About the author
Return to Table of Contents
Go back to the Forward & Preface


Chapter 1

B ack in 1787, the United States was supposed to be a decentralized federal republic. The Constitutional Convention in Philadelphia drafted a document that provided for the State and local governments to manage most of the business of government — except that they would not be permitted to issue paper money or impose tariffs on goods from neighboring States. That had been the problem with the earlier charter, the Articles of Confederation: the States had abused any power to sell privileges to vested business interests, so the new Federal government of the United States was given those regulatory powers. State government abuses were limited by free trade and competition among the various States.

The new Federal government, however, was not supposed to impose direct taxes on the citizens. The system of federalism, in theory, is that you have a division of powers. At the top, there would be a Congress, a court system, and a President with clearly separated powers. But that was not all. The Federal government would take over the duties of defense and regulate interstate commerce, so that no State government would be able to seal its borders.

If a government does not have the power to keep its citizens from leaving, it can't impose heavy taxes or discriminatory regulations — because free trade from better-situated businesses in neighboring States or people emigrating to avoid taxation will put a limit on such abuse by government.

The power to regulate property rights and maintain police forces, however, was not the duty of the Federal government. The separation of powers was supposed to assure us that the new Federal government, which did control its borders, could not act like a tyrant. The revenue of the Federal government was supposed to be contributed by the States, in proportion to their population. This was to be the guarantee that the government in Washington could not become a police state, preying upon its citizens and handing out favors according to political clout.

What went wrong with this plan? How did we end up with today's overblown central government, dragging down the economy with taxation, inflation, and regulation — driving up interest rates, unemployment, and welfare rolls?

Alexander Hamilton is the culprit. He was Secretary of the Treasury under George Washington, and he was worried about the public debt. His friends owned the bonds that the United States had issued to finance the Revolutionary War (and which many of them had purchased at steep discounts). Hamilton argued that we needed to pay off the debt, and persuaded Congress to raise the tariff. This was one tax in particular that the Federal government could impose. There were some sophisticated arguments (quite incorrect, by the way) that America needed protection for its "infant industries" against cheap imports from England. This lucrative idea — lucrative to industrialists in New England, bondholders in Boston, New York, and Philadelphia, and to the Federal Treasury itself — was sold to Congress, and the new government was off and running.

By the 1820s, the tariff was bringing in enough money that the State legislatures didn't have to send any money to Washington to finance the Federal government. The local politicians liked that. As a matter of fact, there was enough money already in Washington to pay for "public works" otherwise familiarly known as "pork barrel" legislation. Until the Civil War, the tariff was the major source of money for the Federal government, just as property taxes were the major source of revenue for the States.

These early forms of taxation didn't require the government to collect personal information about American citizens. The whisky tax was the first Federal tax that began to infringe on individual behavior. It even sparked a rebellion, and those who felt strongly enough about it found ways to avoid it. The famous American tradition of making "moonshine" whisky (at night, by the light of the moon) started in those days. And thus were born the "revenoors," the first I.R.S. agents.

During the Civil War the United States experimented with an income tax. It wasn't enforced by "revenoors," however, but by pressure from one's neighbors. Each citizen was asked to declare his "income" and pay the appropriate tax. The declarations were published in newspapers and the opinion of one's neighbors was supposed to regulate the degree of cheating. People who wanted to appear rich declared more than they were really worth, as a way of buying a little social status. After the Civil War, this tax was abolished, but not for seven years. There were serious challenges to its constitutionality, and the Supreme Court cleared the books.

War tends to whet the appetite of power-seekers, however, and the Federal government "needed" revenue. Congress was pressured by the new industrial entrepreneurs to raise the tariff. Never mind that this increased the prices for consumers and reduced world demand for America's exports, chiefly farm products; never mind that this enriched the industrialists and hurt the farmers; never mind that the Federal government got wealthier and began to take on more "public works." The Federal budget was in surplus every year from 1872 until 1894. But the power-seekers knew what they wanted — more!

With the growth of America's industrial development, and the waves of immigration from Europe, a new "social consciousness" was advocated. Greed and envy were cultivated by pointing to the new class of rich industrialists and entrepreneurs. Not only workers and immigrants were victims of envy-mongering, but the established, old-line upper-class families looked down upon the new wealth. The income tax was seen as a way to make accumulation (but not preservation) of wealth more difficult.

Not only was opulence seen as a potential source of revenue for the government, it fed the ideological fires of people who argued that the poor could be helped by taxing the incomes of capitalists. The ideas of Karl Marx spread among the intellectuals — that the wealth of society belonged to "humanity" instead of to the individuals who earned it in the free market, and should be distributed according to "need." Productive people should pay according to "ability." Religious leaders and sentimental members of wealthy families (and their class-conscious siblings, envious of the "new rich") agreed that "loving thy neighbor" required redistributing the current revenues from individuals to whom it really belonged — the ones who had created it by hard work and wise investment. The idea of "class war" was advanced.

The tariff kept increasing, because the expenses of the Federal government were rising. The farmers in the Midwest became more and more aware that the tariff was a tax on what they could buy with the corn and wheat they produced. A sectional division developed, and the idea of replacing the tariff with a tax on "income" was increasingly debated. Economists argued, stupidly, that every other civilized nation had an income tax; so the United States was "backward." Everybody believed that this new tax would be one that somebody else would have to pay! Since almost everybody was "poor" in the 19th century by today's standards, the idea of "ability to pay" was popular. This is the fundamental principle of the highwayman: take where the getting is good. There is no sense at all of justice in it — just greed and envy.

In 1894, the Populists' call for income taxation was enacted by Congress in the midst of an economic recession. The Supreme Court declared it unconstitutional even before it could take effect. The income tax was supposed to make up for a loss in government revenues from tariff reduction. Everybody knew that reducing the tariff was important, and the old balanced budget canard was used to justify a new tax. Notice how the possibility of eliminating established government programs is avoided when any Federal deficit is the issue!

In each Congress for the next 15 years the tariff debate was linked with a demand for a Federal tax on incomes to make up a deficit. The balanced budget argument became the Trojan horse for the Sixteenth Amendment, which was proposed to Congress by William Howard Taft in 1909 and ratified by 42 States by 1913.

Under Franklin D. Roosevelt, the income tax became the major tool for social engineering. Steeply progressive tax rates were imposed in the name of "social justice," and government spending to stimulate the economy and subsidize politically influential interests became an accepted justification for redistributing wealth. Today, more than half of the Federal budget goes to "direct payments to individuals."

At the beginning of 1943, the Secretary of the Treasury made a momentous announcement — nobody would have to pay any taxes for 1942! Instead, each week employers would withhold money from workers' checks toward their 1943 liability. Thus, Big Brother's modern system of exacting revenue was born in the heat of war with the flag of patriotism draped around the measure.

The question for a new generation of Americans is: Are we going to make the necessary changes? The mistakes of our parents and grandparents can be corrected — if we really want to. If, as Abraham Lincoln is supposed to have said, "You can't fool all of the people all of the time," there is still hope that this economically irrational — and socially evil — form of taxation can be abolished.

The government in Washington today [written in 1982] is in an economic crisis, with record budget deficits that it seems unable to correct. Pressure groups are bombarding Congressmen with threats and pleas. State legislatures are calling for a balanced budget amendment to the Constitution, yet the basic problem of government spending is not addressed.

We are calling for a new, fundamental reform — yet one that is as old as Thomas Jefferson, Andrew Jackson, and the hardworking individualists who built America from a wilderness to the greatest nation on earth. It is never too late to look at the root causes of our economic and political problems.

As Thomas Paine wrote in Common Sense (1776): "Perhaps the sentiments contained in the following pages are not yet sufficiently fashionable to procure their general favor; a long habit of not thinking a thing wrong gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason." To reverse the error of 1913, we need to raise again the battle cry of 1776 — Taxation is theft!

Go on to Chapter 2
your comments are welcome.

About the author
Return to Table of Contents