A Proper System of Taxation
April is an exciting and meaningful month. It has tremendous significance in both religious and secular history. In Hebrew and Jewish history it is the first month of the year. It is the month of Passover and Easter. To many, it represents the real month of Christ’s birth, for it is in March and April that the Spring grass appears on the hills of Bethlehem and so there can be “shepherds abiding in the fields, keeping watch over their flocks by night”. In American history, it was on April 6 th that the Senate was first organized and on that day the representatives of the first free people in modern times (House of Representatives) and the states (Senate) met for the first time in joint session to see who would be the first president of the United States. George Washington was inaugurated on April 30 th at Federal Hall in New York City.
It is ironic that April has also become a dreaded month for some, especially for those who are self-employed. April is income tax month-a time of accounting to governments of the results of all the hard work of the past year. For many it is a wrenching time, for it is neither natural nor gentle, two requirements the American Founders said are absolutely necessary for a proper system of taxation.
Taxation-Historical Cause of Revolts
Few issues raise American tempers as much as that of taxation. Nor is our generation any different from those that preceded it. Early American patriots risked the stern British justice system to dump a shipload of taxable tea into the bay at Boston. Many of the same men rioted in the streets of Boston to protest Britain’s stamp tax.
After the Revolutionary War was over, deep-seated concerns about government taxation continued. Just months before the Constitutional Convention began, Shay’s Rebellion erupted over issues of paper money, bank foreclosures, and unfair taxation.
With this history of volatility, it is no wonder that taxation was a subject of hot debate in the conventions that created and then ratified the Constitution.
The Task of Developing a Proper System of Taxation
It is important to note that the form of taxation chosen by a government has a profound impact, not only on the nation’s economic health, but also on the extent to which the collection of revenues invades the privacy or otherwise violates the rights of the individual taxpayer. The framers of our Constitution believed that taxes should be very modest and should be “collected by mild and gentle means, by a peaceable and friendly application to the individuals of the community.” Yet it is clear that today’s federal tax system-meaning both the enormity of the assessments and the government’s tactics in collecting them-is far more oppressive than that of eighteenth-century Great Britain, which ignited the Revolutionary War and ultimately led to American independence.
Understanding the Founders’ comments on taxation requires some definition of terms. In their writings taxes are divided into two general categories, “external” and “internal.” External taxes are duties on goods imported from other countries and are often called “imposts.” Import duties, or imposts, are always considered “indirect” because they are taxes on things, not people. Indirect taxes-sometimes called “consumption”-can be passes on to the consumer and simply added to the purchase price of the product. Thus they are much less painful to collect than “direct” taxes, which are levied directly against an individual, his property, or his income and cannot be passed on to anyone else.
“Internal” taxes may be either direct or indirect. An “excise” is a tax on goods produced at home rather than abroad; like the impost, it is an indirect tax. Direct taxes include property taxes, income taxes, and capitation taxes. The word “capitation” comes from a Latin word meaning “head”. A capitation tax is levied as “so much per head” regardless of wealth or other circumstances. This basis of taxation was less desirable to the Founders and only to be used in emergencies.
The Most Abhorrent Tax of All-The Income Tax
But still worse is the income tax, which since 1913 has become a major threat to the constitutional rights of American citizens. Unlike a head tax, the income tax grossly violates “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures,” supposedly protected by the Fourth Amendment.
The modern income tax further departs from the intent of the Framers in at least three ways:
- although taxes under the Constitution were to be “uniform,” the income tax is a graduated or “progressive” tax;
- the Founders’ strict limitation on direct taxes-they were to be based on population rather than wealth (Article I, section 9, clause 4 of the Constitution)-was overturned by the Sixteenth Amendment; and
- as we have said about the capitation taxes, direct taxes were originally looked upon as temporary “last resort” taxes for war and other emergencies, but they have become a permanent reality in American life and are now actually the principal source of federal revenues.
In our day we continue to hear of “tax cut” proposals, “tax increase” proposals, and “tax reform” proposals either on the federal or state levels. What is amazing is that whatever they call it, it usually winds up either actually increasing our taxes or it places a proportionately heavier burden on the middle and upper class and is nothing more than a means to continue the socialistic effort to redistribute the wealth in America.
The Clear Vision of the Founders on Taxes
In light of all this, it is refreshing to return to the Framers’ clear vision of Congress’s power of taxation. Their words to us are a testimony, once again, of the heavenly wisdom which descended upon them at the time of our Founding.
Thomas Jefferson: “Preserve inviolate the fundamental principle that the people are not to be taxed but by representatives chosen immediately by themselves.” (to James Madison, 1787)
Comment: It is a well known fact that administrative agencies of federal, state and local governments set rules for taxation, such as, on which articles or income it applies, what any exemptions or deductions may be taken, whether or not it is an expense or a depreciable item, etc. These agencies, such as the IRS, are not the representatives of the people.
Melancton Smith: “It is a general maxim, that all governments find a use for as much money as they can raise. Indeed, they have commonly demands for more. Hence it is that all, as far as we are acquainted, are in debt. I take this to be a settled truth, that they will all spend as much as their revenue; that is, will live at least up to their income. Congress will ever exercise their powers to levy as much money as the people can pay. They will not be restrained from direct taxes by the consideration that necessity does not require them.” (in New York ratifying convention, 1788)
Comment: Even though the Founders carefully limited the use of direct taxes only to cases of emergencies (Art. I, Section 9, Clause 4), governments today treat nearly everything as if it were an emergency. Most state constitutions prevent state and local governments from going into debt, but creative financing has produced several ways of skirting this restriction, such as the use of revenue bonding (the sale of bonds for things that produce revenue so that money does not have to come out of general funds to pay them off), lease purchase agreements (leasing buildings from the contractor so it does not have to be shown as mortgage debt), and certificates of participation (public-private agreements where the public credit borrows the money but the private enterprise pays it off). As a result of these schemes, even though state and local government founders wished it otherwise, it is estimated that state and local debt is into the trillions of dollars.
Jefferson: “Taxation is.the most difficult function of government and that against which their citizens are most apt to be refractory. The general aim is, therefore, to adopt the mode most consonant with the circumstances and sentiments of the country.” (preface to Political Economy , 1816)
Comment: Not too many would argue that our present taxing system, particularly with regards to the present graduated income and inheritance taxes is not consonant with the circumstances and sentiments of the country.
Jefferson: “The taxes with which we are familiar class themselves readily according to the basis on which they rest: 1. Capital, 2. Income, 3. Consumption. These may be considered as commensurate; Consumption being generally equal to Income, and Income the annual profit of Capital. A government may select [any one] of these bases for the establishment of its system of taxation, and so frame it as to reach the faculties of every member of the society, and to draw from him his equal proportion of the public contributions; and, if this be correctly obtained, it is the perfection of the function of taxation. But when once a government has assumed its basis, to select and tax special articles from either of the other classes is double taxation.
“For example, if the system be established on the basis of Income, and his just proportion on that scale has been already drawn from everyone, to step into the field of Consumption and tax special articles in that, as broadcloth or homespun, wine or whiskey, a coach or a wagon, is doubly taxing the same article. For that portion of Income with which these articles are purchased, having already paid its tax as Income, to pay another tax on the thing it purchased, is paying twice for the same thing; it is an aggrievance on the citizens who use these articles in exoneration of those who do not, contrary to the most sacred of the duties of a government, to do equal and impartial justice to all its citizens.
“To this a single observation shall yet be added. To take from one because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, ‘the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.’ If the overgrown wealth of an individual be deemed dangerous to the state, the best corrective is the law of equal inheritance to all in equal degree; and the better, as this enforces a law of nature, while extra taxation violates it.” (Note in Political Economy , p. 464-66)
Comment: It will be noted that while Jefferson said the use of more than one of these basis of taxation is really double (or triple taxation) we are presently doing just that-using all three-Capital, Income, and Consumption-as the basis of taxation. It is estimated that a dollar changes hands once every 20 days. Our taxing system provides for money to be taxed nearly every time it changes hands-from investor to equity (Capital), from employer to employee (Income), and from buyer to seller (Consumption).
Edmund Randolph: ” Will not the people choose men of integrity, and in similar circumstances with themselves, to represent them? What laws can they make that will not operate on themselves and friends, as well as on the rest of the people? Will the people reelect the same men to repeat oppressive legislation? Will the people commit suicide against themselves, and discard all those maxims and principles of interest and self-preservation which actuate mankind in all their transactions?” (Virginia ratifying convention, 1788)
Comment: The Founders intended the legislatures to be made up of citizens who had been through the fire of life and would serve in government more as a calling or mission rather than as a job. As soon as we began to pay huge salaries and benefits to Congressmen and let them exempt themselves from some of the very laws they pass for us to obey, then they become immune to the plight of citizens and to the heavy tax load we are suffering under.
Jefferson: “Taxes should be continued by annual or biennial reenactments, because a constant hold by the nation of the strings of the public purse is a salutary restraint from which an honest government ought not to wish, nor a corrupt one to be permitted, to be free. No tax should ever be yielded for a longer term than that of the Congress wanting it, except when pledged for the reimbursement of a loan.” (to John Epps, 1813)
Comment: Most of our tax laws today are perpetual from year to year unless changed by the Congress. If all of our tax laws were to be voted on with each new term of legislators, they would be forced to become more accountable to the people.