4. How It Came Upon Us

CHAPTER IV

How It Came Upon Us

THE CONSTITUTION of 1789 barred the income tax. The Fathers could not have put it in, even if they had a mind to, and there is no evidence that they had. A century later, when Americans were flirting with this invasion of property rights, legal minds tried to twist the language of the Constitution to their support. Whatever crumbs of comfort they got out of word juggling, the fact is that the Americans of 1789 would have none of this income tax. They were not that kind of people.

Behind these people lay a century and a half of training for freedom. Individualism—which is nothing but a high regard for oneself—had been beaten into their souls; their conquest of nature had taught them the lessons of self-reliance and self-respect. When it was necessary to wage war in defense of the freedom they had wrung from the wilderness, they were well prepared, not materially, but spiritually. John Adams, writing in 1818, said: “the Revolution was in the hearts of men”… it was effected “before the war commenced.” They had come by freedom the hard way and they meant to hold on to it.

In point of fact, they went to war with King George III over what we might deem trifles. When you compare the disabilities put on the Americans by the British Crown, as listed in the Declaration of Independence, with what other peoples have complacently suffered from governments, you recognize the high price these Americans put on freedom. How petty the indictment of George reads when one thinks of what the Germans endured under Hitler, the Russians under Stalin! And if we could penetrate our own adjustment to bureaucratic interference, and could see things as they really are, we would write a new Declaration that would make Jefferson’s sound picayune.

One of the principal causes of the Resolution was taxation. The Americans summed up their attitude toward taxation in the slogan “Taxation without representation is tyranny.” The fact is, they looked upon taxation as a form of tyranny, or an invasion of their property rights, with or without representation, but were willing to make some sort of compromise with it as a matter of necessity; the compromise was “representation.” Judging by their reluctance to suffer taxes imposed by their own governments, local or state, it is a certainty that if the Crown had given them representation in Parliament they would have disliked taxes only a little less. The levies laid upon them by the Crown were so minuscule, compared to those their progeny have learned to endure, that the fuss they made seems ridiculous. It seems ridiculous only because we are a different kind of people.

As for an income tax, there would never have been a Revolution if the Americans of 1776 had had any notion of offering it to King George. They probably could have had representation in both houses of Parliament in exchange for such a boon; he would have given them any other kind of “freedom” their hearts desired. But a people who remonstrated so vigorously over a measly tea tax could hardly have understood the idea of letting their pockets be picked. The suggestion would have sounded preposterous.

The Constitution did not give Americans freedom; they had been free long before it was written, and when it was put up for ratification they eyed it suspiciously, lest it infringe their freedom. The Federalists, the advocates of ratification, went to great pains to assure the people that under the Constitution they would be just as free as they ever were. Madison, in particular, stressed the point that there would be no change in their personal status in the new setup, that the contemplated government would simply be the foreign department of the several states. The Constitution itself is a testimonial to the temper of the times, for it fashioned a government so restricted in its powers as to prevent any infraction of freedom; that was the reason for the famous “checks and balances.” Any other kind of constitution could not have got by.

In the important matter of taxation, the Constitution quite definitely granted the new government very limited powers: import tariffs and excise taxes. Even the latter were grudgingly admitted. The only federal taxing powers on which there was general agreement were tariffs; the “infant industry” argument—the need of encouraging manufactures in the new country by protection from foreign competition— carried weight with the people, and it was conceded that a federal monopoly of tariffs would be better than different tariffs by the thirteen states. Hamilton, however, pleaded (in The Federalist Papers) the inadequacy of income from tariffs alone. He had in mind not only the expected expenses of the new government, and the need of establishing its credit position, but also the funding and paying off of the Continental debts. He asked for the privilege of sharing internal taxes with the states. He specifically rejected the idea of income taxation, both because it would yield little and because it would be repulsive to the people.

And so, the government of the United States got along with what it could get out of tariffs and a few excise taxes until the Civil War; it is interesting to note that the excise levies were dropped in 1817, and not restored until the Civil War. As a consequence, it was a weak government, in the sense that it could not become bothersome; and the freedom of the people made them strong, so that wealth multiplied and the country flourished. The government did lead the nation into two stupid wars, but these were cut short mainly by lack of funds; the national credit, thanks to low taxes, was weak and federal borrowing was extremely limited. Under the doctrine of eminent domain, the government did create a privileged class—which it always does when it steps into the economic picture—by handing out land grants.

But, on the whole, previous to the Civil War the government of the United States confined itself to the business for which it was created, that of protecting people in the enjoyment of their God-given rights. It should not be forgotten that the Founding Fathers, agreeing with John Locke, with whose writings they were familiar, thought of government principally as an instrument for safeguarding private property; and that was considered the prime business of the United States government until 1860.

In 1862, Lincoln instituted the first income-tax law in American history. The debate in Congress over this major change in our fiscal policy makes curious reading. It was tacitly agreed that the law was unconstitutional, because it was a direct tax. A few Congressmen tried to stick the “excise” label on the proposed tax, thus forcing it into the formula of the Constitution. But, on the whole, the argument for it rested on the need for money to carry on the war. It was a matter of expediency only. The Constitution was set aside.

That is as it should be. If there is any moral justification for war, it is the need of safeguarding the life of the community. When the existence of the nation is at stake, the natural inclination of a people is to suspend their claim to rights. Their lives are forfeit in the common cause, and so should be their property. The only practical way for putting the property of the people to the common effort is to confiscate it, and income taxation is the perfect confiscatory instrument. But, since defense of the homeland is in the interests of all, both necessity and equity demand that there should be no discrimination and no limit: all that is needed should be taken without regard to rights, even as life is conscripted. It is everybody’s house that is on fire, and every available water bucket, without regard to ownership, must be taken to put out the conflagration. So, if war is justified, unlimited and unrestrained income taxation can also be justified. The question is: when is war justified?

Every war is fought with current wealth. There is no way of shooting off cannons that have not yet been made, no way of feeding soldiers with the produce of the next generation. The argument that a future generation can be made to pay the costs of a present war is both specious and deceptive; it cannot be done. All the labor and all the materials expended in the struggle are current, not future, labor and materials. We pay as we fight.

The deception that some of the costs may be put on the future is created so as to ease the strain that total confiscation would put on patriotism. To prevent dissatisfaction with the war from getting out of hand, the government takes what it needs, and gives I.O.U’s (bonds) to the owner. But, this I.O.U. is not payment for the goods taken; it is a claim on future production. So that, the holder of the I.O.U., the grandson of the one whose goods were taken for the war, can demand from other grandsons a share of their production. The bondholder is simply a partner of the tax collector. But how is this payment for a past war?

It has been argued that if the government could not borrow it could not wage war. This may be true; neither could it wage war without soldiers. But if people will not give up their property or risk their lives, then the war is not wanted. If the war is not wanted, why should it be waged? If, instead of resorting to loans, the government should confiscate whatever it needs for the purpose, perhaps a waning patriotism would cause the war to be called off.

Those who describe bonds as payment for past years are wont to overlook the fact that the bonds, taken as a whole, are never paid up. The bonded debt of a nation has a way of increasing from generation to generation. That is so because each generation, or its government, encounters a new emergency that needs financing, and it is most convenient to say that the next generation ought to pay for the benefits it will derive from meeting the present emergency. But every generation conveniently ignores the obligation it has inherited. And so the national debt grows.

Since all bonds are claims on production, what really happens when bonds are issued is—let’s call it by its right name—counterfeiting; the amount of purchasing power, or money, is increased.

There are several ways by which bonds are monetized, but that is not germane to the present subject; the point is that all bonds add to the fund of money in circulation, and unless the additional money is accompanied by an additional amount of goods in the market, we have inflation. Inflation is simply a greater amount of money bidding for the same amount of goods. The dollar looks like the old dollar, but it buys less. Hence, even the bond buyers are eventually cheated. The dollars they put into the bonds could have bought them more goods than the dollars they earn after the bonds have been issued, or the dollars they get from the government when the bonds mature. It takes a violent wrench of logic to say that we pay for past wars by depreciating the value of the dollar.

Government borrows on its ability to tax, because taxes are its only source of revenue, the only security it has to offer the lender.

Thanks to its low taxing power, the Lincoln administration had difficulty in disposing an issue of bonds bearing twelve percent interest. That means that its credit was very poor, and it had to resort to confiscation. Its first income-tax law called for a flat three percent of net income over $600 a year; this was quite an exemption in itself, since at that time a man could buy an all-wool suit of clothes for $6. The method of collection was simplicity itself: the citizen declared his income on his own estimate, unchecked, and his estimate was published in the newspapers, the idea being that public opinion would compel a degree of honesty.

However, the amount brought in by this tax was not enough to carry on the war, and within two years Lincoln got around to the graduated income tax. Thus was brought into our fiscal policy the ability-to-pay doctrine. This doctrine, new at the time, has since attained the dignity of an axiom of taxation. Yet, when we examine it under the light of ethics it does not shine so well; and it is a complete denial of the equality principle that guided the Fathers in establishing the Republic. The taxing power of the federal government was thus limited in the Constitution:

“No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”

There is no tax that can be more properly described as “direct” than an income tax. In order to get around this prohibition in the Constitution, the Lincoln administration arbitrarily declared its income levy an “excise” tax, and the Supreme Court upheld this perversion of language in a decision rendered in 1868; showing that the art of proving a point by changing a definition was practiced long before the discovery of the modern “science” of semantics.

Reinforcing the prohibition of a direct tax is the requirement that taxes shall be levied in proportion to the population. The meaning is clear: that in respect to the law all citizens are to be considered equal, as persons, and should be taxed accordingly; their possessions have nothing to do with their legal status. A man who has acquired (presumably by honest methods) a large amount of wealth is legally on a par with the one less fortunate or less proficient. The dictum that “all men are created free and equal” held in the matter of taxes as it did in the matter of social stratification; the Constitution recognized no caste system. No one, and no group, could be singled out by the government for special spoliation.

The ability-to-pay doctrine proceeds from a direct violation of this principle of equality.¹ It establishes a legal classification of society. It sets up a principle of government that was not contemplated when this nation was formed; it is a reversion to the caste system that had existed in Europe.

The easy argument that is used to slide this caste idea into our law is that those who are rich became so because they enjoy more of the benefits of government and therefore ought to pay more of its expenses. Is that so? Did the government make them rich? If so, then the government is at fault; the only way the government can enrich a citizen is by giving him a special advantage over other citizens, and in that case the government violates its trust.

The government has nothing of its own to give, for it is not a producer of wealth. In granting one citizen a special advantage it automatically creates a disadvantage for other citizens. Thus, if it grants me tariff protection, it compels those who buy my merchandise to pay a higher price than they would have had to pay for similar merchandise from abroad; that extra price is my advantage, my customers’ disadvantage. Or, if the government subsidizes my rent, it simply takes from other citizens what it hands me; it enriches me at the expense of other citizens.

It is obvious that in handing out special privileges the government is doing what it ought not to do; it is using its power not for the purpose of dispensing justice, but for the purpose of creating injustice. This is in violation of the principle of equality, and the violation is not corrected by taxing some of the proceeds of privilege; the privileges should be abolished. If I have acquired wealth by way of a special privilege granted me by the government, then when it lays a tax on my ill-gotten wealth it is sharing my unfair advantage; it is, so to say, a partner in my loot.

The advocates of ability-to-pay, however, do not distinguish between wealth obtained by production and wealth obtained by privilege. They simply assert that one could not get rich unless one operated under a government. This is true only in the sense that if there were no government to maintain order and protect property no one would try to acquire property; in a society where thievery is prevalent, production must fall to the point of mere subsistence. But the protection afforded to any one citizen is afforded to all; that is why men institute governments.

It is not police protection that makes one rich, the other poor. The differences in personal wealth that arise in any society—barring special privileges granted by government—are due either to accident or to qualities inherent in the individual: industry, thrift, abstinence. But it so happens that those who have and exercise these qualities do not injure others; their very substance indicates that in acquiring it they have benefited their fellowmen. If I become rich by making and selling shoes, it follows that many people have found my shoes desirable, and they have thus profited by my efforts. The wealth of society is in proportion to the productive efforts of the individuals who compose that society, and government has nothing to do with it—beyond the negative function of maintaining order and protecting property. People make wealth; government can only take it.

The effect of the ability-to-pay doctrine in practice is to discourage production. If an increasing portion of what I earn is taken from me—and that is the intent of the graduated income tax—then my inclination will be to cut down on my earnings. Men work to satisfy their desires, not to pay taxes. There is no sense in keeping my barn full if the highwayman empties it regularly and I have no means of preventing him from so doing. It is true that despite heavy income taxes men will try to keep up their standard of living by greater productive effort; but there comes a point where “what’s the use?” impels them to adjust themselves to a lower standard of living. Why expand my business, why work overtime when my increased income will leave me little for myself? It isn’t worth it. That is the effect of the ability-to-pay doctrine.

If we examine the income tax carefully we find that it is not a tax on income so much as it is a tax on capital. What the government takes from me is not what I consume but what I might have saved. To be sure, I might have spent some of it for a new suit or to paint my house, but some of it I might have put in the bank, where it would have become available, at interest, to someone who would have used it to build a new factory, enlarge his plant, open a store, or buy a farm. That’s what generally happens to savings. Certainly, a good part of the earnings of a corporation are put to plant improvement or expansion, which it cannot effect if the earnings are confiscated. Hence, the effect of income taxation is to impair the capital structure of the country.

Since all wages come out of production, and since the amount of production is in proportion to the amount of capital in use, it follows that the income tax, by depleting capital investment, tends to reduce both job opportunities and wages. Furthermore, the goods that are not produced because of the lack of capital surely do not help the consumer; the less goods on the market the higher the prices he must pay. The income tax therefore hurts the wage earner to a far greater extent than by what is filched from his pay envelope. It hurts him by increasing his cost of living and reducing his earning power.

Even the government must suffer, in the long run, from ability-to-pay taxation. Carried to its ultimate conclusion, this kind of levy must become so discouraging to the goose that lays the golden egg that it will stop laying, and the government that caused this condition will have no egg to live on. Of course, it can then try to use the capital it confiscated to produce goods, something to tax; it can go into business to replace the vacuum it created. That is socialism, which might be all right if it worked. It is not our province here to prove that state capitalism (socialism) is inefficient, that it produces very little besides deficits; witness, our Post Office Department. When all the capital in the country is in the hands of the government, then all of us must work for the government under the conditions it prescribes—and that is slavery. Which is the end product of ability-to-pay.

Despite all the long words and moral platitudes that have been used to shore up ability-to-pay, the fact is that this doctrine is closely related to the rule of highwaymanry: take where the taking is good. Those who practice that trade have the good grace not to moralize about it; they pick on the traveler who looks opulent and pass up the obvious bum. The government does likewise, and like the highwayman it does not quibble over how the victim came by his wealth.

The Sixteenth Amendment specifically says that the government may tax incomes “from whatever source derived.” That means it may tax the earner, the gambler, the second-story man, the highjacker, the housemaid, the prostitute. The highwayman is also undiscriminating, save as to ability to come across.²

---

¹ Ability-to-pay is now taught as a sound basis of taxation in most college economics textbooks. One book that has achieved wide circulation is Economics, by John Ise. Typical of the line of reasoning which is fed to our youth is the following quotation from this book:

“Students of political science insist, however, that an economic oligarchy like the United States cannot be a political democracy in the best sense; that inevitably a few powerful capitalists and financiers will assume power in political affairs, which is inconsistent with genuine democracy; and the only way to maintain a real political democracy is to restore economic democracy though progressive taxation or otherwise.” (Page 619.)

Despite such devious logic, the professor cannot avoid a gleam of sense. On the very next page of his textbook he says: “Any tax on man-made wealth or on income therefrom is a penalty on industry and thrift and an encouragement to laziness, improvidence and incompetence.” Then he adds, “Yet it is inevitable that taxes should be levied in this way because the state must get revenues from people who have the money.” So, our students are being taught that it is right to get where the getting is good.

² “In this country we neither create nor tolerate any distinction of rank, race or color, and should not tolerate anything else than entire equality in our taxes. So, then, I think the proposition [progressive income taxation] cannot be justified on any sound principle of morals. It can only be justified on the same ground that the highwayman defends his acts. It is saying to the man of wealth, ‘you have got the money and we will take it because we can make better use of it than you will.’” Representative Morrill, May 23, 1866.