In such a system of natural liberty, Adam Smith argued, government would be restricted to a small number of functions, the primary one being the protection of each individual’s right to life and property through courts of law, police, and national defense. In essence, government was no longer to be an agency of force and compulsion for bestowing privileges and favors on some at the material and social expense of others.
The world was transformed in unimaginable ways by these ideas of political and economic liberty. Not only were men now made free through equal rights before the law; they were increasingly liberated from the plundering and privilege-making powers of government. Human relationships began to be based on mutual agreement and voluntary association. The free-market society replaced the servile state of the feudal order and the mercantilist system of regulation.
The free market’s social system of division of labor is one of mutual interdependency and mutual service for common benefit. Voluntary exchange means that no one can get what is the property of another without that other’s willingness to part with the property he rightfully owns. Each participant in this system of division of labor, therefore, must orient himself towards the wants and desires of his fellow men if he is to succeed in offering a good or service that others will be willing to take in trade for what he would like to acquire in exchange.
As a result, in the free marketplace, each is both a servant and a master. As a producer, each of us must serve our neighbors by marketing a product others will be interested in buying; and we must try to offer it at a price at least as competitive as our closest rivals, who also are themselves attempting to win the consumers’ business. If we fail to do so, we are then limited in our own ability to reenter the market as a consumer, where those same others must now serve us so they can earn the financial wherewithal to buy from us in the next round of the never-ending network of market transactions.
Income and wealth, therefore, in the free market are not the result of plunder, privilege, or political power. They are what each of us has earned for services rendered based on what other members of the society consider our services to be worth in furthering their own plans and purposes. The successful, profit-making entrepreneurs are the ones who are better at anticipating what others might find it attractive to buy and who, being more cost-efficient producers, are able to sell at the lowest prices possible. In the division of labor, those who lack the entrepreneurial quality or who are more risk-averse in the face of the uncertainties of the business world hire out their services for market-determined wages. Each employee’s income is a reflection of what an employer thinks his services are worth in the manufacture of a potentially consumer-demanded product, in competition with other would-be employers who might hire that worker for their own production activities instead. Those who earn interest incomes do so by voluntarily forgoing other uses they might have for their own wealth and lending it to others who are willing to pay a price in the future (in the form of interest) for having use of some of that wealth for enterprising endeavors they have in mind.
As the classical liberals of the nineteenth century clearly argued, the beauty of the free-market economy is that it harnesses the self-interest and productive potential of each of the society’s members in the service of their fellow men. And it does so without force or command. It leaves each man free to peacefully go his own way, but to go his own way in a social setting in which the advancement of his own ends directs him towards furthering the ends of others at the same time.
The relative incomes earned by participants in the free-market economy are derived from neither exploitation nor plunder because the very principle upon which market exchanges are based — voluntary and mutually agreed-upon terms of trade — precludes the existence of unjust or unfair material gains. If some enter the market as consumers with a greater monetary capacity for buying available goods and services, it is a reflection of their greater reward in their role as producers in successfully meeting the consumer demands of their fellow men in that same market process.
But in the middle and late decades of the nineteenth century, counterrevolutionary forces arose in opposition to the revolutionary liberation of the free-market society. The most important of these counterrevolutionary forces were socialism and the interventionist-welfare state. The socialists perversely said that the worker selling his labor services for wages to an employer in the market was the same as the medieval serf compelled to work for the lord of the manor. They saw no difference between the free man who voluntarily contracts for wages in an open competitive market and the serf bound to the land and compelled to work at the lord’s command under threat of physical punishment or death. In the place of the system of private property and market competition, the socialists called for the radical nationalization of all the means of production, with the state then acting as the central planner of all production and the single employer of all those needing to work to earn a living.
Many intellectuals, political philosophers, and active politicians accepted the socialist critique of capitalist society but did not want to follow the socialists in their call for the radical transformation of the social order. Instead, they advocated a redressing of the supposed abuses of free-wheeling, “unbridled” capitalism through a “middle way” of industrial regulation and redistribution of income and wealth.
In the twentieth century, these socialist and interventionist-welfare statist ideas and policies have triumphed all around the world. Even in the present “post-communist” era, the prevailing ideological and political ideas still rest on the socialist premise that a truly free-market capitalism would be harmful to the general interests of society, threatening the exploitation of many and resulting in an unjust distribution of income among the various individuals and groups.
For 150 years, the income tax has been considered a fundamental weapon in the arsenal of government powers to correct the supposed “evils” and “abuses” of capitalism. In the Communist Manifesto, published in 1848, Karl Marx and Friedrich Engels formulated their most famous condemnation of capitalist society. After articulating their reasons for believing that capitalism would eventually pass away and be replaced by the socialist society of the future, they proposed a ten-point program for “despotic inroads on the rights of property … as a means of entirely revolutionizing the mode of production.” The second point in their program called for “a heavy progressive or graduated income tax.” If a violent transformation of the social order could not be implemented at one stroke, then at least the wealth of the rich could be cut down and slowly eroded over time through a progressive income tax.
Even when the income tax has not been thought of as a conscious tool for bringing about the complete end to the capitalist order, it has been considered a useful and indispensable method for manipulating social outcomes and redistributing wealth into more desired patterns. As one example, James E. Meade, who received the Nobel Prize in economics in 1977, published a book entitled Planning and the Price Mechanism in 1948 (just one hundred years after the Communist Manifesto) in which he proposed what he called “the liberal-socialist solution” to social problems. He said that those who “labored to obtain a more equal distribution of income and property may well be proud of their achievements which … have brought about a quiet but complete social revolution in the last ten years” through an increasingly more progressive income tax.
The income tax, in Meade’s view, was one of the useful and necessary “radical measures to ensure a tolerably equitable distribution of income and property.” His only fear was that if the income tax was pushed too high towards the 100 percent mark, it would kill the goose that laid the productive eggs by undermining incentives for work and investment. Hence, one needed to manipulate the income tax rate to achieve some “optimal” combination of income equity and productive efficiency. He was confident the social engineers of the interventionist-welfare state had the knowledge and ability to ensure that goal.
The socialists and interve
ntionists have understood that if government can directly tax income, then the political authority has within its power the ability to control both the wealth-creating and spending processes. Like the medieval lord of the manor, who demanded a portion of the physical output of the land produced by the serfs and thus determined how much of the sustenance of life would be left in the hands of those who had produced it, the advocates of the income tax have wanted to control how much of what each of us has earned in the marketplace shall be left in our respective hands. They have wanted to be the political lords and masters who determine how much we each have to live on and how the remainder that is taxed away shall be spent and redistributed to fulfill their collectivist fantasies.
The difference between 1948 and now is that in the immediate post-World War II era, the socialists and interventionists of the day were filled with ideological confidence that they could set the world on to a better and brighter utopian future through their wise leadership and technical expertise as economists and statisticians. Today, the interventionist-welfare states of Europe and the United States have almost no ideological purpose other than serving and pandering to the ocean of special-interest groups who each want to manipulate the tax codes and the income-tax schedules to serve their narrow designs at the expense of the rest of the society. In this sense, the income tax has lost its collectivist ideological rationale; lip service is still paid to “social justice” and “income fairness,” but everyone knows that these are merely covers for plunder, privilege, and income transfers for those interest groups at the expense of the society as a whole.
In the immediate aftermath of the First World War, economist Joseph Schumpeter published an essay entitled “The Crisis of the Tax State.” He argued that there is no better way to understand the social forces at work in a society than to investigate that society’s fiscal history, because in the taxing and spending policies of government are to be seen everything that is important for understanding how and why entire peoples and cultures have declined and decayed throughout the ages.
In the pages of the book you hold in your hand, Sheldon Richman has unmasked the reality of the American tax state. With logical eloquence and detailed historical accuracy, he demonstrates the immorality, injustice, corruption, and inefficiency of America’s income tax system. No one who reads this book can ever again see the income tax as anything other than the dragon seed of evil that is eating away at the moral and productive fiber of American society. After explaining why the income tax must be abolished if a free America is to be restored, Mr. Richman forcefully reminds us that taxes are only one side of the fiscal coin. Governments tax so much because they spend so much. And governments spend so much because of all that an increasing number of us lobby government to do for us. The monster tax state will be successfully slain only when we have also defeated the monster spending state.
For almost ten years, The Future of Freedom Foundation has devoted its activities to unmasking, criticizing, and defeating the socialist and the interventionist-welfare statist ideas of our time. Mr. Richman’s book is an important contribution to this effort. It has been said that the power to tax is the power to destroy. Since the passage of the Sixteenth Amendment to the Constitution in 1913, the U.S. government has had one of the most destructive of those taxing powers in its hands. It is time to take it away. It is time to deny government the right to intrude into our lives and investigate how we earn and spend our income, while at the same time intimidating tens of millions of people into becoming obedient tax slaves through the threat of confiscation and imprisonment. The future of freedom depends upon our total victory over this monster taxing and spending state.
— Richard M. Ebeling
Vice-President of Academic Affairs
The Future of Freedom Foundation
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The Permanent War
About ten years ago Stanley McGill, 93, mailed a check for $7,000 to the Internal Revenue Service. When he died, his daughter discovered that Mr. McGill had made a mistake. The money should not have been sent. Marian Brockamp explained to the IRS that her father was senile and asked for a refund.
The IRS said no. Requests for refunds must be made within three years.
Mrs. Brockamp took the case to court. It went all the way to the U.S. Supreme Court.
She lost.1
In the grand scheme of things, that is a small event. The Internal Revenue Service has done far worse in its time. It has harassed and tormented people. It has seized property and frozen bank accounts. It has ruined credit records. It has driven people to suicide. Nevertheless, the Stanley McGill story sums up a great deal about the IRS and the American tax system. The IRS concedes that the $7,000 should not have been sent. It is money that the agency should never have received. Mr. McGill made a mistake. His daughter informed the IRS as soon as she discovered the error. No one questions the facts. But the IRS won’t surrender the money. And now the U.S. Supreme Court says the IRS doesn’t have to. (The Ninth Circuit Court had ruled that it was “unconscionable” for the government to keep the money.)
Speaking for a unanimous court, Justice Stephen G. Breyer wrote:
The nature and potential magnitude of the administrative problem suggest that Congress decided to pay the price of occasional unfairness in individual cases … to maintain a more workable tax enforcement system.
Congress decided to pay the price? How noble. Except that in this case it appears Congress has forced Mr. McGill’s heirs to pay the price. Why? Because the rights of the individual must not be permitted to create administrative problems for the IRS or to interfere with the maintenance of a workable tax enforcement system.
Yes, that incident occurred in the United States of America.
Imagine if the tables were turned and after Mr. McGill’s death the IRS discovered that he “owed” the government $7,000. Imagine further that Mrs. Brockamp politely replied that the IRS was too late in its request. What would have happened? The IRS would have seized the money and perhaps have made hell out of Mrs. Brockamp’s life. And the Supreme Court would have sided with the IRS.2
The IRS reign of terror is something we have unfortunately grown accustomed to. But someday it might be different. Someday we will look back on the era of the income tax and the IRS with embarrassment that such an immoral system could exist in this noble land. We will be bewildered that this system could have been adopted in 1913, considering the revolutionary libertarian roots of the great American experiment in freedom. How could the American people have permitted and put up with the Internal Revenue Service, which tax historian Charles Adams equates with “a miniature Soviet state with the power to intimidate just about everyone”?3
This book tries to put the income tax, and the Sixteenth Amendment that permitted it, into historical context and show its implications for morality, the relationship between citizen and state, and the quest for prosperity. The verdict on the tax is not favorable: ratification of the amendment and passage of the tax was a major turning point in the transmogrification of America from republic to democratic despotism. More than anything else, it converted Americans from citizens to subjects. Indeed, there is not a single good thing that can be said about the income tax.
In fiscal year 1997, the federal government spent about $1.6 trillion. Income taxation in one form or another raised about $1.3 trillion. One trillion, three hundred billion dollars. Think about that. Americans are paying between 15 percent and more than 30 percent of their adjusted gross income, thousands of dollars a year for the working and middle classes, in personal income taxes alone. They pay more than 15 percent for Social Security and Medicare. In hidden ways they pay the corporate income tax. According to the Tax Foundation, the personal income tax takes almost 10 percent of net national product. Do Americans get their money’s worth? The question answers itself. As Will Rogers said, thank goodness we don’t get all the government we pay for.
But even to ask about getting one’s money’s worth is to miss the point. Th
e tax system and the distributive engine it fuels are not about giving citizens value for value. Only voluntary exchange can accomplish that. The IRS may call the taxpayers “customers,” but the point of the system is to milk them to the maximum without setting off a revolt and to use the money to keep politicians and bureaucrats in power. As that great tax collector Jean-Baptiste Colbert, Louis XIV’s controller general, said, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
In carrying out its mission, the IRS is only serving a higher power: the lawmakers who need a never-ending flow of cash to the federal treasury. They wrote the laws that loosed the IRS on the American people. They can repeal them. Why don’t they? They want the money, pure and simple.
Nuclear-Proof Taxation
To see the government’s true priorities, consider that when the threat of nuclear war with the Soviet Union loomed, a top government concern was how to collect taxes after 100 million Americans were killed and U.S. society was devastated.4 A Department of Treasury document on the subject was titled “Fiscal Planning for Chaos.” A later memorandum noted that the tax system would vary from place to place, depending on the amount of destruction. Where damage was cataclysmic, martial law would be declared and government officials would simply seize whatever resources they needed. “Simply stated,” according to the memo, “everybody would be in the Army.”5
Your Money or Your Life Page 2