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Chapter 2

L et's consider briefly some of the theoretical arguments about taxation. Economists have produced criteria to determine whether some taxes are "good" or "bad." We are not prepared to believe that any taxes are good: taxation is exaction; exaction is extortion; extortion is unjust. It makes no difference whether Congress does it or whether the neighborhood bully does it.

The income tax destroys more wealth than it collects. It impairs individual liberty in the process of exacting revenue. Far from its image as a fair tax, based on ability to pay, it is really arbitrary and discriminatory. It is not our purpose here to make some argument for a "better" tax. The income tax must go because it is a bad tax, period.


F ew of us realize that the concept of "income" is a pretty fuzzy notion. If we receive a paycheck each week, or a monthly salary, we might just assume that is our "income." Yet, the notion is much more complex than that. Just consider — what is the "income" of a traveling salesman who has to pay his own expenses? Is it his paycheck? Or is it his paycheck after deducting his expenses? What about his meals?

What is the "income" of a mom-and-pop grocery store, where the family may regularly prepare dinner from meat, milk, and eggs that are not fresh enough to sell? Perhaps each child in school takes an apple for the teacher from the fruit section. Is that part of "income"?

What is the income of a coal miner, copper miner, or oil producer, who may sell coal, ore, or crude oil but in the process the mines or wells slowly become exhausted? Are they entitled to deduct from their gross revenue some part for this depletion, the same way that an automobile dealer deducts the amount he paid the factory for your new car before he sold it to you?

One definition that economists like to use for income is the change in your wealth from one point in time to another. Of course, this idea is just as fuzzy as the original notion, because nobody can define "wealth" in any clear way. Is it the market value of all your property? Does it include the stored-up potential value of your training and education? Is your native intelligence — or the guidance from your parents that helped you develop good attitudes toward work — a part of your "wealth"?

The problem of attempting to measure income is one of the main defects in an income tax. Of course, the Internal Revenue Service loves this particular defect, because it can make all kinds of complex and obscure rules to audit the traveling salesman, the mom-and-pop grocery, and the coal miner. Farmers have a really good thing going for them. Most farmers can hide the distinction between family consumption and business expenses without even thinking about it. The I.R.S. has an entire special set of rules to audit farmers, most of whom don't have "income" at all.

If you try to picture someone's "income" as a river that is flowing across his property, you can see the analogy with the weekly paycheck. The river might flow at a rate of a thousand gallons per hour. Your paycheck might arrive at the rate of $300.00 per week. The income tax, however, is imposed on your annual income. The process of taking something that flows over time and lumping it into a fixed total at the end of a period of time is a major defect in the income tax. Should the tax be the same on someone who earns $300.00 per week for 52 weeks as for someone who only works for 13 weeks in the summer at $1200.00 per week and spends the winter on a Caribbean island? Their annual incomes are the same.

Many people believe that a person's "income" is somehow related to his standard of living. The argument is that "equity" requires that people who have a higher standard of living should pay more in taxes than people who have a lower standard of living. Take two people, however, who receive an equal amount of money on January 1st. Assume that one of them goes to Las Vegas and has a jolly good time eating and drinking, losing all his money at the tables, and enjoying live entertainment. Assume the second person takes the same amount of money and builds a school for orphans.

Aside from the fact that both started with the same amount of cash, and each chose to spend it voluntarily in different ways, what kind of argument can pretend that their standard of living is the same? Perhaps the benefactor of the orphans was a lonely old woman who lives in a one-room apartment with three cats. Perhaps the high-roller in Las Vegas is a blue-collar worker, dying of cancer, who took his entire pension benefit in a lump sum to enjoy it before he dies.

It is irrational to attempt to "measure" the amount people should pay in taxes according to sociological criteria. People who regularly put large amounts of their "income" or "wealth" into savings and investments help to create jobs and furnish modern tools and technology to workers, who then become more productive and earn higher wages. How does the concept of "income" or "wealth" fit the model of the high-roller in Las Vegas and the lonely old woman, who might in fact be a millionaire's widow? There is no justification for taxation according to "ability to pay" or "standard of living." All taxation is arbitrary and punitive.


A t the end of the 19th century, when the income tax was a major political issue because people (both old-rich and new "poor" immigrants) were envious of the successful businessmen, anybody could theoretically become a rags-to-riches Horatio Alger hero. This is no longer true — because of the income tax.

If a young man today tries to work his way through college, he has to watch the sticky fingers of government skim off the cream of his paycheck before he can pay his rent, buy his books, or pay his tuition. If he wants to save part of his money to invest in a business, or perhaps start a new one, his only funds available are those left after taxes. People with savings to invest who don't want the risks of starting their own business may invest in the financial markets, or the financial institutions; but any interest or dividends earned are reduced annually by the income tax, so they can't keep reinvesting to accumulate capital. Ask any accountant about compound interest: the difference is dramatic when you see the comparison between a tax-free investment and an investment with yearly taxes deducted!

On the other hand, some of America's upper-class or aristocratic families, whose grandfathers built their fortunes in the days before there was an income tax, enjoy a standard of living that our hypothetical young man could achieve only with a lot of lucky breaks and hard work. This is no reason, of course, to impose punishments on the people who already have property — we believe in the right to private property — but it is a compelling reason to abolish the discriminatory income tax that makes it almost impossible for most Americans today to accumulate any! All spending and taxation by government reduces capital formation and lowers the living standard of everyone, especially the weaker members of society.

If a majority feel anger or annoyance because some people receive welfare benefits from government, financed by income taxes according to the Marxist principle, "from each according to ability, to each according to need," they should look at the system of incentives as the welfare recipients see them. If someone on welfare decides to get a job and his employer deducts taxes, not only will he most likely lose his welfare benefits, but he will be surrendering part of his gross pay to the government for FICA and personal income taxes. In many cases, when he looks at the net benefit of working -vs- welfare, taking both the wages received and the welfare benefits lost, the effective tax rate on the first few thousand dollars of earned income is greater than 50 percent!

When you add to this disincentive the fact that unskilled workers often have to take unpleasant jobs, the reason why so many people choose a life of unemployment is not hard to understand. This is not to say that such people are making a happy choice, however, as the high incidence of alcoholism and drug abuse among the unemployed indicates. The taxation of "income" is just one more barrier to the development of a productive and meaningful life in our modern society.


T he modern income tax is supposed to be based on the taxpayer's "ability to pay." This is one reason why the rates are higher on larger incomes. The simple idea is that for a person whose "income" may be only a few dollars, one extra dollar is somehow more important than an extra dollar to a millionaire. Yet, it is impossible to compare the relative values of something like "one dollar" to two individuals in a purely abstract way. What if the poorer person is a Catholic monk, living in a monastery; what if the wealthier person is attempting to raise sufficient funds to pay for a kidney transplant for his child? There is no system for making value judgements about different increments of "income" to different people — so it is just a manifestation of hate and envy in our political system to tax different levels of "income" at different rates.

In the 1930s, when steep, progressive tax rates were imposed for the first time, politicians were using the spectre of evil businessmen as a scapegoat for the Depression. The slogan was "Soak the Rich." Most voters went along with the comedy, never dreaming that by the 1970s everybody above the poverty level would be paying "rich people's" tax rates. History records many cases like this, where the frog in the pot of tepid water that slowly dies as the temperature rises was the same creature who turned on the gas in the first place. A new generation of American "frogs," however, can turn off the gas! The belief in "evil wealth" is just so much fuel for envy.

The different tax rates for different amounts of "income" are also the fundamental reason why the tax code is so complex that most people need help to prepare their tax returns. Businessmen have to pay for professional accountants and tax lawyers, just to comply with a law that confiscates their working capital if they pay some invoices in January instead of December. Why do some wealthy physicians and attorneys take long vacations in December, or ask their clients to pay them in January, or tell their stockbrokers to sell things that have gone down in value around Christmas time? How much inefficient or irrational economic activity is based on the absurdities of the tax code?

Remember the analogy of the river? With a progressive income tax, it makes a big difference from one year to the next how you can make that river appear to flow, even though in reality it may not change at all. When tax rates go up or down, people jump through hoops to get their incomes or deductions timed in the best year. If "tax indexing" is introduced, supposedly to correct "bracket creep" (another vicious consequence of different rates for different nominal incomes) the game of switching the timing of your income will become even more widespread. Accountants and lawyers — and I.R.S. investigators — will have more work to do, and will enjoy a larger share of everyone else's productivity.

Best of all, from the standpoint of the totalitarians in the Federal government, is the complexity of the tax code — due entirely to their power to define "income" in an arbitrary manner. Economists cannot even identify income rigorously; accountants cannot even measure "income" except by arbitrary conventions, and they can interpret it in different ways at different times. When both the concept and the definition are vague and arbitrary, the Rule of Law vanishes! How can you obey a law when you cannot understand it? The courts tell you that ignorance of the law is no excuse. Catch 22.

Many people who suffer from high taxation become hostile to others in the economy because there is a perception that others aren't paying their "fair share." How often have you heard the self-deception, "I wouldn't mind paying my taxes if everybody else paid their fair share." Nobody knows what the "fair share" of others might be, but because their own taxes are too high, instead of getting angry at Congress or the I.R.S., their political energy is diffused at some abstract "others" who aren't "paying their fair share." This is the kind of mass confusion that governments have always used to prevent revolutions! Make the peasants suspicious of each other! When one of the peasants is cut from the mob and burned at the stake, all of the rest of them will cheer!

Are you tired of being played for a sucker by this game of secret law? Are you tired of knowing that if "they" really want to "get you," no matter whether it is for your unpopular opinions or your race or religion, all "they" have to do is look up your number and call you in for an audit! Worst of all, we live in constant fear of "them" — as if we had no rights! The Sixteenth Amendment is a contradiction to the rest of the Constitution, and a contradiction in our fundamental law will lead inexorably to its complete destruction.

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