be changed as necessary on an ongoing basis to best serve the needs and desires of the constituent voters. Government, however, requires funding to function effectively, even in its most limited form. Therefore, the government was permitted to enforce uniform taxation on commerce, as oversight of interstate and international commerce was already part of the federal government's role. Slowly, as government grew ever larger (a phenomenon the founders warned us of) it required greater and greater funding, particularly as post-Depression America learned to depend ever more on the federal government as a source of social welfare programs (charity by coercion, as the cynics might call it). Once the government had wrestled away the authority to tax “all income from whatever source derived”, all bets were off. So now we have a tax system that taxes you any time you:
Buy anything
Sell anything
Earn anything
Inherit anything
Trade anything
Extract anything from the dirt (oil, coal, buried treasure...)
Of course, this list looks frighteningly unfair, and we must remember that every single line of the entire ridiculously large and complex tax code exists for a reason. But since the little list above says that just about everything you do can be taxed, why do we need so much law about it? Well, for two reasons:
One reason is that people hate paying taxes, so they find creative legal loopholes to avoid paying them. As soon as a loophole is discovered, it is closed with a new addition to the tax code. After all, taxes are meant to be uniform, and if you're clever enough to legally avoid the tax – well shame on you, they'll get you next time.
The second reason for all the messy tax code is that Congress figured out that once they had virtually unlimited power to tax the people, the had virtually unlimited power to shape our behavior. If you don't want people to smoke, tax it. If you want people to buy more goldfish, give a tax credit for goldfish purchases. If you want people to stop importing cheap shoes made in Bangladesh, put a heavy tariff on cheap shoes from Bangladesh. Politicians will smile winningly while manipulating you with taxes, using one of these lines of reasoning (every time, I guarantee):
[your favorite social program] needs to be funded
[your favorite social vice] needs to be restricted
[your favorite social behavior] needs to be supported
[your favorite social class] needs to be more fairly treated
So it is that we have taxes that are marginally progressive but pragmatically regressive, offset by deductions for dependents, based on age, social status, legal status, offset by income caps, offset by rate changes depending on marital status, offset by rate changes for investment losses, offset by deductions for all sorts of expenses, offset by direct credits for having children, going to school, getting sick, not getting sick, helping the environment, and on and on and on.
None of this is necessary. And most of it was never intended by the founders to be constitutional. So accept that there will be taxes. Indeed, there should be taxes. But only because we need some sort of government, and that only to protect our sovereignty as a nation and to guarantee the rule of justice. So the next time you hear about a tax hike for “the rich” remember that “the rich” drive commerce, and those higher taxes will lead to higher prices for you. When you hear about a “tax cut” for the poor, remember that a cut being implemented means that politicians know your taxes were already too high to begin with, and probably still are, but the group getting the cut is a politically expedient poster-child for whatever cause-of-the-moment politicians are latching on to. It really is that simplistic.
Above all else, remember that your money is your money. The government only has a right to it if you give them that right. You give them that right by voting for politicians that raise taxes. Politicians only raise taxes to punish the rich (and thereby appease the poorer classes), and/or to fund government spending. Since even the most die-hard Democrat will laugh at a joke about government inefficiency, it should be clear to every American that funding government projects is a horrible idea. Indeed, history proves it so. And since there is no way to seriously claim that punishing the rich for being rich is in any way fair (to whom is a progressive tax fair, exactly?) or remotely American (sorry Biden, but you're dead wrong on this one if the Constitution and the founding fathers are any gauge), then why ever vote for anyone that raises taxes? The cynic in me has some answers, but the realist in me says that only a champion reader has suffered through my rant to this point, and I need to stop. Hopefully, you've learned something, or at the very least will think long and hard the next time you hear any politician of any political stripe talking about any kind of tax policy. Unless the politician is suggesting massive repeals, simplifications, and accompanying cuts in government spending, you can be absolutely and completely certain he/she is simply using tax as a political tool to manipulate you into voting against your own best interests. Every time this will be true, without exceptions. I guarantee it.
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5 comments:
Ah, the steady, linear march of government growth and encroachment. It's always chilling to see it laid out baldly. Please note, during or following any crisis, the government will invariably grab more power (Quasi-War, Civil War, Great Depression, War on Terror, "Economic Crisis").
For those of you who got the Quasi-War reference, you get the Diligent Historian Gold Star... and immediate deportation under the Alien & Sedition Acts...
I disagree with your interpretation of the enumeration of congress' taxing power - by explicitly stating that all Duties or Excises be standard, the founders did not forswear taxing income or any other economic activity, only that trade related taxes could not be used to change the economic playing field between states, or that some states would receive an unfair burden on its inhabitants. The founders were well aware of the creativity taken in creating new forms of taxation (The stamp act could be considered the Barry White soundtrack of our nation's conception), and made a point not to forswear any particular form of taxation, so long as it was applied equally.
Mr. Wheat - perhaps if you called it the Pirate wars, or the Half-war, you might get better traction with the reasers.
Luscus -
I would point out that I did not claim the founders swore off taxing income or other economic activity. In fact, I explicitly state that, "the government was permitted to enforce uniform taxation on commerce, as oversight of interstate and international commerce was already part of the federal government's role."
The founders were very wary of direct taxation on individuals or businesses because, as you point out, they wanted taxes to be equal, and income taxation can be either proportionate or uniform, but never both. Indirect taxes were OK, so long as at the federal level they were restricted to interstate and international commercial concerns (as you seem to recognize). Indeed, the supreme court found conclusively that direct taxation of income was constitutionally inviable. The 16th amendment essentially eliminated the classification of taxes as "direct", opening a Pandora's box of new taxes that were never conceived of as being under the purview of the *federal* government. It's easy to tax anything when you say "it's not the people or the money that's taxed, it's the transaction". That's the essence of indirect taxation, and ALL transactions in the current tax code are considered transactional taxes, even when they amount to direct taxes on individuals.
The states had virtually unlimited authority to tax from the beginning, and could have leveled any income taxes their residents agreed to (remember the reserved powers of the states?). The trick is that the *federal* government had no business creating a federal income tax because it can never end well, and only feeds the beast.
I might add some context, which is always required when analyzing our Constitution. The Revolution itself was, in the minds of many patriots, a measure to stave off what they feared was a path to property and income tax, which they saw as one of the highest forms of tyranny, manifest in the Stamp Act and the Intolerable Acts.
It should say something, also, that, as Hariolor aptly points out, the income tax doesn't really appear on the American political scene until around 90 years after the Revolution itself and in a time of great calamity, and even then in the form of a paltry 3% rate on wealthy Americans.
A 3% tax on the wealthiest Americans' grows to a 90% tax on the wealthiest pre-Reagan. Government grows ever bigger as our indignation turns into complacency and resignation.
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