“Render unto Caesar, the things that are Caesar’s…” ─ so taught Jesus Christ in the gospels. Perhaps nothing brings out more ire and anger in citizens than the subject of paying taxes, and
in most cases, not without good reason. Most thoughtful citizens realize that taxes are necessary if a civil society is to be maintained and the general welfare of a nation to be provided for, so they are happily willing to support a government that fulfills those needs. The rub comes when that government exceeds its authority in the levying of taxes so that the burden of bearing those costs is inequitable, or the citizens see that the monies taken from them are foolishly wasted by those in the government who have the fiduciary responsibility over the disbursement of those funds.
In considering the subject of taxation there are several matters that come into play. First is the fact that, as the Biblical quote in my opening sentence intimates, government has the right to expect to be supported by its citizens, and citizens hence have the moral responsibility to contribute to the functioning of their government. Second is the consideration as to what are the most effective kinds of taxes (since there are several kinds) that the government should use in order to fulfill its obligations. Third is the question of once the kind of tax to levy is decided, upon whom should the taxes be levied, and fourth, in what proportion should they fall upon those who are to pay them? Finally, that which will affect the amount of taxes needed is the all-important question of what are the legitimate purposes for collecting these taxes? These five matters will serve as the platform for the remainder of this essay and the one to follow, while subsequent ones will deal more with the history of taxation in our nation and delve more into the merits of our current tax system (or as I intend to show, the lack of merit) and explain the alternative of what I feel is the answer to our tax problem as well as our economic threat.
Government is necessary for the preservation of a civil society, and in order to do that funds must be collected. This has been the case from the very first government that mankind formed. So if we wish to reap the benefits of a government, then we are obligated to support it financially. On this point I see no argument or disagreement.
Down through history governments have used various methods of taxation. In the oppressive empires of antiquity, much of their revenue was raised though the extracting of “tribute” from nations they had conquered as well as through trade and fees for goods passing through their territory. There was also the rampant corruption in the Roman empire where the basic means of taxation was the bidding out to “contractors” the responsibility to raise a set amount of money from an assigned region and those individuals then being given free reign (with the backing of the Roman army) to raise whatever amounts they could extort from the people. After the assigned funds were turned over to the Roman government, these individuals were allowed to keep the balance of the amounts they had extorted from the people – obviously a system rife with corruption, causing much hatred among the citizens.
In more modern times (by which I mean the past two or three centuries) the methods of taxation have been more refined, but there still remains what many feel to be that old feeling of oppression, extortion and corruption. One primary method of taxation early on in this time period was the tariff – the imposing of a tax on imports and exports of goods from and to other nations. Although this method was widely in use at the time of founding of our nation, it was and continues to be unto this day a sore point between nations. It was the British export tariffs upon products such as tea shipped to America that helped to spark the American Revolution (and there were others in addition to this one).
The conflict arises whenever one nation raises its tariffs on the imports of another nation, obviously making those products more expensive in order to protect industries within their country that may produce similar products. This of course will cause the exporting nation to retaliate by raising their tariffs on imports from that country, and a full-blown trade war will erupt in which neither nation wins and revenues in both governments will decline. In our current climate, there is much debate over the notion of “free trade”, especially over the NAFTA treaty. America espouses this concept of free trade, and yet the trading nations with whom we trade the most do not reciprocate, thus putting American products at a decided disadvantage in those countries. The dilemma we now face is that due to a failure of the government to bring adequate pressure on these nations, allowing this trade inequity to “flow along”, our trade deficit and dependence upon the imports from these other countries is now at the point where we have lost most, if not all, leverage to use against these nations to entice them to relax their tariffs on our imports and to “play fair” in the matter of global trade. Tariffs have today become an economic weapon that one nation can use against another in an attempt to affect the economic stability of that nation and therefore they should be recognized as being just that – a weapon aimed at wounding the productivity of our economy.
Another very ancient tax which was used in the early part of our nation but has been discarded is what is properly called the “capitation” tax (also known as a “poll” or “head” tax). This tax is a flat amount levied upon individuals. If you are a student of the Bible you will be familiar with this tax that was imposed upon the first-born males of the nation of Israel, referred to in Scripture as the “redemption price of the first born”, an example of which can be found in the book of Numbers 3:44-47. Typically a capitation tax is the same for everyone upon whom it is levied, regardless of the variance among those taxed in regards to their wealth or ability to pay. A capitation tax can be levied upon every citizen or only upon a designated group within the nation. In early America, this would have been levied upon only men who were property owners and therefore eligible to vote in elections (hence the application of the term “poll” tax to this form of revenue). It was subsequently eliminated in our nation as it was used in the ante-bellum South as a means to prevent the newly liberated slaves from exercising their rights to vote. Surprisingly, it wasn’t until 1964 when the twenty-fourth amendment was ratified that the use of the poll tax, property ownership, or the payment of any other kind of tax was prohibited from being a prerequisite to having the right to vote.
Property taxes are another form that has been in use for centuries. This has taken the form of either a direct tax upon the valuation of the property (which we still have today on state and local levels), or a tax upon what Adam Smith wrote about in The Wealth of Nations as a tax upon the rental income of property (which in essence becomes a tax upon income). In most localities across our nation this is the primary method for funding our public education institutions. The problem of arriving at a fair evaluation of a piece of property has been at the heart of dispute over this form of tax from the very beginning of its introduction. The issue that is at the core of its injustice, however, is not the methodology of determining the taxable value of a particular property, but rather its intrusion upon the right of individual property ownership by the government. Again, as I have written in previous essays, the individual right to property was a primary basis for our founders’ understanding of liberty and freedom and was therefore of the utmost importance for protection against government seizure. You think you own your home and property, even if it is completely paid off? Just try and not pay your property taxes and you will quickly learn that you do not own your property, but that the government has the right of claim over it for they will seize it for your failure to pay those taxes. Listen to this very charge made by the Anti-Federalists in Pennsylvania who issued a report once they lost the ratification vote in that state to ratify the Constitution (issued on December 18, 1787):
“The power of direct taxation will further apply to every individual, as congress may tax land, cattle, trades, occupations, etc. in any amount, and every object of internal taxation is of that nature, that however oppressive, the people will have but this alternative, except to pay the tax, or let their property be taken, for all resistance will be in vain. The standing army and select militia would enforce the collection” [emphasis added].
There are also various kinds of sales or consumption taxes that have been used down through the years. There is the common sales tax with which we are familiar that is levied at the retail level on products as a percentage of the value of the sale. This is a fairly straight-forward tax that you can readily see, as it appears on your sales receipt. There is also a tax that is being considered by President Obama’s administration and the Congress that is very insidious and invisible, called the Value Added Tax, or better known simply as the VAT tax.
A VAT tax is in principle a sales tax that is levied at every step of the production process. I’ll use the example of manufacturing a common number two lead pencil to illustrate just how insidious this tax is, as you will never know the true amount of tax included in the final price of the pencil. First a tree is harvested from a forest and sold to a lumber mill, and a tax is charged on that transaction. After the lumber is milled, it is sold to a middle-man who handles the supply of raw materials to a pencil manufacturer, and a tax is levied on that transaction. Of course, the charge made to this middle-man includes the cost of that initial tax charged to the lumber mill, so the value of the lumber now includes two taxes. The middle-man sells the wood to a pencil manufacturer, and yet another tax is added to that transaction. At this point, in this simplified example, there have already been three taxes added to the value of the lumber and not a single pencil has yet to have been made. Once the manufacturer completes the production of the pencils from the lumber it purchased, it may sell them to a wholesaler of office supplies, and you guessed it, another tax is included on that sale. On and on this process goes until it finally reaches the office supply store and you purchase a box of pencils and pay a final sales tax on the value of the pencils that will have hidden in it countless numbers of previous taxes. So as a result, you will never know just how much in taxes you are paying to the government, and even worse, you will never know the exact rate of taxation as the government can raise these rates which will then become buried in the cost of all of the products you purchase. Since this is a consumption tax, as Adam Smith pointed out, the burden of the entire tax system falls upon the consumer, and most heavily upon those least able to bear it.
An alternative to this is a consumption tax presently before Congress as H.R. 25, commonly referred to as the Fair Tax. This is not a VAT tax, but a sales tax levied on all products sold at the initial retail level, and unlike the VAT, it is not levied at any other level; thus you know exactly the amount of tax that you pay with each purchase. However, the key to this tax is that it is in place of all other taxes related to income and payroll – the VAT tax is in addition to your income and payroll taxes (i.e., Social Security and Medicare). As a result, the cost of all products will be less as they will not have all of these taxes rolled into them, and in the end, even with this consumption tax, you will pay about the same amount as you would have paid in our current market economy. Also, unlike any other sales-related kind of tax, a rebate on life-sustaining necessities will be made to all families so that unlike the VAT in particular, it will not adversely impact the lower income families among us on items necessary to the sustaining of life. However, I will have more to say on this in a later essay, but this will at least set forth the best alternative when it comes to consumption-styled taxes – especially since it is intended to replace all income-related taxes.
This brings us to the final tax for consideration, which is a tax upon income. What is it about the income tax that stirs such animosity among us? The answer is simple – it is a direct assault upon our property rights, which as I’ve said before, was sacrosanct in the eyes of our founders. To quote the catch line of a current commercial by a loan agency, “It’s my money and I want it now!” It’s our money and we want to keep it, as we worked for it, yet the government dictates to us just how much of those earnings it deems proper for us to retain. What is even more significant is that when an income tax was initially attempted, it was struck down by the Supreme Court as being unconstitutional. Hence, the only way it was able to be enacted was to modify the Constitution, which was done with the ratification of the sixteenth amendment. There is much I intend to go into on this specific tax since it is the most oppressive, unjust and economically-deadly of any tax that can be imposed upon a nation, so I will leave the topic of the income tax for that later discussion.
The power of taxation, how it is levied and upon what it is expended is, according to our forefathers, one of the most dangerous threats to liberty and freedom that can be placed in the hands of a government. This is why I wish to devote the next several essays in this new series to this all-important topic. In next week’s post we will take a look at the remaining matters mentioned in the beginning of this essay that were not covered in this one. I will close by leaving you with this warning written by the Anti-Federalist who used the pseudonym “Brutus”, which was part of an essay written in opposition to the ratification of the Constitution published on October 17, 1787:
“It” [i.e., the general legislature] “has authority to make laws which will affect the lives, the liberty and property of every man in the Unites States;….The legislative power is competent to lay taxes, duties, imposts, and excises ─ there is no limitation to this power, unless it be said that the clause which directs the use to which those taxes, and duties shall be applied, may be said to be a limitation: but this is no restriction of the power at all, for by this clause they are to be applied to pay the debts and provide for the common defense and general welfare of the United States; but the legislature…are the sole judges of what is necessary to provide for the common defense, and they only are 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 their pleasure; not only is the power to lay taxes unlimited, as to the amount they may require, but it is perfect and absolute to raise them in any mode they please….It is proper here to remark, that the authority to lay and collect taxes is the most important of any power that can be granted; it connects with it almost all other powers, or at least will in process of time raw all other after it; it is the great means of protection, security, and defense, in a good government, and the great engine of oppression and tyranny in a bad one” [emphasis added].
- Epaminondas
