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Advancing Austrian Economics, Liberty, and Peace

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The Income Tax: Root of All Evil (Continued)

CHAPTER V

The Revolution of 1913

THE CIVIL WAR income-tax law, or laws, underwent several changes; but each change specified the same terminal date, 1870. Political promises being what they are, the last law was continued until 1872. This adherence to a terminal date is worth noting; it is a left-handed admission that the taxation of incomes was generally held to be obnoxious, perhaps unconstitutional, and was tolerated only as a temporary necessity. It was a war measure. Several Congressmen, from time to time, offered bills for the resumption of these taxes, but their efforts died a-borning. Two generations had to come and go, and two depressions had to be suffered, before Americans were ready to accept complacently the confiscation of their property. A quick look at the economic causes of this moral deterioration is in order.

The period after the Civil War was characterized by the customary boom followed by the inevitable bust. War stimulates productive activity, and the habit carries over into the peacetime. Everybody keeps on being busy. And everybody keeps on buying because everybody has a lot of the bogus money issued by the government during the war; also, everybody has bonds which can be cashed in or borrowed upon. The boom is on.

The post-Civil War boom was accelerated by the promise of the West; the prairie was being penetrated by miles and miles of railroad. It seemed that prosperity not only was here to stay, but that it would be a constantly expanding prosperity. Men gambled on it. They speculated on the future; they bought pieces of the future in the form of land and industrial securities, and paid prices that were based on the belief that people would grow richer and richer, forevermore.

In 1873 the inevitable depression set in. A depression is a halting of production. Production stops when people cut down on their consumption. They are compelled to curtail because they burdened themselves with obligations during the boom and now they are unable to meet the interest payments. Values did not rise as fast as they had expected; mortgages and other debts hang heavy on their necks, and in an effort to save their original investment they cut down on their consumption. Cutting down on consumption means putting people out of jobs, and so the whole house of cards collapses. Only when the false values are liquidated, the mortgages wiped out, can there be a resumption of production. The depression is a period of deflation following a period of inflation.

But hungry people are impatient. They cannot wait for deflation to wipe out the debris of their own orgy. A much quicker cure is called for, and the medicine that promises a quick cure is money. During the war, it was reasoned, the government printed greenbacks and there was prosperity; why not print more greenbacks and force prosperity to come back? And so, during the depression of 1873-76, and for twenty years after, there was a loud clamor for greenbacks, plus silver money to supplement the scarce gold. This was the principal recipe of the social doctors of the times, a loud-mouthed lot who acquired the generic name of Populists.

These do-gooders were most vocal in the new West, where the "hard times" hit hardest and held on for the longest time. The story of this area is the story of the railroads. In the light of later experience, we can describe the railroad expansion of the 1880’s as a make-work program, fostered by government subsidies and bounties. There was no economic need for most of these railroads. They were not built to serve an existing population, but to attract population from the eastern seaboard and from Europe. They amounted to a suburban land promotion. Even before they were built, when the companies had only pieces of paper giving them franchise rights, the bonanza that awaited prospective "empire builders" was advertised. All one needed to do to cash in on this promise was to buy a piece of land from the railroad companies, land which they had got for nothing from the government and which was still worthless and would continue to be worthless until settlers made them productive. With a gleam in their eyes, the settlers paid the companies’ price by pledging their future earnings on the land; they mortgaged themselves to the hilt. Of course, their earnings would prove for a long time to be insufficient to meet their living expenses as well as the interest on the mortgages. Add to this sad picture the high freight rates which the monopolistic railroads charged them, and you have a panorama of gloom.

The plight of these farmers was made worse by the protective-tariff policy of the government. The best they could get for their products was the competitive world price, while the manufactures they bought, from the East, were loaded down with duties. Next to their demand for more money, the Populists clamored for lower tariffs.

It is not difficult to see that the boom and the bust were stimulated, if not caused, by acts of government, aided and abetted by the natural cupidity of people. But a people who feel a sense of hurt are not likely to look for basic causes, and are surely not inclined to blame themselves. They must have a "villain" on whom to vent their spleen; just as a child is satisfied when the mother spanks the wall against which the child has struck its head.

So, during the latter part of the nineteenth century, Americans took to the class-war doctrine recently imported by the socialists; here was a plausible cause of all their misfortunes, a logical scapegoat for their dissatisfaction. And the words that hung on the lips of the country were "plutocracy" and "robber barons" and "bloated rich" and "money bags," with suitable overtones. Also, since the opulence of the country was concentrated in the East, sectionalism added fire to the class-war doctrine, and "Wall Street" became the ultimate cause of all the economic ills of the country.1

The socialists had also imported the idea of a graduated income tax. Their prophet had written that this is the ideal instrument for destroying the hated capitalistic system, and they were in duty bound to promote it. It took Americans a long time to see eye-to-eye with the socialists on this matter of abolishing capitalism, for the tradition of private property was too strongly imbedded in their culture; but the income tax appealed to them as a means of wreaking their vengeance on those they hated-that is, those who had more than they had. By 1891, the Populists, who had by that time coagulated into the People’s Party, included an income-tax plank in their platform; the Democratic Party later appropriated it.

Lots of learned treatises have been written on income taxation, and a wealth of erudition has been expended in its support. But when one looks to bottom causes one finds them quite simple:

Income taxation appeals to the governing class because in its everlasting urgency for power it needs money.

Income taxation appeals to the mass of people because it gives expression to their envy; it salves their sense of hurt.

The only beneficiaries of income taxation are the politicians, for it not only gives them the means by which they can increase their emoluments but it also enables them to improve their importance. The have-nots who support the politicians in the demand for income taxation do so only because they hate the haves; although they delude themselves with the thought that they might get some of the pelt the fact is that the taxing of incomes cannot in any way improve their economic condition. So that, the sum of all the arguments for income taxation comes to political ambition and the sin of covetousness.

In 1893 the country had a new depression and a new president. Grover Cleveland, though endowed with more integrity than the run-of-the-mill politician, nevertheless had to "do something" to satisfy the dissident elements. He asked Congress to lower tariffs and to make up this loss of government revenue with a tax on corporation incomes. Congress, heeding the screams of the Populists and the bombast of William Jennings Bryan, put through a bill calling for a two-percent tax on all incomes, with variations, and a deeper cut in tariffs than the president requested. This bill (which became law without Cleveland’s signature) was declared unconstitutional by the Supreme Court before it became effective. The arguments for and against the bill, and some comments by the Court, are worth noting in the light of our later experience. But we might digress for a moment to examine the use of a demand for tariff reduction to introduce income taxation.

A tariff duty is a tax on consumption, and it is a tax from which the protected manufacturers derive a profit. The Populists, representing areas that had no manufactures quite soundly denounced tariffs as an imposition on farmers and wage earners and as a special privilege conferred upon a small class in the East. The argument had too much weight to be easily ignored. Yet, the fact was that the government depended on tariffs for nearly half its revenue, and a cut in tariffs was a threat to the United States Treasury. For this argument the Populists were prepared with their cherished "soak the rich" proposal, the income tax. Hence, the bill of 1894 and the several income-tax bills introduced later, linked tariff reduction with income taxation. Not until the constitutional amendment was passed by Congress was the fiction dropped that tariff reduction and income taxation are related.

The Populists, as do all reformers, assumed that social good can be achieved through political action. They ignored the age-old fact that whenever the government does "good" it acts in the interests of some at the expense of others, meanwhile acquiring power for itself. The end product of government intervention in the economy of the country is more power for government. It never gives up power; it never abdicates.

Hence, the idea that the government would give up tariff revenue in exchange for income-tax revenue was contrary to all experience. It promised to make the swap, and perhaps its leaders believed the promise, but the nature of government is such that it cannot give up one power for another; not permanently, at any rate.

The historic fact is that tariffs rose higher than ever after income taxation was ultimately constitutionalized.2 The income tax so enriched the Treasury that the revenue from tariffs became unimportant, and the government could afford to give more and more protection to the manufacturers; not only did the government thus gain the political support of the manufacturers, but it also shared in their tariff-enlarged profits through the income tax. If the government did not have the income tax it could not have raised the tariffs so high as to make importations impossible except for luxury goods. For, in order to get revenue the government would have had to encourage importations by keeping tariffs low. It would have had to pursue a tariff-for-revenue policy rather than a protective policy. The effect of income taxation on tariffs can be seen when we reflect that in 1894 the government’s income from tariff duties amounted to 44 percent of its total revenues, while in 1950 less than 2 percent came from that source.

However, the Wilson tariff bill of 1894, with income-tax attachment, was passed. It was passed for two reasons: first, it reflected the growing "soak the rich" enthusiasm of Americans; second, it catered to the socialistic idea that was getting hold, namely, that the government is the ideal agency for the economic redemption of mankind. How much head- way this second notion had made can be guessed when one reads the following argument by Representative David De Armond, of Missouri:

"The passage of the [Wilson] bill will mark the dawn of a brighter day, with more sunshine, more of the songs of birds, more of that sweetest music, the laughter of children, well fed, well clothed, well housed. Can we doubt that in the bright, happier days to come, good, even-handed Democracy shall be triumphant? God hasten the era of equality in taxation and in opportunity. And God prosper the Wilson bill, the first leaf in the book of reform in taxation, the promise of a brightening future for those whose genius and labor create the wealth of the land, and whose courage and patriotism are the only sure bulwark and defense of the Republic."

The do-gooding promises of such bilge, with which the debate was liberally sprinkled, were not implemented with specific "social" legislation, the kind that came upon the country when income taxation attained fulfillment. But, they bespoke the secret desire for a golden calf to lead Americans to the promised land. They prepared the ground for Big Government.

It should be pointed out, however, that throughout the debate emphasis was placed on raising money only for the proper expense of government.3 None of the advocates of income taxation spoke of expanding the functions of government, and while the opposition mentioned "socialism" it seems doubtful that they had any idea of a New Deal. The American mind of the nineteenth century was incapable of comprehending paternalism, regulation, and control; it was too strongly rooted in the past for that. Even those who advocated the tax method of undermining private property were not aware of what they were doing, and would probably have stopped in their tracks if they could have foreseen the consequences of their proposal. It was not any urgency for Big Government-which they could not even have understood-that prompted them to advocate income taxation. It was simply an urgency to "soak the rich"-the very common sin of envy.

The debate is heavily spiced with the desire to pare down fortunes, and for further relish there was a generous dash of sectionalism. For the fortunes that irritated their envy were located in the East; they were after "foreigners," not neighbors. For example, Senator William A. Peffer, of Kansas, who, by the way, was even more "advanced" than the bill in that he advocated a graduated income tax, expostulated thus:

"The point to be made is that because wealth is accumulated in New York, and not because those men are more industrious than we are, not because they are wiser or better, but because they trade, because they buy and sell, because they deal in usury, because they reap in what they never earned, because they take in and live off what other men earn, they shall be exempt from taxation, and that we who are hewing wood and carrying water shall continue to bear the burdens of government."

William Jennings Bryan, of Nebraska, spoke for the impoverished West when he said:

"Gentlemen have denounced the income tax as class legislation because it will affect more people in one section of the country than in another. Because the wealth of the country is, to a large extent, centered in certain cities and states does not make a bill sectional which imposes a tax in proportion to wealth. If New York and Massachusetts pay more tax under this law than other states, it will be because they have more taxable incomes within their borders. And why should not those sections pay most which enjoy most?"

In reading these speeches one wonders whether there ever would have been an income tax in this country if the advocates of it could have held off until Chicago was able to stand up to New York, and Nebraska farmers, sporting limousines, became the envy of Boston workers. Even the opponents of the bill seemed little aware of the concentration of political power that income taxation would generate, and directed their arguments mostly to the principle of private property, to the unconstitutionality of the bill, to the doctrine of class legislation. Bourke Cockran, Representative from New York, almost touched on the vital subject when he said:

"…to persuade a majority to oppress a minority is not to serve the people but to injure them; it is not to vindicate popular power, but to discredit it; it is not to conserve free institutions, but to undermine republican government."

After the bill was passed, and it came to the Supreme Court, some references to the subject of individual rights and limited government were made; there seemed to be no awareness that income taxation might destroy the American tradition of freedom.4 Thus, Justice Field, in a brilliant argument supporting the majority opinion declaring the bill unconstitutional, quotes approvingly the point brought up by counsel:

"There is no such thing in the theory of our national government as unlimited power of taxation in Congress. There are limits of its powers arising out of the essential nature of all free governments; there are reservations of individual rights, without which society could not exist, and which are respected by every government. The right of taxation is subject to these limitations."

The seed of class hatred that had been planted during the Civil War proved fertile. Its sprout was merely stunted by the 1895 decision of the Supreme Court. In the years following, it continued to send forth shoots that circumvented the Constitution, for under the guise of "excise" taxation, levies were laid on some corporation incomes and on inheritances. The Spanish-American War created a climate favorable to these taxes, and the Supreme Court, in 1900, did some major logic-chopping to justify the legislation; in fact, the decision of 1900, which was a piece of legislation in itself, was of great help later to those who wanted general income taxation.

The drumfire of "soak the rich" was having its effect. Even the rich began to join in the chorus. The wealthy are of course no more motivated by principle than the poor; expediency and convenience shape the thoughts and guide the behavior of the millionaire as well as the worker’s. Even as "Park Avenue," in our times, mouths communistic phrases in order to appear "advanced," so in the early part of the century some of the wealthy assumed a "democratic" pose and spoke nice words about income taxation.5 Professors of economics would not be left behind; the "progressive" thing to do was to write erudite articles in support of ability-to-pay. The mob had captured the intelligentsia, even as it led the politicians; the aristocratic champion of the masses, Theodore Roosevelt, advocated progressive inheritance taxation in 1906, and in his 1908 message to Congress he urged an income tax.

When William Howard Taft became president, not only the Democrats but also an "insurgent" segment of the Republicans had been captured by the Populist philosophy, and the combination worked strenuously to put over the "great reform." As usual, an income-tax amendment to a tariff bill was proposed. Mr. Taft, a former judge, opposed this amendment because he was solicitous for the reputation of the Supreme Court, which would be compromised whether it upheld or reversed the decision of 1895. A political deal was put over; the tariff bill was passed with a rider taxing corporation incomes, and the opposition was promised a bill for a constitutional amendment. This promise was later kept by the Republican leadership, which was opposed to income taxation; they were sure that not enough states would ratify the bill. By 1913, forty-two states did ratify it, and the Sixteenth Amendment became part of the Constitution.

In name, it was a tax reform. In point of fact, it was a revolution.

For the Sixteenth Amendment corroded the American concept of natural rights; ultimately reduced the American citizen to a status of subject, so much so that he is not aware of it; enhanced Executive power to the point of reducing Congress to innocuity; and enabled the central government to bribe the states, once independent units, into subservience. No kingship in the history of the world ever exercised more power than our Presidency, or had more of the people’s wealth at its disposal. We have retained the forms and phrases of a republic, but in reality we are living under an oligarchy, not of courtesans, but of bureaucrats.

It had to come to that. The theory of republican government is that sovereignty resides in the citizen, who lends it to his elected representative for a specified time. But a people whose wealth is siphoned into the coffers of its government is in no position to stand up to it; with its wealth goes its sovereignty, its sense of dignity. People still vote, of course, but their judgment in the ballot booth is unduly influenced by handouts from their government, whether these be in the form of "relief," parity prices, or orders for battleships. Though it is not exactly an over-the-counter transaction, the citizen’s conscience is bought. Nor are voters immune to the propaganda issued by the bureaucrats, in their own behalf, and paid for by the voters themselves.

With America’s immunity of property went the immunity of body. Notice that Mr. Lincoln had great difficulty in enforcing a moderate form of conscription, even in wartime; now we have peacetime conscription, apparently as a permanent policy. Mr. Lincoln had difficulty with his draft because he did not have the wherewithal to hire an army of enforcement agents. Thanks to the income tax, our present government is not so handicapped. Resistance is so dangerous that we have made a virtue of compliance; the conscript army is described as a "democratic" army, and the conscientious objector is often looked down upon as little better than a traitor. So completely have we become adjusted to this detestable practice of the Czars, that every mother is reconciled to the fact that her newborn son will be a soldier if, unfortunately, he grows up sound of mind and body.

While we are on this subject of immunity of the body, we should mention the fact that though we long ago abolished debtors’ prisons, we do have prisons for those who violate the income-tax laws. We can cheat one another with impunity, but not the government. So thorough and so ruthless is the machinery of tax collections that it is used to catch and incarcerate suspected criminals against whom legal evidence of criminality cannot be adduced. Professional gamblers, hoodlums, and racketeers of all sorts, aware of the swift and certain punishment dealt out by the minions of the income-tax law, are scrupulous in the making out of their tax reports. Thus, the Sixteenth Amendment, enacted to increase the government’s revenues, has spawned another police department, another means of forcing the citizen into line.

The third great immunity is that of the mind, the freedom to think as one wishes. The impairment of this immunity is not easy to detect, for the operation can be conducted in such a way that the victim is never aware of it. It is necessary to look at the methods employed by the government to shape thought, to know that the shaping is being done; when the job is completed it takes a keen observer to realize that people think differently from the way they used to think.

Thus, the farmer who receives checks for not planting does not realize that his grandfather would have thought the practice immoral; he accepts the taking of gratuities as the regular order of things, as quite proper, because government propaganda has got him into that frame of mind. Free school lunches do not strike the modern mother as an insult, as suggesting that she is unable and unwilling to carry out the responsibility of motherhood; the convenience of free lunches, plus the saving of expense, plus the government’s leaflets have changed her way of thinking. And so with every activity of government turned Santa Claus by the income tax: a mass of propaganda introduces the new practice and more propaganda justifies it, until the people think as the government wants them to think. Free judgment becomes next to impossible.

Not content with direct propaganda, the opulent government goes in for shaping the mind of the future by invading the educational machinery. In this it is aided by the very operation of the income tax. The rich cannot be as generous with their contributions to the colleges as they used to be, for the government has the money that they might have given. So the government comes to the rescue of these institutions with grants. It cannot be said with certainty that the government determines the curricula of the colleges as a condition of the grants. But the generosity cannot fail to impress the professors, particularly since the professors have learned to look forward to jobs in the ever-growing bureaucracy.

It is interesting to note that in nearly all the economics courses it is taught that the income tax is the proper instrument for the regulation of the country’s economy; that private property is not an inalienable right (in fact, there are no inalienable rights); that the economic ills of the country are traceable to the remnants of free enterprise; that the economy of the nation can be sound only when the government manages prices, controls wages, and regulates operations. This was not taught in the colleges before 1913. Is there a relationship between the results of the income tax and the thinking of the professors?

There is now a strong movement in this country to bring the public-school system under federal domination. The movement could not have been thought of before the government had the means for carrying out the idea; that is, before income taxation. The question is, have those who plug for nationalization of the schools come to the idea by independent thought, or have they been influenced by the bureaucrats who see in nationalization a wider opportunity for themselves? We must lean to the latter conclusion, because among the leaders of the movement are many bureaucrats. However, if the movement is successful, if the schools are brought under the watching eye of the federal government, it is a certainty that the curriculum will conform to the ideals of Big Government. The child’s mind will never be exposed to the idea that the individual is the one big thing in the world, that he has rights which come from a higher source than the bureaucracy.

Thus, the immunities of property, body and mind have been undermined by the Sixteenth Amendment. The freedoms won by Americans in 1776 were lost in the revolution of 1913.

CHAPTER VI

Soak the Poor

"FROM ANY source derived" includes wages. To be sure, the original Populists, and the aping Democrats and Republicans, to say nothing of the conscious Socialists, little thought that their income-tax gadget would ever be used to "soak the poor." It was an instrument, they thought, that could lend itself to no other purpose than to expropriate the rich in favor of the poor. How the poor would benefit from the expropriation, they did not explain; their intense hatred of the rich conveniently filled this vacuum in their argument. Their passion blinded them to the fact that this "soak the rich" law would enable the government to filch the pay envelope.

The class-war doctrine is most vicious not in that it sets man against man, producer against producer, but in that it diverts the attention of the contestants from their common enemy, the State. Men live by production, but the State lives by appropriation. While the haves and the have-nots struggle over the division of existing wealth, it is the business of the State to improve itself at the expense of both; it picks up the marbles while the boys are fighting. That has been the story of men in organized society since the beginning. That this lesson of history should have escaped the reformers of the nineteenth century, when the habit of freedom was still strong in America, can be easily understood; what is not easily explained is the acceptance of the doctrine of benevolent government in our day, when all the evidence to the contrary is before our eyes.

However, one good "reason" followed another for making better use of the Sixteenth Amendment. After 1913, the government, which for over a century had managed to get along without income taxation, felt a continuing need for more funds.1 The income-tax rates kept climbing, and the exemptions kept declining; the mesh of the dragnet was made finer and finer so that more fish could be caught. At first it was the incomes of corporations, then of rich citizens, then of well-provided widows and opulent workers, and finally the wealth of housemaids and the tips of waitresses.

This is all in line with the ability-to-pay doctrine. The poor, simply because there are more of them, have more ability to pay than the rich. The national pay envelope contains more money than the combined treasuries of all the corporations of the country. The government could not for long overlook this rich mine. Political considerations however, made the tapping of the pay envelope difficult. The wage earners have votes, many votes, and in order not to alienate these votes, it was necessary to devise some means for making the taxation of their incomes palatable. They had to be lulled into acceptance of "soak the poor."

The drug that was concocted for this purpose was "social security." The worker was told that he was not paying an income tax when his pay envelope was opened and robbed; he was simply making a "contribution" to "insurance" against the inevitable disabilities of old age. He would get it all back, when he could no longer work, and with a profit.

This is sheer fraud, as can be readily seen when comparison between social security and legitimate insurance is made. When you pay a premium on an insurance policy, the company keeps part of it in reserve. The amount thus set aside is based on actuarial experience; the company knows from long study how much money it must keep on hand to meet probable claims. Most of your premium is invested in productive business, and out of the earnings from such investment the company pays its running expenses and builds up a surplus to meet unexpected strains; or it pays the policy holders a share of this extra income, in dividends. Without going into the intricate details of the insurance business, the guiding principle is that benefits are paid out of the reserve or the company’s earnings from investments.

Is that what happens to your "contribution" to social security? Not a bit of it.

Every cent taken from wages is thrown into the till of the United States Treasury, and is spent for anything the government decides upon. So, too, are the "contributions" from the employer. That is to say, social-security taxes are taxes, pure and simple; they are "forced dues and charges" levied by the sovereign on his subjects for the expenses of state. None of the money is held in reserve, none of it is invested in business. All is spent, and it is spent long before the "insured" is entitled to benefits.

To give some plausibility to the "insurance" advertisement, the government sets up a so-called reserve fund. In place of the money it collects, it piles up its own bonds, or I.O.U.’s, in an amount equal to the collections. The interest on these bonds, it says, will be adequate to meet the old-age obligations when due. But the interest on these bonds is paid out of what it collects in taxes; where else can the government get money? Since the so-called premiums are only taxes, and since the benefit payments are also taxes, the operation is the same as if an insurance company used up its premium collections in salaries and cocktail parties and then paid out benefits from new premiums. For doing that, the directors of the company can be sent to jail. However, the laws made for ordinary citizens are somewhat different from the laws made for public officials.

One of the arguments which helped to sell social security is that the "contributor" will not be dependent on his children for a livelihood when he can no longer work. Let’s see if that is true. We must keep in mind that taxes are part of production; they are levied on what is being produced currently, not in the past. The payments to the nonproductive aged therefore come from what the government collects from those who are producing, their children. The government cannot get the money from anybody else. So that, in effect, the children are supporting their parents, collectively and without love.

The swindle is further compounded by the promise of something-for-nothing. The worker is told that his employer, the "exploiter," pays part of the premium, and is in effect compelled to make a contribution to old-age benefits. The fact is, as every schoolboy should know, that the employer must include in his expenses what he is compelled to "contribute." This expense shows up in the price of his goods, and the wage earner, as consumer, actually pays it. There is a similarity in this scheme with the shell game at the county fair.

The more we look into this offspring of the Sixteenth Amendment the more we are astounded by its fraudulent character. Take the matter of the bonds in the reserve fund.   The government can issue money against them-that is,   it can "buy" them with printed money when it needs money to pay old-age benefits; that is part of the law. Or, if the government sells the bonds to private persons, or to the banks, the buyers can borrow against them. In either case, new money comes into the market, lowering the value of all the money in existence. That is inflation. Now, the money taken from the worker’s pay envelope is worth more, will buy more goods, than the money he will get when he is old, simply because these bonds are in existence. This social-security scheme was started in 1937. One does not have to be an economist to know that in 1937 the dollar bought more bread and shoes than it does in 1954. The man who in 1954 begins drawing old-age benefits gets dollars that will fetch him less of the things he needs than the dollars he was compelled to "contribute" in 1937 and during the years that followed.

When the law was put into effect, the social-security doctors figured out that the fund will have to reach fifty billions of dollars before the interest on the bonds will be enough to pay the stipulated benefits to all who are entitled to it. That is, if the stipulated benefits are not increased. However, for political reasons there have been changes in both the benefits and the number of people who have been forced into the scheme. The "premiums" have also been raised. These changes have been made under the name of "insurance," but the plain fact is that the government made them in order to increase its spendable funds. It wanted more taxes, and it dipped further into the pay envelope; that is the real purpose of the social-security laws.2

At this writing, the fictitious reserve fund has accumulated fifteen billions in bonds. Already some economists are beginning to wonder how the government will be able to pay benefits to all those who during the past sixteen years have been making "contributions" when they will have reached the age of sixty-five. Figurers have shown that the interest will not be sufficient to keep the aged barely alive, if they have to depend on these stipends; and under the law they are deprived of these stipends if they earn more than $75 a month extra. This is the answer:

The government will meet its obligations by handing out brand-new printed dollars, with declining purchasing power, and the old folks will have to depend on what support they can beg from their tax-ridden children.

This book deals with income taxation, not with social security, which needs a book in itself. But we started out with the purpose of showing how the Sixteenth Amendment changed our country economically, politically, and morally, and there is no better example of this change than the operation of the social-security branch of income taxation and its effects on the character of the nation.

Despite the fact that social security is a fraud in every respect, there are many who, ignoring the evidence, support it because "we must not let the old folks suffer destitution." This implies that before 1937 it was habitual for children to cast their nonproductive parents into the gutter. There is no evidence for that, and there are no records supporting the implication that all over sixty-five regularly died of hunger. The present crop of children are just as considerate of their old folks as were the pre-1937 vintage, and it is a certainty that if their envelopes were not tapped they would be in better position to show their filial devotion. Besides, if the government did not take so much of our earnings, we would be better able to save for our later days.

The fact is, there is no such thing as social security; only the individual grows old and is in need. Society is never in want and never grows old, simply because society is not a person. Security against the exigencies of old age has always been a problem of life, and each person in his own way has tried to solve it. Paying up the mortgage on the old home so that one would always have a roof over one’s head was one way; laying up a nest egg was another; annuity insurance is the most recent form of security.

These methods of taking care of oneself through thrift, however, call for self-reliance, and that is exactly what the advocates of social security would destroy. It is contrary to the whole philosophy of socialism. If the individual is allowed to shift for himself, there is no need for the services of the self-anointed do-gooders. Hence it is necessary to develop a slave psychology, a feeling of helpless dependence on the group. If this calls for the use of police power-and it always does-so much the better; that means the organization of a bureaucracy with a vested interest in continuing poverty.

Lurking in the background of social-security thinking is a concept of organized society that is gall and wormwood to fundamental Americanism. It is the idea that in the nature of things some men are destined to rule and others to obey. As a matter of fact, social-security advocates must take resort in the caste system of society to support their "insurance" scheme. They maintain that social security is necessary because most wage earners are incontinent and must be secured against their own weakness. Who is best qualified to look after them? Why, those who have been anointed with the proper college degrees and are crowned with the power of the State.

It was exactly this father-child concept of society that Bismarck held, and for that very reason he took to social security. In his political philosophy it was axiomatic that the Junker class was ordained by God to rule over Germany. As a correlative, it was an obligation of that class to look after the welfare of the ruled.3

In a feudal society, where the economy is almost wholly agricultural and people do not move from place to place, it was quite simple for the ruling lord to see that his sick and old tenants were provided for. But this direct relationship between ruler and ruled could not be maintained in an industrial economy, and in Bismarck’s time, industry was upsetting the comfortable feudal system. Social security came to his rescue; it was just what he needed to make his feudal concept of government work.

If anybody could make social security work, it would have been the Junkers. They were by tradition and economic independence free from the petty temptations of office; they were not beholden to an electorate for either their income or their position. And yet, they were unable to build a healthy society upon social security.

The reason for the failure of social security in Germany, and wherever else it has been tried, is psychological, not political. When the individual is relieved of the obligation of self-respect, he acquires the habits of helplessness; he is inclined to retreat to the security of the prenatal state. The more he is taken care of the more he wants care.

In the past twenty years, thanks to the prevailing social-security philosophy, it has become a habit of mind with American youth to look upon government as its permanent guardian; the idea that one is responsible for oneself is sneered at as "reaction." It is nearly impossible to convince a young man born after 1920 that to accept a government handout is degrading-or that the whole social-security business is a fraud.

There are some advocates of social security who maintain that it can be divorced from politics and run on sound insurance principles. It can, but not by the government; that, however, is not what is meant. It is assumed that the government can run an honest insurance business, sticking very close to actuarial figures in determining its policy payments. But how can a government business be rid of politics? Especially a government which rests on popular suffrage?

Any attempt to limit security payments by actuarial figures would raise a howl of protest, a howl that would be recorded at the next election. The politicians have convinced the American citizen that the government owes him a living, as a matter of "right," and what is easier than to ask for more? And the aspirant for office would have to be much above the average if he did not promise more. Were he to tell the citizen that the whole thing is a fraud, that only a private insurance company could manage the business on a sound basis, he would be inviting defeat at the polls.

In Germany, the social-security philosophy of government led to that moral decadence which facilitated the advent of Hitler. In England, it made a once-proud people into a nation of panhandlers. What will it do to America?

In 1943, taking advantage of the war, the federal government put further pressure on those of modest incomes; it enacted a law requiring employers to deduct twenty percent from the earner’s pay envelope, or check, for the government’s account. The government was spending money so fast that it could not wait until the end of the year for collections. It had to have its cut of income even before the earner saw it. In line with this urgency, it required corporations and business and professional men to pay every quarter, in advance, an estimated amount of their earnings.

Measures instituted by government during war have a way of perpetuating themselves during peacetime. Government is incapable of relinquishing powers. And so, the withholding and the pay-as-you-go taxes are still in force and will continue. And, of course, government will find good reason for spending money as fast as it comes in, or faster. Despite its monstrous take from production, and its means for expediting collections, its expenses exceed income, and the excess is annually taken care of by what is known as "deficit financing." This, as every spendthrift knows, is borrowing against expected income; it is borrowing against the future. But while the private spendthrift is held in leash by the threat of bankruptcy, government is unhampered by any such fear; it can print money or something equivalent to money, and compel citizens and banks to accept this paper in payment for its debts; it can rob its subjects by the trick of inflation, and thus make up its overspending.

The real reason for withholding taxes is the unwillingness of workers to share their incomes with the government and the consequent difficulties of collection. To overcome this handicap, the government has simply impressed employers into its service as involuntary and unpaid tax collectors. It is a form of conscription. Disregarding the right of privacy, which is an essential of liberty, the government’s agents may, under the law, invade the employer’s office, demand his accounts, and punish him for any infraction which they believe he has committed; they can impound his property and inflict a penalty for not having collected taxes for the government.

This violation of our vaunted rights was highlighted by Miss Vivien Kellems, a Connecticut manufacturer, several years ago. To test the constitutionality of the law, Miss Kellems refused to collect these taxes and notified the government of her intention. She asked that she be indicted so that the matter could be brought to court. At the same time, she instructed her employees to pay their taxes regularly, helped them compute the amounts, and saw to it that they had proof of payment. The government refused to indict her. Rather, its agents, without court order (the government is not hampered by such formalities), impounded her bank account and demanded a penalty from her for not collecting taxes which had been paid. The only thing she could do under the circumstances was to sue the government for recovery of her money. In this she was successful. But the matter of constitutionality was assiduously avoided by the government’s attorneys, by legal tricks, and she was never able to get to it. Laws are made for citizens, not the government, to obey.

There is grave question as to the constitutionality of the withholding taxes. But that is not a point of consequence; the Constitution has often proved itself amenable to political considerations. The main point is that the Sixteenth Amendment has widened the area of government power, and as a consequence has reduced the area of liberty.


  CHAPTER VII

Corruption and Corruption

"The imposition of the [income] tax will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of officials with inquisitorial powers. It will be a step toward centralization…. It breaks another canon of taxation in that it is expensive in its collection and cannot be fairly imposed;… and, finally, it is contrary to the traditions and principles of republican government." -REPRESENTATIVE ROBERT ADAMS, January 26, 1894.

THE WORD "corruption," in American usage, suggests the use of office for the betterment of the politician. The word has other meanings. The fact that this political meaning comes to mind first, indicates that the practice is common. Is it because the men we put in office are of particularly low character, innately, that political corruption is so common, or is it because the opportunities to better one’s circumstances are so inviting in public office? Since in our form of government the officials are not born into it, but are drawn from private life, we must conclude that they are no worse and no better than the rest of us, and that their moral deterioration results from the temptations political power generates. Therefore, the more political power the more corruption. And political power concerned directly with the nation’s wealth contains the most corruptive possibilities.

That corruption in the Internal Revenue Bureau runs high needs no proof. It would be easy to fill up many pages with "sensational" stuff by merely recounting what has appeared in the public press, even in the last few years. But that would be like serving up a full course of filth, disgusting and hardly illuminating. It is now part of American folklore that agents of the Internal Revenue Bureau have been amenable to bribery, that "pull" has played a part in the adjustment of disputed tax returns, that cases against tax dodgers have been quashed by higher-ups after field agents have conscientiously worked them up. The Bureau itself has made some disclosures of such malpractice, and the opposition party, always mindful of a "corruption" issue for the coming election, has made much of what it could dig up.

It would be miraculous if things were otherwise. The Internal Revenue Bureau is charged with the task of enforcing an immoral law, a law that violates the principle of private property. The taxpayer, even though he prates about his willingness to pay his "just share" of government expenses, always finds his "just share" unjust. And so it is. Even the doctrinaire socialist, while decrying the iniquity of private property, resents being deprived of his own; after all, the socialist is a human. It is written into our consciousness that "mine is mine," and all the tomes in support of income taxation cannot wipe out that thought.

The Internal Revenue Bureau quite sensibly takes the view that every one of us is a potential lawbreaker, as far as the income-tax law is concerned. To approach its task with any other point of view would undermine its effectiveness. It has a war against society on its hands, and to win that war it must make use of the artifices of war, such as espionage, deception, and force. Society, on the other hand, though necessarily on the defensive, is not entirely helpless. It knows that the weakness of the Internal Revenue Bureau is the fact that its operatives are also human. They too are always on the lookout for an easy dollar. Thus, the natural inclination of the agent blends with the natural inclination of the taxpayer to form a setting for the circumvention of the unnatural law. Why expect anything else? If this setting produces corruption, we must look to the law, not to the human beings involved, for cause.

Aiding the agent in his collusion with the taxpayer is the disparity of numbers in this struggle; the potential lawbreakers are entirely too numerous for the handful of collectors. If the number of enforcement agents were to be increased to a proper balance, the cost would eat into the "profits" of the operation. For political reasons, it is necessary for the IRB to show that the cost of collection is little, compared to the amount collected. Knowing this, and knowing also that his usefulness to the Bureau is measured by the amount of the collections he is able to effect, the agent is inclined to settle a disputed tax case; if, incidentally, the settlement is topped with a clandestine gratuity, so much the better. One senator is currently making a name for himself by bringing to light settlements amounting to as little as a few cents on the dollar, when the taxpayer, although admitting his indebtedness to the government, proves he is virtually bankrupt. The Bureau’s answer is that "something is better than nothing," and the senator, unable to prove what he obviously suspects, must accept that sensible answer.

It is a certainty that the wage earner cannot be a party to such corruption; not that he is above it, but that he lacks opportunity; what is taken from his envelope is beyond settlement. Besides, what can he offer in the way of a bribe? Only the taxpayer in the higher brackets is in position to "do business" with officials. The "business" is aided by the complexities in the laws designed to tap their incomes. And these complexities, which result in interpretations, which encourage corruption, are unavoidable.

All taxes come from production. A tax law that stops production is self-defeating. Hence, in framing the statute the government must try to get all that the traffic will bear without stopping the traffic. The producer must be allowed to keep enough of his returns so that he will be able to continue to operate; the victim must not be strangulated. This presents a difficult problem in lawmaking, especially when the victim is a large and complicated business; or when the law seeks to cover every contingency in all the industries that make up the complicated national economy. The lawmakers must overlook something; they cannot anticipate every new scheme that man, in his desire to get along in the world, will think up. Therefore, "loopholes" in the law show up, and sometimes these loopholes are deliberately put into the law at the behest of some important pressure group.1

The ingenious entrepreneur, trying to "beat the rap," will take advantage of the clauses in the law which were intended only to permit him to stay in business, after taxes. With the help of expert accountants, he finds ways of squeezing an extra dollar through the "loopholes," or discovers a "loophole" not intended by the lawmakers. But here he may come into conflict with the government’s agent, whose opinion on what are legitimate expenses of business may differ from his. Was too much deducted for depreciation? Was the inventory taken at true value, and what is true value? How about those large expense accounts, that costly public-relations program? Are they necessary to the conduct of the business? The agent says this, the taxpayer says that, and thus we have the makings of a costly lawsuit. The natural inclination of the taxpayer is to seek some other way out, and sometimes the agent is quite amenable to "reason." The corruption is written into the law.

However, if corruption were limited to the mere giving or taking of bribes, direct and indirect, we could write it off as of secondary importance; it is simply the inevitable consequence incident to the operation of an immoral law. Of far greater concern is the use of income taxation to undermine the principles of republican government and to make a mockery of our tradition of freedom.

In 1931-that was before the arrogance of federal power had reached the point to which the administration of Franklin D. Roosevelt ultimately brought it-the infamous case of William H. Malone began. This man, who ran for Governor of Illinois on the Republican ticket in 1932, had been Chairman of the Illinois Tax Commission. In that position he had offended the Pullman Company and the Chicago Traction Lines; that is, he had made decisions unfavorable to the tax claims of these companies. Their resentment flowered into the passion of revenge. Somehow, the passion found expression in a case against Malone, instituted by the Internal Revenue Bureau, for "willful evasion" of his income taxes.

The case lasted six years. The record of the case, written up in a book entitled They Got Their Man, by Elmer Lynn Williams, indicates that witnesses were coerced and threatened, that bribes were tendered to secure an indictment, that the District Attorney, who later rose to a judgeship, conducted the trial with "the fury of a political feud." The presiding judge, who sentenced Malone to two years in the penitentiary, was known to be active in the campaign of the District Attorney for U. S. Senator. It should be pointed out that Malone had protested certain taxes levied against him, that he promised to pay the sum in dispute if the Board of Tax Appeals decided against him, that he cooperated with the investigating agents, as they themselves testified. Nevertheless, the charge was "willful evasion," which is a criminal offense, and Malone was sent to jail. He was a political undesirable.

Sixteen years later, a similar case sprang up in Boston. A sixty-four-year-old businessman decided to give his time and talents to public service. He ran on the Republican ticket for the General Council and was elected. Before his election he had had some disagreement with the Labor Commissioner, who came from his own town. After election he recommended to the Governor the dismissal of this man from office. The ousted Labor Commissioner thirsted for revenge. He was a loyal member of the party in the federal saddle. Whether this had anything to do with it or not, the fact is that shortly after he had taken office, Alfred Calvin Gaunt was charged by the Internal Revenue Bureau with "willful evasion."

The case involved the matter of evaluating depreciation; there was a dispute over the value Gaunt put upon the plant in 1931, which in turn had a bearing on his tax returns. In the investigation, Gaunt, like Malone before him, hid nothing from the agents, but went out of his way to furnish them with every scrap of evidence in his possession as far back as they wanted to go. There was certainly nothing that could be called "moral turpitude" in his behavior or in his background, and it seemed that the most the Bureau could ask for would be additional taxes, based on a different evaluation of the plant, plus interest and penalties. The conduct of the case, however, indicates that the Bureau was acting under political pressure. They wanted Gaunt, not his money. They got him. He was sentenced to serve eighteen months in jail.

The two cases are identical in significance, and are here offered as examples because they occurred under different Washington administrations. The composition of the ruling regime makes no difference; the Internal Revenue Bureau is a self-operating inquisitorial body. It has the means of harassing, intimidating, and crushing the citizen who falls into its disfavor. In the two cases cited the starting point was a difference of opinion on the correctness of a bookkeeping entry. The Bureau could have sued for the recovery of taxes, a civil case; it chose to bring the criminal charge of "willful evasion." The Bureau has that choice. The tax laws are so intricate, and made more so by Bureau rulings and Tax Court decisions, that it is virtually impossible for an accountant to be sure his method of arriving at a taxable income, or his computation of the tax, is beyond question. The technicalities that the Bureau may bring up are legion. Therefore, whenever the Bureau has reason to "get" somebody it has ample means at its disposal. And its viciousness in pursuing a chosen victim, as in the cases mentioned, is unrelenting, simply because its reputation for success is at stake. It must not fail.

This is what the late Senator Schall of Minnesota had to say about this phase of corruption:

"The one glaring governmental agency that constitutes a menace to the citizens is the Income Tax Bureau, which often goes outside the constitutional limitations and frequently harasses citizens by unjust exactions and by the oppressive conduct of its agents. This system has one defect that is fundamental. That is its lack of certainty, involving not only the time and manner of payment but also the clear, definite and fixed amount. While the Bureau is a Babel of conflicting regulations and opinions, it believes it is so entrenched by authority granted and assumed, and by its anonymous character, that it even dares to attack the citizens by a charge of fraud without substantial pretext or cause….

"The bureau is inquisitorial. It is bureaucracy. Washington is cluttered up with its offices. Its forces swarm over the country, and the cardinal doctrine under which it operates is to inspire the citizen with fear. Agents, spies and snoopers annoy and plague the citizens. The agents, rarely of high order in point of skill or character, must show some kind of results. The Bureau grades them for promotion to increased salary, or better still for the honor roll, not on what taxes are finally returned to the government, but by the amounts they mark up first or charge against the taxpayer.

"That practice permits and promotes, if it does not direct, a species of blackmail against the American citizen…. Once having started in pursuit, the agent assumes authority to impute fraud to the most innocent transactions, and the perfectly honest taxpayer must submit to indignities, odium and accusations of criminality and be put to heavy expense to prove to his own government that he is not a criminal."

Nor is that all. There have been cases-for obvious reasons not many have received publicity-where citizens who have offended the party in power were suddenly visited by agents of the Bureau and subjected to interrogation and examination. Of course, the Bureau is entirely within its legal right to do so, and there is no proof that the citizens’ views prompted these special investigations. It cannot be proved that the purpose was to silence opposition. But the practice is so well known that men of means have scrupulously avoided involvement in movements critical of the Administration, even though privately they are in sympathy with such movements.

The corruption of freedom on the individual level is bad enough. But the corruption of freedom on a mass scale is worse. When the political establishment undertakes to undermine the integrity of the people as a whole, to weaken their power of resistance to authority, and even to lure them into an acceptance of it, then freedom has no leg to stand on. This is exactly what income taxation does, particularly with its exemption device. Bribery through exemption is a most insidious form of corruption.

The Civil War income-tax laws did not exempt churches or educational institutions. While it seems that the government did not get much revenue from them, churchmen and educators had no special reason to support income taxation. They did not like it any more than did other citizens. Whether or not the later advocates of income taxation recalled this fact is not known; but they did advertise it around, when the Amendment was under consideration, that the proposed law would exempt the incomes of institutions "not operated for profit." Furthermore, they promised, the law would permit contributors to such institutions to deduct donations from their taxable incomes. Clergy and educators were quick to see that this privilege would give them an advantage in soliciting contributions, an advantage that gave rise to the slogan: "You might as well give it to us as to the government." Income taxation thus won over a large body of opinion farmers. They were bribed into support of an immoral law.

Before 1913, economics textbooks did not make much of the ability-to-pay doctrine. Some professors did advocate taxes on corporations, for revenue purposes, but only the few avowed socialists among them ventured to advocate "taxation for social purposes." Today, practically every textbook used in our college economics courses proclaims the virtue of progressive income taxation as a means of "distributing wealth." Whether the exemption privilege enjoyed by the colleges had anything to do with this change of thought, it would be impossible to prove; but the inference is justified.

And now that income taxation has reached the point that contributors to colleges cannot be as liberal as they used to be, and the colleges are finding it difficult to meet their expenses, there is a great tendency to look to the government for subsidies. Many educators are concerned lest their cherished "academic freedom" suffer from government intervention. Nevertheless, the prevailing attitude among educators toward Big Government-and therefore heavier taxes-is more than favorable, and one wonders whether this attitude is influenced by the need of the colleges for funds. And one cannot help wondering whether the economics textbooks produced since 1913 would have found so much good in income taxation-and so much bad in private property-if these institutions had not been singled out for special favor.

In 1946, the artifice of bribery through exemption was linked to a law to regulate lobbying. This law requires citizens or groups who are engaged in attempting to influence legislation to register with the government. The corollary of this law is that registered lobbying organizations cannot enjoy tax exemption under the "nonprofit" provision of the income-tax law; it is interesting to note that religious bodies which maintain lobbying committees in Washington do not have to register, and therefore do not jeopardize their tax-exempt status.

The effect of this registration law was not to reduce the practice of lobbying-in fact, lobbying has become an important business-but to intimidate the directors of foundations; for fear that they might lose their tax-exemption privilege by supporting any movement that even by indirection might be called "political," or by "attempting to influence legislation," they are most scrupulous in examining applications for donations. They must give money only to "educational" ventures-as if education were free from ideological bias. Thus, the so-called lobbying law has had the effect of bribing Americans into abandoning their right of protest.

In 1950, the ruling regime made an attempt to press this lobbying law against several organizations attempting to influence thought unpleasant to the Administration. The government set up a Congressional committee2 to investigate all lobbying activities, but by odd coincidence this committee selected for study only a few that were distributing anticollectivistic and pro-limited-government literature.

The committee began its "investigation" by redefining lobbying; it asserted that any "substantial effort"-meaning any effort backed with some money-to influence thought that might even indirectly influence legislation must come under the head of "lobbying"; those behind any such effort should register. Since the organizations selected for scrutiny enjoyed the tax-exempt privilege, this meant, if the committee had its way, a loss of revenue; the supporters of these organizations could not deduct their contributions for tax purposes. The committee went onto demand of these organizations a list of their contributors; this insistence on disclosure had only one purpose, that of intimidating and harassing citizens who supported organizations the Administration did not like. Though nothing came of the work of this committee, for political reasons, the point was driven home that organizations enjoying tax exemption had better be careful.

The corruption of freedom is in proportion to the moral deterioration of the people. For a people who have lost their sense of self-respect have no need for freedom. And the income tax, by transferring the property of earners to the State, has disintegrated the moral fiber of Americans to such a degree that they do not even recognize the fact.

Due to the revenues from income taxation, the government is now the largest employer in the country, the largest financier, the largest buyer of goods and services; and, of course, the largest eleemosynary institution. Millions of people are dependent upon it for a livelihood. They lean upon the State, the one propertied "person," even as a bonded servant leans upon his master. They demand doles and subsidies from it, and willingly exchange their conscience (as at the ballot booth) for the gift of sustenance. Wardship under the State, by way of unemployment insurance, public housing, gratuities for not producing, and bounties of one kind or another, has become the normal way of getting along; and in this habit of accepting and expecting handouts, the pride of personality is lost.

Because abolition of income taxes would undermine the value of the government bonds in the banker’s vaults, would do away with the subventions by which manufacturers and farmers thrive, would force into productive work the millions who now feed at the public trough, would lessen the special benefits ex-soldiers would expect-who would be for abolition? Socialism has a way of corroding human dignity.

Moral deterioration is a progressive process. Just as a worn part of a machine will affect contiguous parts and finally destroy the entire mechanism, so the loss of one moral value must ultimately undermine the sense of morality.

The income tax, by attacking the dignity of the individual at the very base, has led to the practice of perjury, fraud, deception, and bribery. Avoidance or evasion of the levies has become the great American game, and talents of the highest order are employed in the effort to save something from the clutches of the State. People who in their private lives are above reproach will resort to the meanest devices to effect some saving and will even brag of their ingenuity. The necessity of trying to get along under the income tax has made us a corrupt people.

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