In moral terms, the income tax is a disaster. It deprives people of their property, punishes success, violates their financial privacy, makes them pawns in social engineering and income-leveling schemes, and interferes with their ethical compass. It is unfit for a free society.
In the next chapter, we will see how it turns citizens into subjects.
Notes
1 Quoted in David Burnham, A Law Unto Itself: Power, Politics and the IRS (New York: Random House, 1989), p. 7.
2 Frank Chodorov, The Income Tax: Root of All Evil (New York: Devin-Adair, 1954).
3 Ibid., pp. 5, 6.
4 Ibid., pp. 6, 8.
5 Quoted in James L. Payne, Costly Returns: The Burdens of the U.S. Tax System (San Francisco: ICS Press, 1993), p. 129.
6 Quoted in James Bovard, Lost Rights: The Destruction of American Liberty (New York: St. Martin’s Griffin, 1995), p. 265.
7 Quoted in Payne, p. 103.
8 Murray N. Rothbard, Power and Market: Government and the Economy (Kansas City, Mo.: Sheed Andrews and McMeel, 1977), p. 136. Rothbard returned to his critique of Smith in Economic Thought Before Adam Smith: An Austrian Perspective on the History of Economic Thought, vol. 1 (Brookfield, Vt.: Edward Elgar Publishing Co., 1995), pp. 469–71.
9 Rothbard, Power and Market, pp. 141–44.
10 See, for example, William F. Shughart II, ed., Taxing Choice: The Predatory Politics of Fiscal Discrimination (New Brunswick, N.J.: Transaction Publishers, 1996).
11 Jean-Baptiste Say, A Treatise on Political Economy (1803; New York: Augustus M. Kelley, 1971), p. 416, footnote. Here Say sounds a little like the late-nineteenth-century American constitutional lawyer Lysander Spooner, who likened the state to a highwayman.
12 Ibid. For a rare analysis of Say’s view on taxation, see Murray N. Rothbard, Classical Economics: An Austrian Perspective on the History of Economic Thought, vol. 2 (Brookfield, Vt.: Edward Elgar Publishing Co., 1995), pp. 40–43.
13 Frank Chodorov, One Is a Crowd (New York: Devin-Adair, 1952), p. 154.
14 Chodorov, Income Tax, p. 12.
15 Much good work has been done in validating individual rights. Among others, see Ayn Rand, “Man’s Rights” in Capitalism: The Unknown Ideal (New York: New American Library, 1967), pp. 286–94; Tibor Machan, Individuals and Their Rights (LaSalle, Ill.: Open Court, 1989); and Douglas B. Rasmussen and Douglas J. Den Uyl, Liberty and Nature: An Aristotelian Defense of Liberal Order (LaSalle, Ill.: Open Court, 1991). For an excellent introduction to libertarianism, the philosophy of individual liberty, see David Boaz, Libertarianism: A Primer (New York: Free Press, 1997).
16 Bovard, p. 289.
17 Quoted in Burnham, p. 28.
18 John S. Carroll, “How Taxpayers Think About Their Taxes: Frames and Values” in Joel Slemrod, ed., Why People Pay Taxes: Tax Compliance and Enforcement (Ann Arbor, Mich.: The University of Michigan Press, 1992), p. 49.
19 Quoted in Payne, p. 130.
20 In truth, since all “flat tax” proposals include a personal exemption, they are not really flat taxes. They include two tax rates, zero and whatever rate has been set for incomes above the exemption.
21 Rothbard, Power and Market, pp. 145, 148.
22 Edwin R. A. Seligman, Essays in Taxation, 9th ed. (New York: Macmillan, 1923), p. 18. The earlier editions predated the constitutional amendment permitting a federal income tax.
23 My thanks to Professor Roy E. Cordato of Campbell University for this point.
24 Rothbard, Power and Market, pp. 144–46.
25 Ibid., pp. 149–50.
26 See ibid., pp. 154–55.
27 Seligman, pp. 72–73.
28 See Frederic Bastiat, The Law (1850; Irvington, N.Y.: Foundation for Economic Education, 1996).
29 H. L. Mencken, A Carnival of Buncombe, ed. Malcolm Moos (Baltimore: The Johns Hopkins Press, 1956), p. 325.
30 H. L. Mencken Prejudices: Sixth Series (New York: Knopf, 1927), pp. 53–54; quoted in Mayo DuBasky, The Gist of Mencken: Quotations from America’s Critic (Metuchen, N.J.: The Scarecrow Press, 1990), pp. 383–84.
31 The leading German state, Prussia, adopted the progressive income tax in 1851, before Bismarck unified and became chancellor of Germany. Prussia was not the first modern state to adopt the income tax. That distinction goes to Great Britain, which started taxing incomes in order to defeat Napoleon. Charles Adams, For Good and Evil: The Impact of Taxes on the Course of Civilization (Lanham, Md.: Madison Books, 1993), pp. 343 ff.
32 Edwin R. A. Seligman, The Income Tax: A Study of the History, Theory, and Practice of Income Taxation at Home and Abroad, 2nd ed. rev. (New York: Macmillan, 1921), p. 518. He pointed out that the same objection had been made to factory regulation and government schooling.
33 Ibid., pp. 618–19.
34 Ibid., p. 628.
35 See Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900–1916 (Chicago: Quadrangle Books, 1967).
36 Roy E. Cordato, “Tax Fairness or Moral Bankruptcy,” IRET Policy Bulletin, no. 53, September 6, 1991, Institute for Research on the Economics of Taxation, Washington, D.C.
37 “The Case for Tax Fairness: Talking Points,” April 1996, at the Democratic Leadership Council-Progressive Policy Institute website: www.dlcppi.org/texts/economic/ftaxtkp.htm.
38 Ibid.
39 Henry C. Simons, Personal Income Taxation (Chicago: University of Chicago Press, 1938), pp. 18–19; quoted in Cordato, p. 6. Strangely, Simons called himself a libertarian.
40 See Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).
41 Cordato, pp. 10–11.
42 The table below summarizes the point that upper-income groups pay the bulk of the personal income tax. What’s more, over the last fifteen years, as marginal rates have fallen, the top filers have seen their share of the tax increase.
Proportion of the Federal Income Tax by Income Group, 1995
Share of AGI Share of Taxes
Top 1% 14.6% 30.2%
Top 5% 28.8 48.9
Top 10% 40.2 60.5
Top 25% 63.4 80.3
Top 50% 85.5 95.4
Bottom 50% 14.5 4.6
Source: The Tax Foundation, www.taxfoundation.org/prtopincomechart2.html.
43 “Top Income Earners Continue to Shoulder Greater Share of Income,” no date, at The Tax Foundation website: www.taxfoundation.org/prtopincome.html.
44 Payne, pp. 145–47.
3
Who’s the Master? Who’s the Servant?
There was a time in the United States when people generally felt they were the master and the government was the servant. Indeed, that libertarian spirit was the legacy of the revolutionary generation, which had been appalled by its experience with the British crown’s treatment of the colonies. Under the colonial regime, arbitrary rule — including a series of intrusive taxes — exacted a painful toll, leading to an unprecedented revolutionary movement. That movement declared that human beings have rights antecedent to government, that government’s purpose is the protection of those rights, and that if government itself became inimical to liberty, the people were justified in altering or abolishing it. It would be impossible to overstate how novel and radical that moment in history was. The United States of America was the first nation self-consciously created for the sake of the individual.
The achievement of the War for Independence was to be an end to arbitrary rule, a respect for the rights of man, and a government that was kept in its place not only by a formal constitution but also by the unwritten constitution in the hearts and minds of the people. Despite some serious contradictions of the libertarian philosophy, the most egregious being slavery, the United States became the freest — and, not coincidentally, the most prosperous — society on earth. Even after an unfortunate accumulation of power in the Civil War, the United States of the 1870s still showed great promise for the future as a beacon of liberty.
But something went wrong. Today, the people are not
the master. The government is not the servant. Somewhere along the way, the Founders’ accomplishment was turned on its head. Many factors contributed to that change. But one thing stands out. In 1913, the Sixteenth Amendment to the U.S. Constitution was adopted. That amendment permitted the federal government to levy taxes on incomes. Although the first tax passed under that amendment affected only a small number of citizens, a virulent germ had been planted in the body politic. That germ would grow and become more powerful, to the point where it would fundamentally redefine the relationship between the American citizen and the federal government. Do you need a dramatic demonstration of that point? The IRS pays people to inform on their neighbors about possible tax violations. What would the Founders have said about that?
More than anything else perhaps, the Sixteenth Amendment and the income tax killed the Old Republic.
This chapter will look at how the income tax has shaped the relationship between the American people and the U.S. government, particularly the IRS, which is charged with collection of the income tax. (We will focus on the personal income tax, though the issues apply as well to the corporate income tax and that other income tax, the payroll tax that finances Social Security.) Readers should bear in mind right from the start that the evils to be described are not incidental to the taxation of income. They are intrinsic. The moment the government is permitted to tax incomes, a dynamic is unleashed that must undermine individual liberty despite the stated intentions of the policymakers. The only way to end that daily assault on liberty is to abolish the taxation of income in all its forms. It should become clear in due course why the American people would experience a quantum leap in freedom and prosperity if the IRS and income tax were abolished.
No Consent of the Governed
We should note up front that the system about to be described cannot be said to have had the public’s consent — despite the nominally democratic form of government we live under. Author James Payne writes that it “has been implemented quietly and incrementally by a handful of tax administrators and senior members of congressional committees” — without public debate, much less knowledge.1 There is no sense in which the people chose the system they are saddled with. How was it adopted? It was adopted piecemeal over many years, primarily after consultation between interested parties in and outside the government and members of the tax-writing committees. The public interest is not what motivated those people. They were more concerned with making it easier for the IRS to bring in the money. (Any outsiders were seeking special treatment only for themselves.) The bulk of taxpayers, on the other hand, were unorganized and too busy raising their families and making a living to become informed on the complex issues and to voice their objections.
Most tax measures are highly technical. Many are tacked on to other legislation. The majority of members of Congress are barely aware of them. How many even read the bills? Only occasionally does a tax issue get the public’s attention and prompt its wrath. In the early 1980s, Congress passed a measure requiring the withholding of tax on bank interest. After it was in the law, banks and savers became enraged and lobbied until the measure was repealed.2 But that was highly unusual. The vast majority of tax changes slip quietly into law. Almost all are skewed against the taxpayers at large. It is a sad story for a country of such noble origins. Surely that is not what the Founders meant by self-government.
The problem of public consent aside, a central point about the system is this: when government is permitted to tax income, it inevitably acquires a variety of powers to obtain personal information about the people’s lives and income-producing activities and to intimidate citizens into complying with its rules. An effective income tax without such powers would be impossible. The government insists the tax system is voluntary. Does anyone really believe that? An IRS official, Charles Gibb, once said that those who believe the tax system is voluntary probably also believe in the tooth fairy.3 True, the IRS relies on the taxpayers (and their employers and banks and others) to provide the bulk of the information it needs to carry out its mission. But it has an arsenal of weapons to ensure that the taxpayers do so and to punish them afterwards if they don’t. Just remember: if you don’t pay, the IRS can seize your money and your home; it can wreck your credit record; it can imprison you! George Orwell would understand how the taxmen use the word voluntary.
A second key point about the tax system is that the federal government, with its $1.6 trillion budget, has an insatiable appetite for revenue. It is a wealth-transfer machine. The dispensing of money from taxpayers to favored interests is the central activity of officeholders and bureaucrats. Their careers depend on it. Thus, they need an uninterrupted flow of money to the U.S. Treasury. Nothing must be permitted to interfere with it. Once that is understood, much else becomes clear. Because of that need for money, the U.S. Congress has endowed the IRS with vast powers and freedom of action. We should be surprised if the IRS did not zealously pursue its objectives and treat the taxpayers as farm animals in the process. The courts have also shown great deference to the IRS. As David Burnham observed in 1989, “The Congress, the courts, and the agency itself have over the years passed hundreds of laws, handed down thousands of decisions, and issued uncounted numbers of regulations that together have molded the IRS into a genuinely formidable organization. In fact, with the probable exception of a handful of agencies in the Soviet Union and China, there is little question that the IRS today is the single most powerful bureaucracy in the world.”4
The IRS enforces nearly 20,000 ever-changing pages of arcane law and regulations. The Internal Revenue Manual is 260 volumes of fine print. The tax code is like a monster amoeba constantly changing shape just when you think you may understand it. Daniel Pilla, an expert on the tax system, points out that the 1980s saw the tax laws changed more than one hundred times. The allegedly historic tax simplification of 1986 “brought amendments to more than 2,000 sections of the code and the creation of more than 100 new forms. To teach us about those forms, the IRS produces thousands of pages of instructions, and hundreds of booklets to teach us about the instructions.”5
Advantage Government
A tax code that is constantly in flux at once puts the citizen at a gross disadvantage with the government. No one can master that body of arcane provisions. Professional tax preparers routinely differ over what they mean. IRS employees themselves cannot agree and typically give out conflicting information to taxpayers. This problem was recognized as early as 1913, the year the tax was enacted, when the influential U.S. senator Elihu Root of New York half-joked that he and all his friends might end up in jail for not understanding the new income tax law.6 It has only gotten worse. An IRS instructor once said that errors could be found in 99 percent of all tax returns. And journalist David Burnham notes, “The reality that so many are somehow in violation of a supremely murky law gives the agency and the individual agent an astonishingly free hand to pick and choose their targets.”7
Disagreements among IRS personnel and tax preparers make funny newspaper stories. But think about what it really means. The existence of a fluid tome full of technical commandments is an attack on the rule of law, which is supposed to protect citizens from arbitrary governance. Among other guarantees, the rule of law, a pillar of Western civilization, promises that the legal rules that are binding on all citizens will be clear and knowable in advance. The law is not supposed to be a snare waiting to nab unsuspecting people as they go about their peaceful business. Yet the tax code is just that. The existence of such a code cannot help but instill in the people a sense of inferiority and timidity with respect to the government, attitudes contrary to the popular and individual sovereignty that is supposed to characterize the American system. Each person may suspect that he has probably already broken the law unintentionally. No one could pass the scrutiny of the tax agents except by the dumbest luck. The feared audit is our modern-day version of the Inquisition. The threat that the authorities could someday examine anyone’s tax records can
have a chilling effect on a citizen’s willingness to assert his rights. The income tax over time has helped to turn the American people from a rambunctious group of revolutionaries, protective of their liberty, into a herd of sheep fearful of offending those in power.
By the same token, this situation must engender in the IRS a sense of awesome superiority over the citizens. An IRS agent told David Burnham that she and her colleagues often referred to the public as “slime” or “deadbeats.”8 In the eyes of the tax agents, everyone is a potential suspect and conquest in a grand cat-and-mouse game. An anonymous tax agent (using the pen name Diogenes) wrote a book in 1973 called The April Game, in which he related how he and his fellow agents intimidated taxpayers by the sheer power they possessed. The author referred to his employer as “an American Gestapo.” “There is hardly an American citizen above the poverty level whose tax conscience is so completely clear that he isn’t scared of being audited,” he wrote. “Of all the information-gathering agencies in all the world’s governments, past or present, the very cleverest must surely be the United States Internal Revenue Service. That monster organization gathers more information about more people, does it more quietly and raises less public outcry in the process than any other government outfit I know anything about.”9
No one should be surprised by any of that. What is more in accord with human nature than for a person to try to keep what is rightfully his? The mission of the IRS is to thwart that manifestation of human nature. That requires extraordinary powers.
Your Money or Your Life Page 6
