Mises Daily Articles
Soak the Poor
[Income Tax: Root of All Evil (1954)]
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 19th 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 16th 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 IOUs, 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 volume 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 $50 billion 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 $15 billion. Already some economists are beginning to wonder how the government will be able to pay benefits to all those who during the past 16 years have been making "contributions" when they will have reached the age of 65. 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 65 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 20 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.
It is the duty of the State to provide sustenance and support of its citizens who cannot … provide subsistence for themselves.
Work adapted to theft strength and capacities shall be supplied.…
The State is entitled and is bound to take such measures as will prevent destitution of its citizens and check excessive extravagance.
- 1. For a number of years between 1801 and 1890, except during the Civil War, the revenues of the country equaled its expenses or sometimes showed an embarrassing surplus.
- 2. Initially, the "social security" tax was 1 percent of all taxable wages up to $3,000 per annum, paid by both employer and employee. In 1951, the tax was extended to wages of $3,600. In 1951, also, "self-employed" persons were pulled in; now they too must pay for "social security," whether they want the "insurance" or not, and the rate, which was set at 2 ¼ percent in 1951, rises each year until it reaches the maximum of 4 7/8 percent in 1970. The rates on employer and employee also rise from the initial rate of I percent to the 1970 limit of 3 ¼ percent.
- 3. Said Bismarck: "I acknowledge unconditionally a right to work and I will stand for it as long as I am in this place. But here I do not stand upon the ground of Socialism… but on that of Prussian common law." Prussian common law, drawn up during several reigns, and finally codified and promulgated by Frederick II, contained the following: