In 2012, the Government Accountability Office (GAO) issued its own warning. Having conducted a number of reviews of the federal government’s fiscal condition, it reported that the “GAO’s simulations continue to illustrate that the federal government is on an unsustainable long-term fiscal path. In both the Baseline Extended and Alternative simulations, debt held by the public grows as a share of gross domestic product (GDP) over the long term. While the timing and pace of growth varies depending on the assumptions used, neither set of assumptions achieves a sustainable path. . . . ”20 In other words, the nation is facing eventual economic collapse.
In response to these disastrous fiscal and financial policies, the Federal Reserve System (Fed) has aggressively pursued monetary policies that are equally ruinous. When the Fed was established in 1913, its original mission was to ensure a stable monetary system and sound dollar. Today the Fed’s authority extends to “conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices; supervise and regulate banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; maintain the stability of the financial system and contain systemic risk that may arise in financial markets; provide certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and play a major role in operating and overseeing the nation’s payments systems.”21 This is vast power in the hands of a relatively few governing masterminds—seven members of the board of governors and five of the twelve Federal Reserve Bank presidents composing the Federal Open Market Committee. They meet every six weeks to vote on monetary policy.
As such, with virtually unencumbered power to manipulate markets, over the last several years the Fed has launched a controversial quantitative easing campaign in which it has monetized trillions of dollars in debt—that is, the Fed creates credit, which is essentially the same as printing money, and uses it to buy federal government bonds, such as Treasury notes and mortgage-backed securities, thereby piling debt upon debt and pumping money into the economy.
The Fed has also held interest rates at historically low levels for years, thereby distorting market behavior and setting the stage for further economic destabilization as interest rates eventually rise—as they must.
In addition, the Fed has stated that it will devalue the dollar by 33 percent over the next twenty years, which will cut the dollar’s value by one-third and drive up prices and costs while reducing the value of savings and investments.22
Further troubling is the Fed’s use of what is dubbed “financial repression,” where private banks are both forced and encouraged, through loosened capital and other regulatory requirements, to buy ever more government debt. As larger and larger bank holdings consist of this debt, it could eventually set off a financial time bomb, should the government renege on its obligations.23
Therefore, rather than ameliorating the consequences of out-of-control fiscal policies, born of political ideology and expediency, the Fed’s monetary manipulations and interventions are facilitating economic chaos, which can easily lead to hyperinflation and the devaluation of the currency, including sky-high prices and the destruction of wealth; stagflation, including sky-high prices and significant economic contraction; or even deflation and the collapse of prices for goods and services.
It is obvious that few institutions are unaffected by the reckless fiscal policies of the federal government, including the Fed’s reactionary role respecting its monetary responsibilities, which makes imperative the need to impose constitutional limits on the federal government’s spending power. The federal government’s fiscal situation is disastrous and dire, resulting from its boundless intervention in and manipulation of the individual and his environment. The evidence is unequivocal and overwhelming.
In Democracy in America, Alexis de Tocqueville warned that ceaseless intervention was a risk for America resulting from the nature of democracy: “In democratic societies . . . there exists an urge to do something even when the goal is not precise, a sort of permanent fever that turns to innovation of every kind. And innovations are almost always costly.”24
• • •
The proposed Tax Amendment’s ceiling on income taxes operates in concert with the spending limitations. It is intended to impose rational decision-making on Congress by strengthening the link between spending and taxing within our constitutional construct. Capping the income tax will establish a workable, stable, and predictable taxing environment, which encourages enterprise and economic growth. Moreover, the proposed amendment prevents resort to alternative forms of taxation, such as the value-added tax (VAT), for the objective is to shrink the federal Leviathan and fund only the legitimate and limited functions of the federal government.
It is worth remembering that the Framers debated with great force the federal government’s size and authority. Many predicted that the federal government’s taxing authority, combined with its power to provide for the “general welfare,” might lead eventually to an unbridled, all-powerful national government, dominating the states and the individual. In one of many examples where the Anti-Federalists raised prescient concerns, Robert Yates, aka Brutus, wrote:
It is as absurd to say, that the power of Congress is limited to these general expressions, “to provide for the common safety, and general welfare,” as it would be to say, that it would be limited, had the constitution said they should have power to lay taxes, etc, at will and pleasure. Were this authority given, it might be said, that under it the legislature could not do injustice, or pursue any measures, but such as were calculated to promote the public good, and happiness.25
Yates argued earlier that “[t]he powers of the general legislature extend to every case that is of the least importance—there is nothing valuable to human nature, nothing dear to freemen, but what is within its power. It has authority to make laws which will affect the lives, the liberty, and property of every man in the United States. . . . ”26 He insisted that the limits placed on Congress’s taxing power were insufficient:
[T]he legislature [has] authority to contract debts at [its] discretion; [it is] the sole [judge] of what is necessary to provide for the common defence, and [it] only [is] to determine what is for the general welfare; this power therefore is neither more nor less, than a power to lay and collect taxes, imposts, and excises, at [its] pleasure; not only the power to lay taxes unlimited, as to the amount [it] may require, but it is perfect and absolute to raise them in any mode [it] please[s].27
However, in Federalist 41, James Madison dismissed the critics. He noted that some Anti-Federalists had asserted that the taxing power “amount[ed] to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare.” But Madison declared that “the idea of an enumeration of particulars which neither explain nor qualify the general meaning, and can have no other effect than to confound and mislead, is an absurdity. . . . ”28
Thomas Jefferson, who had not attended the Constitutional Convention but had followed closely its deliberations, resisted the objections as well. He argued that the power to lay taxes to provide for the general welfare was not viewed by the Framers as all-encompassing: “For the laying of taxes is the power, and the general welfare the purpose, for which the power is to be exercised. Congress are [sic] not to lay taxes ad libitum, for any purpose they please; but only to pay the debts, or provide for the general welfare of the Union.” Jefferson understood that allowing Congress to levy taxes for any purpose would essentially be a grant of a “distinct and independent power to do any act [Congress] pleased.” Such a grant of power “would reduce the [Constitution] to a single phrase, that of instituting a congress with power to do whatever would be for the good of the United States; and, as they would be the sole judges of the good or evil, it would also be a power to do whatever evil the
y pleased.”29 Jefferson was certainly not alone in this view.
Nonetheless, led by the Massachusetts Ratification Convention in early 1788, several states warned that should the Constitution be ratified, the new Congress needed to place further limits on the grant of federal taxing authority.
Amos Singletary, a grist mill operator, father of nine, and local justice of the peace with no formal education, spoke for many during the Massachusetts Ratification Convention:
We contended with Great Britain—some said for a three-penny duty on tea, but it was not that—it was because they claimed a right to tax us and bind us in all cases whatever. And does not this Constitution do the same? Does it not take away all we have—all our property? Does it not lay all taxes, duties, imposts and excises? And what more have we to give? They tell us Congress won’t lay dry taxes upon us, but collect all the money they want by impost. I say there has always been a difficulty about impost [raising enough funds] . . . they will not be able to raise money enough by impost and then they will lay it on the land, and take all we have got. These lawyers and men of learning, and monied men, that talk so finely and gloss over matters so smoothly, to make us poor illiterate people swallow down the pill, except to get into Congress themselves; they expect to be the managers of the constitution and get all the power and all the money into their own hands, and then they will swallow up all us little folks like the great Leviathan, Mr. President, yes, just as the whale swallowed up Jonah.30
The Massachusetts delegation voted for ratification, but urged that an amendment to the Constitution provide that when monies raised from impost and excise taxes were insufficient for the national government’s purposes, Congress would requisition additional funds from the states to raise as they deemed fit. Only if a state failed or refused to pay a requisitioned amount could Congress levy a tax on the state directly.31 The Virginia and Rhode Island ratification conventions followed Massachusetts’s lead.32 In the end, however, no change was made to the Constitution, for the enumerations setting forth the limited grant of power to Congress were believed by the state ratification conventions as both obvious and sufficient.
In the 1830s, Supreme Court associate justice Joseph Story, considered one of the greatest legal minds of his time, emphasized the limits on the Constitution’s taxation authority:
[Jefferson’s] opinion [on Congress’s limited power to tax and appropriate] has been maintained at different and distant times by many eminent statesmen. It was avowed, and apparently acquiesced in, in the state conventions, called to ratify the constitution and it has been on various occasions, adopted by congress, and may fairly be deemed, that which the deliberate sense of a majority of the nation has at all times supported.33
Story’s own view was that the specific language of the taxation clause, in which Congress may “lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense, and general welfare of the United States,” was indeed limiting. For Story, it was obvious that the drafters intended the power to tax to apply to only three purposes: “to pay the debts,” “to provide for the common defense,” and to provide for the “general welfare of the United States.” The power to tax is strictly tied to these three purposes. It is not a general, unlimited power, granting Congress plenary authority, contrary to the specific enumeration of powers in Article I, the explicit recognition of individual and state sovereignty in the Bill of Rights, and the matrix of checks and balances built into the Constitution. No one believes the Framers intended to create, as Story explained, “an unlimited national government.”34
Story underscored the importance of placing limits on federal power to levy and collect taxes:
A power to lay taxes for any purposes whatsoever is a general power; a power to lay taxes for certain specified purposes is a limited power. A power to lay taxes for the common defence and general welfare of the United States is not in common sense a general power. It is limited to those objects. It cannot constitutionally transcend them. If the defence proposed by a tax be not the common defence of the United States, if the welfare be not general, but special, or local, as contradistinguished from national, it is not within the scope of the constitution.35
This should, once and for all, put to the rest the notion that by “general welfare” the Framers intended to grant Congress “general power” to tax. The Federalists insisted the Constitution effectively limited the taxing authority whereas the Anti-Federalists were concerned that the language would be distorted by future Congresses. There was overwhelming concurrence that Congress should not be, and was not, granted plenary taxing power.
For the first few decades of the nation’s history, it appeared that Madison and the other delegates were correct in concluding that the taxing power would be applied as intended. But over time, Congress pushed its limits. In 1861, in order to pay for the growing Civil War debt, Congress passed the Revenue Act, which included an income tax. However, it was repealed in 1872 because it was considered an emergency tax. Indeed, in writing to the chairman of the House Ways and Means Committee, the then-commissioner of internal revenue urged the tax’s repeal. He argued that the income tax was “the one of all others most obnoxious to the genius of our people, being inquisitorial in its nature, and dragging into public view an exposition of the most private pecuniary affairs of the citizen.”36
In 1894, Congress enacted a flat-rate income tax. But in 1895, in Pollock v. Farmers’ Loan & Trust Co., the Supreme Court ruled that the income tax was an unconstitutional direct tax. (A direct tax is a type of tax levied upon the individual directly rather than a tax levied on the purchase of a good or the importation of a good from outside the country.)37 Under the Constitution, direct taxes must be apportioned among the states, meaning each state must pay its portion of the total tax based on that state’s percentage of the general population.
However, the federal income tax—a “progressive” income tax—was a central goal of the Progressive movement. And in 1909, President William Howard Taft urged its adoption through the passage of a Sixteenth Amendment to the Constitution. It was passed quickly by Congress the same year. By 1913, three-fourths of the states ratified it. Then, as now, much of the political debate for the federal income tax was based on shifting the burden of taxation from the broader population to a much smaller segment of society.
Nonetheless, the early tax rates were relatively modest. The original federal income tax rates in 1913 were, in inflation-adjusted brackets, as follows: 1 percent for incomes up to $463,826; 2 percent for incomes between $463,826 to $1,159,566; 3 percent for incomes between $1,159,566 to $1,739,348; 4 percent for incomes between $1,739,348 to $2,319,131; 5 percent for incomes between $2,319,131 to $5,797,828; 6 percent for incomes between $5,797,828 to $11,595,657; and 7 percent for incomes over $11,595,657.38
Whereas the top rate in 1913 was 7 percent, which applied to very few individuals, federal income tax rates today are far more onerous. In the first place, in 2009, for which the latest numbers are available, the CBO reports that the bottom 20 percent of income earners’ average rate for the individual income tax was negative 9.3 percent. For those in the 20–40 percent range of income earners, the average income tax was a little over negative 2 percent. Refundable tax credits exceeded the income tax owed by these individuals. Thus the income tax system today not only is intended to tax higher earners at higher rates, but directly subsidizes a substantial portion of the population with cash payments.39
In 2009, for individuals in the 40–60 percent range, the average income tax was 1.3 percent, while those in the 60–80 percent range had an average income tax rate of 4.6 percent. The top 20 percent of earners paid, on average, a 13.4 percent income tax rate, while the top 1 percent paid on average 21 percent.40
The Tax Foundation reports that “the federal deficit [each year] has grown so large that “[e]ven if the government took all of the income earned by those who have an after-tax income of $1 million or more, the amount of revenue g
enerated would fall far short of eliminating” the over $1 trillion deficit each year. In 2010, for example, the after-tax income of all millionaires was about $709 billion. The 2012 fiscal operating deficit was $1.32 trillion.41
It follows that higher-income earners account for most of the individual income tax revenue the federal government receives. The top 1 percent (adjusted gross income [AGI] of $343,927 and above) paid 36.73 percent of federal income taxes; the top 5 percent (AGI of $154,642 and above) paid 58.66 percent; the top 10 percent (AGI of $112,124 and above) paid 70.47 percent; the top 25 percent (AGI of $66,193 and above) paid 87.3 percent; the top 50 percent (AGI of $32,396 and above) paid 97.75 percent.42
Put another way, the Tax Foundation explains that “the share of taxes paid by the richest 10 percent of households, the share of all market income earned by that group, and the ratio of what that 10 percent of households pays in taxes versus what they earn as a share of the nation’s income, is the highest or most ‘progressive’ in the industrialized world.”43 In 2013, the effective tax rate for the wealthiest households will increase further as itemized deductions have been eliminated or phased out.44
Hence, class warfare or soaking the so-called rich may make for good populist demagoguery and serve the political ends of the governing masterminds, but it does nothing to solve the grave realities of the federal government’s insatiable appetite for spending and its inability to reform itself.
The current spending trend makes certain an immense tax increase on the vast majority of income-earning Americans, despite the overall inconsequence of taxation on bringing down the aggregate debt. There is already talk of a VAT, which is an enormous, hidden sales tax levied at every level of production and service and drives up prices to the consumer;45 overhauling the over $3 trillion 401(k) retirement system, including the elimination of nearly $80 billion in deferred taxation;46 reducing or eliminating the home mortgage interest deduction;47 and reducing or eliminating charitable deductions.48 While terribly destructive of individual and private sector wealth, these taxes and others will be meaningless and increasingly desperate gestures.
The Liberty Amendments: Restoring the American Republic Page 8