Editor’s Preview: The second in a two-part series from a recent Shavano Institute for National Leadership seminar, “Does America Need More Taxes?” held in Milwaukee, this issue includes excerpts from presentations by American Farm Bureau President Dean Kleckner, New Republic Senior Editor Fred Barnes, W. R. Grace & Co. Chairman and CEO J. Peter Grace, and Hillsdale College President George Roche.
In the midst of this widely publicized deficit crisis, people are thinking about tax reforms which might provide some badly needed help. What we need most of all is fiscal responsibility from our elected spenders in Washington, D.C. But spending restraint is unlikely to come voluntarily; as South Carolina Senator Strom Thurmond put it, “You can’t get a hog to butcher itself.”
Congress simply won’t stop spending. Meanwhile, the deficit continues to grow. The $170 billion annual interest payment could have run the entire federal government in 1967; now we’re facing the prospect of even larger interest payments in the next few years.
We know that the Gramm-Rudman-Hollings law requires the FY1991 budget deficit not to exceed $74 billion (which includes a $10 million cushion). That’s assuming the law isn’t tampered with, which is one huge assumption right now. According to the budget summiteers in our nation’s capital, everything is on the table.
President Bush’s original FY1991 budget presented last January called for almost one and a quarter trillion dollars in spending. He projected revenues at less than $1.2 trillion and a deficit meeting the Gramm-Rudman-Hollings target.
Now the figures are changing. The projected costs of bailing out failed savings and loans are exceeding almost everyone’s predictions, running into the hundreds of billions. The FY1991 deficit is predicted to top $100 billion. Indeed, if the budget is allowed to operate as it did in the last fiscal year, the amount will be as high as $140 billion. The savings and loan bailout aside, spending is currently running $15-25 billion higher than projected. Almost 75 percent of all federal expenditures are not subject to Gramm-Rudman-Hollings limitations. You can imagine what a negative effect this has on programs facing up to the deficit-cutting ax. But the real damage is to Americans’ confidence in their own government to make good on its countless promises to spend less.
For the past six years, the nation’s tax revenues have increased an average of $60 billion a year, and, true to form, federal politicians outspend revenue every year, plunging us deeper and deeper into debt. Now we are hearing from Republicans as well as Democrats that the only answer is higher taxes which will be used to reduce the deficit.
This never happens. Higher taxes invariably encourage more spending. Promised cuts never materialize. Remember the budget agreement of 1982? It was supposed to provide three dollars in spending cuts for every dollar of increase. The actual result was three dollars of spending increases for every new tax dollar.
It’s clear that the spenders won’t mend their ways unless forced to do so. It’s also clear that new taxes throw a wet blanket on America’s economic progress. But Washington, D.C. continues to work in the same old way. The 1990 budget summit talks have covered the identical ground that the National Economic Commission did over a year-and-a-half ago. I served on the Commission along with 13 other Republicans and Democrats.
While there were major disagreements along party lines, neither side recommended a tax increase. This astounded many observers. It was widely assumed that the NEC was established as a cover to justify new taxes, and perhaps it was at the outset, but the Commission soon found out just how strong anti-tax sentiment is in the real world and recommended first, that the president and Congress work together to control spending, and second, that new taxes be avoided because of their damaging effect on the economy.
Today’s budget summiteers should also say “no” to more taxes and should focus instead on government spending that has gotten out of control. They should press for across-the-board spending freezes on everything, from agricultural subsidies to Social Security benefits to defense procurements.
They should also restructure the budget process. There are far too many committees. That’s one reason why appropriations legislation is overdue every year. By contrast, there are far too few budget priorities. As an individual, I have to determine how much money I have available, decide what my financial responsibilities are, and spend accordingly. I can’t overspend for long—my credit has limits.
One practical way to help our politicians adopt this sort of commonsense approach is to require them, as the NEC recommended, to write a two-year budget, thus freeing the process from a significant amount of political wrangling and providing a spending plan for legislators to follow. Another way to accomplish reform would be to adopt a balanced budget amendment. The challenge, of course, is to word it in such a way that it does not encourage those who favor balancing the budget by raising taxes.
A line-item veto would also allow the president to veto spending hikes which are hidden in omnibus legislation. Right now, the president can’t do that; he must accept or reject a piece of legislation in its entirety. Since most bills run hundreds, sometimes thousands of pages, he is currently in an untenable position.
In addition to holding the line on spending and tax increases and reforming the budget process, Americans need to push for a capital gains tax reduction. U.S. investors pay one of, if not the highest, capital gains tax rates in the world. It discourages savings, it cripples our international competitiveness, and it hurts all Americans, rich and poor alike.
Look at one example of what a capital gains tax reduction would mean for the average small farm owner: Venture capital, freed up by such a reduction, would underwrite biotechnological advances in fertilization, cross-breeding, natural pesticides and countless other areas. It would reduce the price of goods and services the farmer depends on and enhance the value of his own investments. It would also allow him to keep more of what he earns.
All small businesses stand to gain enormously from such tax cuts, and the resultant economic growth would mean more tax revenue, not less, for the government. The U.S. Treasury Department estimates that a capital gains cut enacted now would increase revenue by more than $12 billion over the next five years. It would also help create an estimated 750,000 new jobs by 1995.
In my book, that does a whole lot more good than raising taxes. It’s up to you and me to convince President Bush and Congress that they ought to agree.
The modem tax revolt in America has been one of the most underreported events of our time. It dates from 1978, the year that Proposition 13 passed in California. What are the tax revolt’s characteristics? What caused it and what have been its main episodes? Is it now a permanent phenomenon of American political life?
First, the characteristics. There are four. Number one is that the tax revolt is, by definition, populist. Individuals see themselves as rising up against the system and against an entrenched establishment. James Ring Adams’ excellent book, The Secrets of the Tax Revolt, describes tax rebels as challengers to “the orthodoxy of centralized government.”
Typically, taxpayers are most concerned about the federal income tax or their local property tax. But there is one new target for tax rebels: the Social Security payroll tax, which has soared to such a level that many Americans are angry and resentful, not, of course, about the burden on employers, but about their own W-2 deductions. No one takes to the streets to demand more employer tax breaks, or that the investment tax credit be restored, for example. They care most about the individual taxes they pay. These are what spur revolts.
The second characteristic of the modern tax revolt is that it is always opposed by the establishment, whether that establishment is the federal government or a state legislature, whether it is liberal or conservative. Often, it is comprised of businessmen as well as politicians, and crosses party lines to include Republicans and Democrats.
When Proposition 13 was on the ballot in California, the establishment claimed that schools would close, libraries would shut down, fire and police departments would be reduced to skeleton crews, jobs would be lost, and so on. It mounted a huge scare campaign that might have succeeded if voters hadn’t been so fed up with their tax burden.
The Kemp-Roth tax cut, first proposed in the 1970s and partially enacted in 1981 during the Reagan administration, was challenged on the grounds that it would drive inflation to astronomical heights. One of Reagan’s opponents in the 1980 presidential race warned that such a tax cut would lead to 30 percent inflation. Interestingly enough, that opponent was George Bush.
The third characteristic of the modern tax revolt is that the tax cuts it inspires always work. In the last 12 years, none of the establishment’s gloom-and-doom predictions has come true. States with lower tax rates have grown faster. They have lower levels of unemployment. They encourage entrepreneurship and investment.
Compare the different tax rates in the Sunbelt versus Rustbelt states. Observe the booming economy in a post-Proposition 13 California which has been so successful that many complain that it is attracting too much capital and too many people. Look at the rest of the United States in the aftermath of the Reagan tax cuts; we’re enjoying the longest peace time expansion in our history.
For more than eight years, we’ve benefited from sustained economic growth without high inflation, which foes of the tax revolt insisted was not possible.
The fourth characteristic of the modern tax revolt is that despite its phenomenal success, despite the fact that the dire predictions of its opponents never come true, tax rebels never get credit, and their critics are never discredited. No one outside a few small circles ever credits Howard Jarvis for creating an economic boom in California after his campaign to legalize Proposition 13. And practically no one wants a retraction from John Kenneth Galbraith who predicted that tax cuts would lead to economic disaster. He and many other liberal economists are still regarded as sages while Jarvis’s name has been almost forgotten.
What caused the modern tax revolt to begin in a series of spontaneous eruptions in the late 1970s and continue through the 1980s? The main cause was simple: individual income stopped increasing while property and income taxes skyrocketed. People earned the same amount as before, but more of it was confiscated through taxes. It is not surprising they revolted.
Federal tax revenues remained stable at about 18.3 percent of the GNP between 1959 and 1968. But in the 1970s they jumped to 19 percent, and President Jimmy Carter’s last two budgets estimated that the federal tax burden would reach 22.3 percent. As it happened, Ronald Reagan ousted Carter and held the line at 18.7 percent.
Now, there’s a big difference between 22.3 and 18.7 percent; that’s nearly four percent of the gross national product, tens of billions that remained in the economy rather than in the hands of federal tax collectors.
The median family income in the 1950s was, adjusted for inflation, about $5,000. In the 1960s, it was $6000. In the 1970s, it only increased $93. Yet families were being knocked up into higher tax brackets. A family that earned $25,000 in 1978 paid a marginal rate of 28 percent. On that same amount of real income in 1965, they would have paid only 19 percent. In the span of a single decade, they were making almost the same income, but paying out nine percent more in taxes. A family making $50,000 was paying 18 percent more, its rate having jumped from 28 to 46 percent.
Of course, state and local tax burdens increased too, from 5.7 percent of the GNP in 1952 to 9.9 percent in 1972. And while income was stagnant, housing prices soared, boosting property taxes. In California, for instance, they rose 20 percent in a single year, from 1976-77.
There was another reason for the modern tax revolt. After both World Wars and the Korean conflict, defense spending fell, the government share of the GNP fell, and ordinary citizens got a peace dividend in the form of a reduced tax burden. That did not happen after the Vietnam War; extra tax revenues that had been supporting the defense budget—amounting to $380 billion between 1970 and 1977, according to Senator Phil Gramm—were simply shifted to domestic programs. And what did we get for the $380 billion? The deficit soared, the economy soured, and in real terms the average American was far worse off in 1981 than he had been in 1970.
Along with this, there was another important factor that helped spur the modem tax revolt. People lost faith in government and in government’s ability to spend tax dollars wisely. Instead of going for tangible services, those dollars were all too often used to make transfer payments. A May 1988 ABC/ Washington Post poll asked Americans to estimate the percentage of tax revenues which they thought the federal government was wasting. The average answer was 46 percent of every tax dollar. That’s not exactly a vote of confidence.
There have been seven key episodes in the modem tax revolt. If Bush and Congress hike income taxes significantly, there will certainly be more episodes to come. The first was the introduction of the Kemp-Roth bill in the mid-1970s, originally intended as a corporate tax cut. Jack Kemp was an obscure Republican congressman from Buffalo who was later influenced by Jude Wanniski and other supplysiders, who argued that cutting individual rates was more important because that would spur entrepreneurship and job creation.
In 1977, the Republican National Committee chairman Bill Brock heard Kemp speak about his 10%-10%-10% tax cut plan and decided to make it the chief Republican message in the 1978 congressional races. But Republican candidates made a poor showing that year and the idea died.
Episode two: Proposition 13. This was a bill to limit property taxes in California to one percent of full cash value and to hold subsequent increases to two percent. Everyone in the establishment was against this bill. It had no significant support; its primary sponsor was Howard Jarvis, a part-time lobbyist for Los Angeles apartment owners. He was certainly no mover-and-shaker. Yet Proposition 13 passed by a 65 to 35 percent margin. A few years later, a Los Angeles Times survey found 70 percent of Californians polled thought it had been a great success. James Ring Adams observed, “The vote for Proposition 13 was to the tax revolt what Bastille Day was for the French Revolution.”
Episode three: Before his next presidential bid, Ronald Reagan met at an airport hotel with supplysiders Jack Kemp, Jude Wanninski, Art Laffer and Martin Anderson and was converted to the cause. Basically, Reagan had been preaching austerity. His public speeches were critical of government spending and abuse of programs like welfare.
“You won’t win the presidency with this,” Kemp told him. “You can’t just talk about what you’re going to take away from somebody—you have to talk about what you’re going to give them.” With tax cuts, Kemp explained, “what you’re giving them is more of their own money.” Reagan signed on, and Kemp-Roth was resuscitated. Many of his advisors tried to change his mind during the 1980 campaign, but he didn’t compromise until the spring of 1981, when he opted for a 25 percent cut over three years.
“It will never happen,” the establishment pronounced. By July, it was signed into law.
Episode four: Proposition 21/2 in Massachusetts passed in 1980. Six years earlier, Michael Dukakis had run for governor on the promise—“a leadpipe cinch,” he called it—that he would not raise taxes. But once in office, he presided over the largest tax increase in the state’s history. He lost the next election to a businessman named Ed King.
Under the new governor, Proposition 21/2 passed 59 to 41 percent. It not only showed Dukakis that he had misjudged the electorate, but that the modern tax revolt had geography, and that it could succeed even in a liberal state in the East.
Episode five: the 1986 tax reform. Once again, all the experts claimed that tax cuts were impossible. In Washington, the establishment was hysterical. But Ronald Reagan was stubbornly committed to lower tax rates, and he had tremendous popular support from ordinary citizens. In 1986, when the cuts passed, six million people were thrown off the tax rolls and the top marginal rate on individual income was reduced from 50 to 28 percent. Overall, since Reagan’s election, the top rate has been reduced from 70 percent, and since the Kennedy administration it has dropped from 91 percent.
Episode six: “Read my lips.” Speeches often become policy in Washington, D.C. So what went into George Bush’s acceptance speech at the 1988 Republican Convention was carefully prepared. White House speechwriter Peggy Noonan got very little encouragement from Bush to emphasize taxes in the speech: only one small sentence in a long typewritten note that read, “I will put a freeze on spending and I will not raise taxes.”
Then Jack Kemp weighed in. (It is important to remember that single individuals have played an important role in the modern tax revolt. Without Kemp, Jarvis and others, not much would have been accomplished.) Kemp told Noonan, “Look, you’ve got to hit hard on taxes in this speech. You have to make it clear that Bush won’t budge.”
So when Bush took the platform, he said, “The Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and all I can say to them is ‘Read my lips: No new taxes.’” Bush’s aides struck that line time and time again, but Noonan just kept putting it back in. Why did she fight so hard? Because, she explained, “It’s definite. It’s not subject to misinterpretation. It means, ”I mean this” And Bush really seemed to mean it—until he dropped the pledge in June.
I suspect that he regrets calling a budget summit in 1990. His reasons for calling for it were pretty weak; there was no immediate crisis. America has had more than eight years of unprecedented prosperity. But budget director Richard Darman talked him into it by saying, in effect, “Look, Mr. President, interest rates are going to rise and they might lead to a recession in 1992 when you’re running for reelection. We have to do something about the deficit even though there is no empirical evidence to suggest that a bigger deficit will lead to higher interest rates…” He also argued that unless some alternative were found, the Gramm-Rudman-Hollings automatic spending cuts would be so draconian that Congress and the public would protest.
So Bush said, “Okay, let’s have a budget summit.” Well, it’s great for Darman. He can get behind closed doors and bargain on the budget and taxes. It’s lousy for Bush who’s getting pounded by the Democrats and others for calling a summit without any concerted plan.
His no-new-taxes pledge was especially important to Bush after his overtures to Mikhail Gorbachev, to environmentalists, to the child care lobby, after his refusal to back restrictions on NEA grants, and so on. It is the cement that held his political coalition together. By abandoning his pledge, he may drive away the most important part of the coalition, conservatives. But that will only happen if he proposes a serious income tax increase. I doubt if he will agree to that.
Episode seven: the revolt goes on. The 1989 Virginia governor’s race is a good example of how the modern tax revolt is proceeding. In 1986, as lieutenant governor, Douglas Wilder came out against the sales tax increase then being supported by his own boss and fellow Democrat, Governor Jerry Baliles. Baliles was furious, but Wilder stuck with it. In 1989, Wilder became the nation’s first black governor by running on a no-new-taxes platform which he has since lived up to.
In the Illinois Republican gubernatorial primary in 1990, an obscure candidate garnered 33 percent of the vote by opposing Secretary of State Jim Edgar on taxes. In Connecticut, Democratic Governor William O’Neill declined to run for reelection because he knew tax rebels would beat him.
In New York, Mario Cuomo’s reign is marred, because he, like many other governors, particularly in the Northeast, spent all the funds accrued when tax revenues were high. Now that they have fallen off, he’s forced to turn to tax increases. New York’s bond ratings are falling, understandably.
New Jersey Democratic Governor Jim Florio didn’t call for new taxes in his 1989 campaign, but then rammed through a huge tax hike in 1990. His popularity plummeted and signs of an impending tax revolt began to appear.
In Washington, D.C., Senator Daniel Patrick Moynihan (D-NY) has proposed a Social Security payroll tax cut. The establishment says no. His fellow Democrats practically killed the proposal, but it still enjoys some public support.
There is further proof that the tax revolt lives: the level of subterfuge that taxhikers have to go to in order to justify or disguise a tax increase. In California in June 1990, it was a case of a “dedicated” tax increase that doubled the gasoline levy to 18 cents. The extra revenues were earmarked strictly for highway and bridge construction and related expenses, not for welfare or other unspecified state spending.
Another tactic has been to create a phony crisis, just as Darman did when he wanted to convince the President to convene a budget summit. There’s also the hardy perennial: the class struggle. You know, soak the rich and give to the poor. That’s popular with Democrats who want to raise the top marginal rate on individual incomes but oppose capital gains reductions.
Has the modern tax revolt become a permanent phenomenon in American political life? I think the answer is “yes.” One has only to look at a few recent poll results for confirmation. In February of 1990, a Gallup poll recalled a number of issues which Bush stressed during his presidential campaign in 1988 and asked which one had helped him gain the most credibility. The overwhelming answer was taxes.
In March, Time magazine and CNN asked, “Are the Democrats too quick to call for tax increases?” Fifty-nine percent said yes, 29 percent said no. In April, an NBC/Wall Street Journal poll posed the question, “Should President Bush keep his pledge?” Fifty-seven percent of the respondents said yes.
Richard Wirthlin conducted another poll last spring inquiring, “Should taxes be raised to narrow the deficit or should spending be cut?” The spending cut option was preferred by a whopping 89 percent.
If George Bush wants to lead America, then he ought to listen to what Americans are saying about no new taxes.
The subject of cutting waste ought to have been at the top of the agenda at President Bush’s budget summit. Why? Because there are currently 1,139 social programs being supported by U.S. tax dollars and we simply can’t afford them. Because the American people can’t afford another S & L bailout. They can’t afford another HUD scandal, or another procurement scandal, or another cost overrun on countless federal projects. They can’t afford another $1.1 trillion of their money going through the hundreds of incompatible accounting systems their government senselessly follows.
The summit could and should have looked at specific instances of waste: they could and should have recommended collecting overdue and unpaid government loans from deadbeats who collectively owe the federal government over $32 billion.
That’s just one example—imagine how many other kinds of waste cost Americans billions of dollars. Recently, the U.S. Comptroller General admitted on national television that the figure is probably as high as $180 billion. That is a sum equal to more than one-third of all personal income taxes paid by every taxpayer in America. In other words, for every dollar you pay in taxes, 34 cents is wasted.
Six years ago the federal deficit stood at $1.6 trillion. The Grace Commission had just completed its now famous study which recommended 2,478 ways to cut waste. Today, the deficit is $3.1 trillion, or nearly double what it was in 1984. Our addiction to debt, like an addiction to drugs, has gotten worse over the years. There is only one cure: we must put an end to wasteful government spending.
To lead the war on waste, I am calling for the appointment of a “Waste Czar,” reporting directly to the president who would:
It’s an amazing fact, but there is no one in government today who represents the American taxpayer. The Waste Czar would be that person. He or she would champion the interests of the ordinary citizen.
Why do we need a Waste Czar? This year, 54 cents of every dollar paid by individual taxpayers will be used to meet the interest on the national debt. The burden of federal debt service has doubled in the last ten years, despite the fact the Grace Commission recommendations which have been implemented have saved $152.4 billion, according to the OMB.
If we continue on this course, by the turn of the century, more than 100 percent of every dollar you pay in income tax will be required to service the interest on the national debt.
The deficit clearly does matter. Don’t believe those who claim a massive surplus is being built up in Social Security trust funds. No such surplus exists. By law, those funds are invested in Treasury securities, which are the obligations of the American taxpayer; the surplus is actually a liability of the taxpayer—a variation on the theme of robbing Peter to pay Paul.
At. some point in the next century, the Social Security IOUs will come due, and the money won’t be there. Then what? Should we raise taxes? Cut benefits?
Social Security is not the only federal program which is headed for disaster. Medicare is the fastest growing entitlement today. If someone doesn’t do something, it will be bigger than Social Security by the year 2005. Ten years after that, it will be bigger than Social Security and the defense budget combined.
These are examples of basic accounting, but it’s a sad fact that only three members of the U.S. House of Representatives are certified public accountants. Most members of Congress are lawyers and, in my experience, lawyers use numbers like a drunk uses a lamppost—for support rather than illumination.
Many in Congress are calling for higher taxes, since no one was ever elected for spending less money. Mainly, the liberals in Congress are calling for various forms of “soak the rich” tax schemes.
Well, in truth, if 100 percent of all untaxed income in this country above $100,000 of taxable income were confiscated today, we would generate only enough money to run the government for 19 days—less than three weeks. There simply is not enough money raised in the highest brackets to contribute meaningful amounts of revenue.
They once asked the famous bank robber Willie Sutton why he robbed banks. He answered, “That’s where the money is.” And if you want to raise serious tax revenue in this country, you have to go to where the money is. Ninety percent of all taxable income in this country is generated in brackets of $45,000 and under. More than 75 percent is generated by people who make $25,000 or less each year. If politicians raise taxes, it is these people, not just the rich, who’ll be soaked.
Over the last decade, federal tax revenues have grown on average by eight percent a year. Over that same period, government spending has increased by 11 percent. Was that money wisely spent? Was it worth going into debt? Let’s look at a single example. From 1970-87, $4.5 trillion was spent at the federal level in the “war on poverty.” During the same time, the number of people classified as poor rose sharply from 25 to 33 million. If we had simply divided up the entire pool of federal, state and local social welfare spending from 1976 to 1985—and given an equal amount to every U.S. citizen, regardless of income status, we would have completely eliminated poverty in each of those years. The message is clear. We don’t need more taxes. We need less spending. We need a Waste Czar to spread the word throughout the nation.
Somebody in prehistoric times invented government and thereby added taxes to death as tribulations mankind could not avoid. It is hardly clear that we are better off for it.
Anthropological research has shown that government grew out of conquest, especially the conquest of peaceful settlements by nomadic warrior tribes. The nomads learned that slaughtering a farm village for its meager possessions is much less profitable than enslaving and taxing it. This meant that a few of the nomads had to settle among the villagers to keep an eye on them and pretend to look busy. Presumably once a year at harvest time they extracted their tribute at spearpoint, skewering a few malcontents who resisted or cheated on their form 1040.
Later, the rulers learned to pose as gods, settle local squabbles and hand out favors, to make the system look better and keep their subjects in line. They also invented writing and bookkeeping to record their deeds and tax rates, which was the beginning of history. But the system remains essentially unchanged, as Albert Jay Nock gleefully reminded us in Our Enemy, the State. It is still in the tribute business, although nowadays we have more sophisticated terms for it, such as “bracket creep” and “revenue enhancement” and “tax reform.”
The trouble is, we don’t think about the nature of government, the government which imposes taxes. Its actions affect us daily, and we think a lot about those. But its underlying nature is as invisible to us as water is to a fish. We accept it as something we are born into, that is there, that has always been there, that will always be there. This mute and unquestioning acceptance is a victory for the state and all its pretensions. It is equally a defeat for our own forefathers in America who regarded the state, at best, as a necessary evil, and who fought for independence from big government.
We are paying for our lost freedom, and one way is through burdensome taxes. The feature of the state that makes it different from all other human institutions is that it employs coercion and force. It need not compete for revenue or favor, it need not cooperate as others must, because it can compel. Throughout history, this advantage has been endlessly abused.
In the last analysis, the only protection we have is the limited size and therefore relative weakness of the state. The form of a government does not matter nearly so much as the amount of power it wields. Invariably, the bigger the government, the bossier it gets, and the more it acts like any other big, authoritarian government. That we, the people, are ourselves supposed to be the government in republican theory does not change this fact one bit. We have all of human history to tell us that force and violence are very dangerous intruders into human affairs.
The actions of the state raise many moral issues that we ought to talk more about, but in fact discuss less and less. Are governments efforts to “do good” morally impeccable? Or are there serious and legitimate moral objections to these practices? Such discussion as there is—an incessant drone in the media—is always concerned with the benefits of state action and pleas for ever more benefits. But it rarely pays heed to the costs.
I think the moral issue begins with the costs, for government has no wealth to do good with, nor any means to produce wealth, for that matter. It is also in debt up to its ears, or rather, up to our ears, for we and our children must repay what it borrows. In a word, it can only take. It cannot give what it does not first tax away from us.
Taxes, descended from tribute exacted by ancient conquerors, remain the lifeblood of the state. Taxes are thus an excellent proxy for the moral questions concerning the state, and also a near perfect index of how much government we are forced to put up with.
And whereas the Lord tried to terrify wayward Israelites with the specter of a 10 percent tax rate, the modern state knows no limitations. England once set the income tax at over 100 percent, which is like saying, “We’ll take everything you earn and the family silver.”
Nothing so severe has ever happened in this country; our top tax rate peaked at only 96 percent. Thirty years later, we learned of the Laffer curve and its argument that if tax rates are too high, they can be a disincentive. Production falls and the taxes on production fall correspondingly, so there is less money for the state. The supplysiders won the argument, but they also handed the state a tool for fine-tuning tax rates to “generate” more tax revenues.
What do you suppose the New York Times called “a vicious, inequitable, unpopular, impolitic and Socialistic scheme…the most unreasoning and most unAmerican movement in the politics of the last quarter century”? What did the Washington Post denounce as an “abhorrent and calamitous monstrosity” that repudiates “the spirit as well as the letter of Democracy”? The answer to both questions is: the income tax. This was an early version, passed in 1894. Its rate was one percent on incomes over $4000 and it affected only one person in a hundred. By the following summer, it had been challenged all the way to the Supreme Court and found unconstitutional.
Fifteen years later, it was back again. In those intervening years, Fabian socialism was heavily imported from Europe and had become the new “cause” on American college campuses. The Progressive era stirred up many new demands to tax, spend and meddle. The federal deficit reached an alarming $89 million. By 1909, an income tax amendment was drafted and sent to the states for ratification. Proponents claimed that the tax would never exceed five percent and would only be imposed on those “best able to pay.” The New York Times warned, “When men get the habit of helping themselves to the property of others, they are not easily cured of it.” The Washington Post switched sides and endorsed the tax—to reduce the deficit (a favorite excuse for taxes today, and one that invariably increases the deficit).
After the 16th Amendment passed in 1913 and an income tax was imposed, we began down the long road of higher taxation. You cannot give politicians visiting rights to your wallet and expect them to say, politely, “No thank you.” Anyone could have predicted that our take-home pay would suffer, but back in 1913 no one knew how much.
That first tax was one percent on incomes over $3,000 for singles, $4,000 for married couples. Fewer than one person in 35 was affected, as this was a lot of money in 1913.
The tax was progressive, with a top rate of seven percent on high incomes, despite the five percent ceiling the tax’s proponents had promised. It actually peaked at 96 percent during World War II, although this rate affected very few.
With the exception of the World War I years, the income tax has remained largely an assault on a few highly productive, high income earners, and it has not raised any great amount of money. As late as 1941, “the take” was only $41 million. But massive inflation—itself a tax—in the World War II era drove up nominal incomes, ’so more and more workers had to pay the tax. The burden on incomes of $5,000 quadrupled from 1939 to 1947. In the years since, economic growth and more inflation made the income tax a general tax that nearly every worker had to pay. It even began to tax teenagers in their part-time minimum wage jobs. Moreover, inflation pushed even modest incomes into progressive rates once meant to “soak the rich,” and at the same time drastically eroded the value of exemptions for raising children.
In the Nixon-Ford-Carter years, in case we have forgotten, politicians loved deficits, which were supposed to “stimulate the economy.” What they did do was to send false economic signals in every direction, taking vast sums of money out of productive investment.
This can destroy the whole economy in a hurry and in this instance, very nearly did. In the 1970s the Misery Index (inflation plus unemployment) rose to 20 percent. Interest rates nearly killed the real estate business, the Third World debt soared as inflation ran riot, domestic industry suffered, and the family farm was all but driven out of existence. We were lucky to escape with three years of depression (soft peddled as recession). Depressions are not random or cyclical events, but are corrections of previous monetary chaos caused by government mismanagement—and greed.
Taxes make us collectively poorer and are a disincentive wherever they are applied. Whatever we tax—be it jobs, goods, capital or property—we get less of. Whatever we tax is also reduced in value. And it is impossible to “redistribute” income without economic damage; it is not an even trade or zero sum game.
In sum, taxation distorts normal, productive economic activity as well as individual behavior. Where the burden becomes great, people try to avoid taxes, often at the expense of their own productivity. When we reduce taxes, we increase incomes, increase property values, increase capital return, and increase incentives for productivity.
There are more than eighty thousand governments at large in this country. Every state, county, and town in America, every public school district, every sewer district, is a government. And all of this governing takes one dollar out of every three we earn. Its haul—more than a trillion and a half dollars a year—simply dwarfs any other economic factor, and all of it is taken out of the economy. Clearly, that is too much governing, and it comes at too great a cost.
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