Pennsylvanians in Support of the FairTax Act - In the News - The Power to Tax by Lawrence Reed Economist

Reprint from the Foundation for Economic Education, Inc.

The Power to Tax
by: Lawrence W. Reed, Economist

Two-thirds of Americans think the current federal income tax system is "unfair." A majority - 51 percent - favor a "complete overhaul" of the system. Former IRS Commissioner Shirley Peterson has said, "we should repeal the Internal Revenue Code and start over."

It's not as though Americans weren't given fair warning. Guess who made these remarkably radical statements about the very idea of a federal income tax more than one hundred years ago:

1. "[It] is an abhorrent and calamitous monstrosity.... It punishes everyone who rises above the rank of mediocrity. The fewer additional yokes put around the necks of the people, the better."

2. "[It is] a vicious, inequitable, unpopular, impolitic, and socialistic act.... the most unreasoning and un-American movement in the politics of the last quarter-century. "

3. "[It] can only be collected by prying into the private affairs of the people by arbitrary methods hateful to the citizens of the republic."

Those were the words of the Washington Post, the New York Times, and the Chicago Tribune respectively, commenting in 1894 on the first income tax to be passed by Congress. This vitriolic criticism was aimed at a proposal that was to levy a mere 2 percent tax on income in excess of $4,000 which would be at least $65,000 in today's dollars. Because of that large $4,000 exemption, 98 percent of Americans were completely exempt from income taxation. One year later the Supreme Court ruled this tax to be unconstitutional, and so ended America's first peacetime experiment with an income tax. It would take a constitutional amendment - the 16th - to give Congress the legal power to shackle us with an income tax.

In 1909, when the 16th Amendment was being debated, the New York Times criticized it, saying, "When men get in the habit of helping themselves to the property of others, they cannot be easily cured of it." History has proven that prediction to be correct, though I doubt that it bothers the New York Times as much today as it did in 1909.

After the 16th Amendment was ratified, an income tax was imposed starting in 1913 with rates ranging from I percent to 7 percent, and the top rate applying only to incomes in excess of $500,000. By 1916 that top rate had risen to 15 percent, on income in excess of $2,000,000. The top rate exceeded 90 percent at its peak in the early 1950s.

The first 1040 form - instructions and all - took up only four pages. Today, there are some 4,000 pages of tax forms and instructions. American workers and businesses are forced to spend more than 5.4 billion man-hours every year figuring out their taxes. Since those hours could be put to a more productive use, and almost surely would be in the absence of today's incomprehensible tax code, the result is a large dead-weight output loss of some $200 billion each year.

Changes in the law keep all of us in a constant state of confusion. Since the 1986 so-called "simplification" of the tax code, some 4,000 amendments have been worked back into it. Changes have become so commonplace that on several occasions, Congress has rewritten the law - in the words of a past IRS commissioner -" before the IRS even had time to reprogram its computers from the previous tax reform."

Interestingly, 60 percent of the members of the House Ways and Means and Senate Finance Committees do not prepare their own returns. When Lloyd Bentsen was writing our tax laws as chairman of the Senate Finance Committee a few years ago, he admitted that he personally used a professional tax preparer because "my return is a complicated one."

The IRS now has more enforcement personnel than the EPA, BATF, OSHA, FDA, and DEA combined. With its 115,000-man workforce, it has the power to search the property and financial documents of American citizens without a search warrant and to seize property from American citizens without a trial. It routinely does both.

Economist James L. Payne has written a most revealing analysis of the IRS, a 1993 book entitled Costly Returns. He gives us this stunning revelation: the total cost to collect our federal taxes, including the effects on the economy as a whole, adds up to an amazing 65 percent of all the tax dollars received annually. The U.S. tax system, says Payne, has produced hundreds of thousands of victims of erroneous IRS penalties, liens, levies, and tax advice. In answering taxpayer questions, for example, the IRS telephone information service has in previous years given about one-third of all callers - as many as 8.5 million Americans - the wrong answers to their questions.

A 1987 General Accounting Office study found that 47 percent of a random sample of IRS correspondence - including demands for payments - contained errors. Incredibly, a GAO audit of the IRS in 1993 found widespread evidence of financial malfeasance and gross negligence at the agency. The IRS could not account for 64 percent of its congressional appropriation!

With all this history of taxes and abuse of the taxing power behind us, proposals for much-needed, radical change are in the air. The flat rate income tax is one. A national sales tax is another. Americans will soon be debating both. Advocates of liberty ought to work to make sure that the case for much smaller government figures into that debate.

The forthcoming national debate about how the federal government taxes American citizens will provide a fruitful educational opportunity which proponents of liberty should employ to the fullest. We should use it to remind our fellow citizens of the evils of taxation and the tyranny of the bureaucracies that administer them. America's experience with the federal income tax confirms the prophetic wisdom of John Marshall almost two centuries ago: "The power to tax involves the power to destroy."

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At the time of the original publication, Lawrence W. Reed, economist and author, was President of The Mackinac Center for Public Policy, a free market research and educational organization headquartered in Midland, Michigan.
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Reprinted with permission from The Freeman, a publication of the Foundation for Economic Education, Inc., October 1995, Vol. 45, No. 10.

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