The Income Tax Implies that the Government Owns You

The income tax is enshrined into law but it is an idea that stands in total contradiction to the driving force behind the American Revolution and the idea of freedom itself. We desperately need a serious national movement to get rid of it – not reform it, not replace it, not flatten it or refocus its sting from this group to that. It just needs to go.

The great essayist Frank Chodorov once described the income tax as the root of all evil. His target was not the tax itself, but the principle behind it. Since its implementation in 1913, he wrote, “The government says to the citizen: ‘Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.”

He really does have a point. That’s evil. When Congress ratified the 16th Amendment on Feb. 3, 1913, there was a sense in which all private income in the U.S. was nationalized. What was not taxed from then on was a favor granted unto us, and continues to be so.

This is implied in the text of the amendment itself: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

No Limits

Where are the limits? There weren’t any. There was some discussion about putting a limit on the tax, but it seemed unnecessary. Only 1% of the income earners would end up paying about 1% to the government. Everyone else was initially untouched. Who really cares that the rich have to pay a bit more, right? They can afford it.

Today, the ruling elite no longer bothers with things like amendments.

This perspective totally misunderstands the true nature of government, which always wants more money and more power and will stop at nothing to get both. The 16th Amendment was more than a modern additive to an antique document. It was a new philosophy of the fiscal life of the entire country.Today, the ruling elite no longer bothers with things like amendments. But back in the day, it was different. The amendment was made necessary because of previous court decisions that stated what was once considered a bottom-line presumption of the free society: Government cannot tax personal property. What you make is your own. You get to keep the product of your labors. Government can tax sales, perhaps, or raise money through tariffs on goods coming in and out of the country. But your bank account is off-limits.

The amendment changed that idea. In the beginning, it applied to very few people. This was one reason it passed. It was pitched as a replacement tax, not a new money raiser. After all the havoc caused by the divisive tariffs of the 19th century, this sounded like a great deal to many people, particularly Southerners and Westerners fed up with paying such high prices for manufactured goods while seeing their trading relations with foreign consumers disrupted.

People who supported it – and they were not so much the left but the right-wing populists of the time – imagined that the tax would hit the robber baron class of industrialists in the North. And that it did. Their fortunes began to dwindle, and their confidence in their ability to amass and retain intergenerational fortunes began to wane.

Limit to Accumulation

We all know the stories of how the grandchildren of the Gilded Age tycoons squandered their family heritage in the 1920s and failed to carry on the tradition. Well, it is hardly surprising. The government put a timetable and limit on accumulation. Private families and individuals would no longer be permitted to exist except in subjugation to the taxing state. The kids left their private estates to live in the cities, put off marriage, stopped bothering with all that hearth and home stuff. Time horizons shortened, and the Jazz Age began.

Class warfare was part of the deal from the beginning. The income tax turned the social fabric of the country into a giant lifetime boat, with everyone arguing about who had to be thrown overboard so that others might live.

The demon in the beginning was the rich. That remained true until the 1930s, when FDR changed the deal. Suddenly, the income would be collected, but taxed in a different way. It would be taken from everyone, but a portion would be given back late in life as a permanent income stream. Thus was the payroll tax born. This tax today is far more significant than the income tax.

The class warfare unleashed all those years ago continues today. One side wants to tax the rich. The other side finds it appalling that the percentage of people who pay no income tax has risen from 30% to nearly 50%. Now we see the appalling spectacle of Republicans regarding this as a disgrace that must change. They have joined the political classes that seek advancement by hurting people.

The Payroll Tax

It’s extremely strange that the payroll tax is rarely considered in this debate. The poor, the middle class and the rich are all being hammered by payroll taxes that fund failed programs that provide no security and few benefits at all.

It’s impossible to take seriously the claims that the income tax doesn’t harm wealth creation

It’s impossible to take seriously the claims that the income tax doesn’t harm wealth creation. When Congress wants to discourage something – smoking, imports, selling stocks or whatever – they know what to do: Tax it. Tax income, and on the margin, you discourage people from earning it.Tax debates are always about “reform” – which always means a slight shift in who pays what, with an eye to raising ever more money for the government. A far better solution would be to forget the whole thing and return to the original idea of a free society: You get to keep what you earn or inherit. That means nothing short of abolishing the great mistake of 1913.

Forget the flat tax. The only just solution is no tax on incomes ever.

But let’s say that one day we actually become safe from the income tax collectors and something like blessed peace arrives. There is still another problem that emerged in 1913. Congress created the Federal Reserve, which eventually developed the power to create all the money that government would ever need, even without taxing.

For the practical running of the affairs of the state, the Fed is far worse than the income tax. It creates the more-insidious tax because it is so sneaky. In a strange way, it has made all the debates about taxation superfluous. Denying the government revenue does nothing to curb its appetites for our liberties and property. The Fed has managed to make it impossible to starve the beast.

Chodorov was correct about the evil of the income tax. Its passage signaled the beginning of a century of despotism. Our property is no longer safe. Our income is not our own. We are legally obligated to turn over whatever our masters say we owe them. You can fudge this point: None of this is compatible with the old liberal idea of freedom.

You doubt it? Listen to Thomas Jefferson from his inaugural address of 1801. What he said then remains true today:”…what more is necessary to make us a happy and a prosperous people? Still one more thing, fellow citizens a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement and shall not take from the mouth of labor the bread it has earned.”

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Chocolate and Rocket Companies Ditching California for Sunnier Tax Rates

Nestlé USA, “the maker of Häagen-Dazs, Baby Ruth, Lean Cuisine, and dozens of other mass brands,” is moving its US headquarters from California to Virginia. It is among many businesses that have left California in recent years. In 2010, Northrop Grumman Corp. moved its headquarters out of California, leaving the state that gave birth to the aerospace industry without a single major military contractor based there. Last Spring, the parent company of Carl’s Jr., founded in Anaheim, California 60 years ago relocated its headquarters to Nashville, Tennessee, where there is no state income tax.

California’s “skyrocketing” housing costs and high tax rates have prompted an “exodus of residents,” reported the San Jose Mercury News in June 2016.

During the 12 months ending June 30, the number of people leaving California for another state exceeded by 61,100 the number who moved here from elsewhere in the US, according to state Finance Department statistics. ‘They are tired of the expense of living here. They are tired of the state of California and the endless taxes here,’ said Scott McElfresh, a certified moving consultant. ‘People are getting soaked every time they turn around.’

Virginia, where Nestlé and Northrop Grumman moved, has lower corporate and individual tax rates than California, and much less onerous labor laws. In California, cities adopt ordinances meddling in private sector hiring (such as ban-the-box ordinances in Los Angeles and San Francisco). By contrast, Virginia has a Dillon rule that prevents cities and counties from regulating the employment practices of private businesses. That keeps them from dictating wage levels or adding new protected classes of employees at businesses’ expense.

The exodus of businesses undercuts claims by Obama administration officials like Julian Castro, who asserted at the 2016 Texas Democratic Convention that “California is kicking our butt, creating more jobs and more economic growth than Texas.” Over the last decade, California has experienced job growth of about 8 percent. By contrast, Texas, despite suffering from declining oil prices, saw job gains of about 19 percent over the same period. Castro criticized Texas’s economic performance, saying it was poor because the Texas Republican party “doesn’t believe in government.” But Texas’s performance looks pretty good compared to California, where the GOP holds neither the governor’s mansion nor even a third of the seats in the state legislature. Texas now has a higher rate of employment than California, something that was not true before 1990.

For businesses, the worst is yet to come.

If it did not have so much burdensome regulation and taxes, California would be growing much faster than Texas, given California’s immense natural advantages (such as a climate which is much more pleasant than Texas’s, and economic engines such as Silicon Valley that came into being before California was taken over by left-wing politicians). But as it is, some multi-state businesses have closed their facilities in California, despite having plenty of customers, after experiencing pointless harassment due to California’s oppressive regulatory regime, or the threat of meritless lawsuits.

For businesses, the worst is yet to come. California is increasing its minimum wage over the next several years to $15 per hour. The American Action Forum predicts the increase will ultimately cost California 700,000 jobs. An economist at Moody’s calculated that 31,000 to 160,000 California manufacturing jobs will be lost. 

California taxes may rise further, to deal with a rising state budget deficit over the next decade. The deficit is rising in part due to California’s unusually high state welfare spending which grew about twice as fast in California in 2016 as in the U.S. as a whole. California also spends its transportation dollars very poorly, and it is wasting billions on a high-speed rail boondoggle that few people will ride. As Reason magazine notes, federal transportation officials are warning that California’s misnamed “bullet train” is a disaster in the making: they believe California is drastically understating the costs of its massive high-speed rail project. Just the first leg of this $70 billion project could cost billions more than budgeted. And the project is already at least seven years behind schedule.

Republished from the Competitive Enterprise Institute.

Hans Bader

Hans Bader

Hans Bader is a senior attorney at the Competitive Enterprise Institute. He graduated from the University of Virginia with a B.A. in economics and history and later earned his J.D. from Harvard Law School. Before joining CEI, Bader was Senior Counsel at the Center for Individual Rights.

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When Equal Access Means Zero Access for All

There is irrational comfort taken in the belief that man-made laws somehow ensure equality for all. More often than not, the exact opposite is true.

Within the next week, UC Berkeley will be forced to remove over 20,000 lectures, videos, and other digital documents from its free online library. While the prestigious school has been generous in making its electronic resources available to the public, a violation of the Americans with Disability Act has left the University with no other choice but to remove the online archive in its entirety.

We are currently living in a golden age of information, where the internet has provided the world with limitless sources of learning without ever having to leave the comfort of home. Like many institutions of higher education, including many other Ivy League schools, UC Berkeley has contributed to open source learning by sharing its curricula and other materials to online platforms like YouTube and iTunes, as well as its own site.

Berkeley’s free online library was found in violation of the ADA. 

While many were celebrating the fact that technology has helped make Ivy League education accessible to anyone with a computer and a wireless connection, others did not believe this accessibility went far enough.

Enter the State

Nearly 3,000 miles away from the iconic Sather Gate entrance at UC Berkeley, two employees of Washington D.C.’s Gallaudet University—a school for the deaf— were outraged to learn that Berkeley’s online archives, though extensive in scope, were not accessible to those with hearing impairments.

Instead of contacting Berkeley to see if accommodations could be made without resorting to state intervention, the complainants sought help from the Department of Justice (DOJ). 

After investigating the claims made by the two Gallaudet employees, the DOJ came to the conclusion that yes, Berkeley’s free online archive had in fact violated the ADA, particularly Title II, which mandates that all public audio and video content provide accommodations for the deaf and hard of hearing. Among these stipulations is the requirement that all applicable content offer closed captioning, which, regrettably, 543 of Berkeley’s videos were missing.  

The DOJ has declined from publicly commenting on the matter, but its letter to Berkeley officials laid out the alleged violations clearly:

“The Department found that of the 543 videos it could identify on the YouTube channel, 75 had manually generated closed captions. Of the remainder, many had automatic captioning generated by YouTube’s speech recognition technology.”

Unfortunately, the government is not a magical entity, it cannot wave a wand and level all playing fields without trespassing on someone else’s freedom along the way., which is precisely what is happening as a result of the complaints filed against UC Berkeley.

Now, the whole world will lose access to Berkeley’s entire digital archive.

All or Nothing

All 20,000 files will have to be removed from the online library. Now, instead of one group of people having limited access to a very small portion of Berkeley’s extensive online library, the whole world will lose access to the entire archive.  

UC Berkeley was put in the unfortunate position of being demonized for providing free information. To satisfy the ADA requirements and keep the content live, the University was going to have to reformat all the videos in question. However, this process is both timely and extraordinarily expensive, which left Berkeley with only one remaining option if it wished to comply with the DOJ’s demands.

In September, Cathy Koshland, vice chancellor for undergraduate education at the University made the following statement:

“In many cases the requirements proposed by the department would require the university to implement extremely expensive measures to continue to make these resources available to the public for free. We believe that in a time of substantial budget deficits and shrinking state financial support, our first obligation is to use our limited resources to support our enrolled students. Therefore, we must strongly consider the unenviable option of whether to remove content from public access.”

Last week, the University made its decision final, and announced that it will begin the process of removing all the content on March 15th. To add insult to injury, it turns out that removing this digital library will ultimately end up requiring about five months worth of work— a cost UC Berkeley will be forced to pay.

The Market Provides a Way

While this entire situation is frustrating, there is, of course, a possibility that the two authors of the DOJ complaints had no idea their actions would result in a major loss of public information.

However, for many people, and perhaps even most people, they view the state as the benevolent enforcer of all things good, not realizing that government entities always hurt what they claim to protect: liberty.

The fact that the two scorned Gallaudet employees felt they had no option aside from involving the state in this matter is the real tragedy at hand. Perhaps, if instead of choosing to file complaints these two people would have channeled their disappointment and passion into a positive solution, both parties could have benefitted, rather than both sides losing.

Once the government gets involved in a scuffle, everybody loses.

Generally speaking, people love being a part of something bigger than themselves. Giving back to communities we feel connected to, and dedicating ourselves to causes we feel passionately about, is part of the human experience.

Just as technology has made sharing information more convenient than ever, it has also made fundraising and coalition-building easier as well.

Utilizing crowdfunding sites like GoFundMe and allows individuals from all walks of life the opportunity to feel as though they are invested in some grand, unified effort. It allows each donor to feel as if they have participated in something important, whether they donated a few thousand dollars or just a couple of bucks.

Imagine an alternative reality where instead of pursuing legal action against UC Berkley, those who felt passionately about this matter joined together as a community and raised awareness and funds in order to provide the funding needed to have the 543 videos reformatted. If they had “criticized by creating,” instead of by litigating, not only would the problem have been solved in a more productive manner than it actually was, but all parties would actually benefited in the end.

Berkeley wouldn’t have to spend several months taking down its content, those who wanted the content adapted for those with hearing impairments would have not only gotten what they wanted, but they would have also raised awareness and possible donors to their own school. Additionally, the entire world would have also continued to benefit from the use of Berkeley’s material.

Unfortunately, as this situation has so aptly demonstrated, once the government gets involved in a scuffle, everybody loses.

Brittany Hunter

Brittany Hunter

Brittany Hunter is an associate editor at FEE. Brittany studied political science at Utah Valley University with a minor in Constitutional studies.

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It’s Long Past Time to Cut Corporate Tax Rates

The centerpiece of President Trump’s tax plan is a 15 percent corporate tax rate.

Republicans in Congress aren’t quite as aggressive. The House GOP plan envisions a 20 percent corporate tax rate, while Senate Republicans have yet to coalesce around a specific plan.

Notwithstanding the absence of a unified approach, you would think that the stage is set for a big reduction in America’s anti-competitive corporate tax rate, which is the highest in the developed world (if not the entire world) and creates big disadvantages for American workers and companies.

If only.

While I am hopeful something will happen, there are lots of potential pitfalls, including the “border-adjustable tax” in the House plan. This risky revenue-raiser has created needless opposition from major segments of the business community and could sabotage the entire process. And I also worry that momentum for tax cuts and tax reform will erode if Trump doesn’t get serious about spending restraint.

Internationally Speaking

What makes this especially frustrating is that so many other nations have successfully slashed their corporate tax rates and the results are uniformly positive.

My colleague Chris Edwards recently shared the findings from an illuminating study published by the London-based Centre for Policy Studies. It examines what’s happened in the United Kingdom as the corporate tax rates has dropped from 35 percent to 20 percent over the past 30 years. Here’s some of what Chris wrote about this report.

New evidence comes from Britain… It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury. …the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.”

And keep in mind that GDP today is significantly greater in part because of a better corporate tax system.

Here’s the chart from the CPS study, showing the results over the past three decades.

The results from the most-recent round of corporate rate cuts are especially strong.

In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. …But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!”

None of this should be a surprise.

Big reductions in the Irish corporate tax rate also led to an uptick in corporate receipts as a share of economic output. And remember that the economy has boomed, so the Irish government is collecting a bigger slice of a much bigger pie.

And Canadian corporate tax cuts generated the same effect, with no drop in revenues even though (or perhaps because) the federal tax rate on business has plummeted to 15 percent.

Back Home

Would we get similar results in the United States?

According to experts, the answer is yes. Scholars at the American Enterprise Institute estimate that the revenue-maximizing corporate tax rate for the United States is about 25 percent. And Tax Foundation experts calculate that the revenue-maximizing rate even lower, down around 15 percent.

I’d be satisfied (temporarily) if we split the difference between those two estimates and cut the rate to 20 percent.

Let’s close with some dare-to-hope speculation from Joseph Sternberg of the Wall Street Journal about what might happen in Europe if Trump significantly drops the U.S. corporate tax rate.

Donald Trump says many things that alarm Europeans, but one of the bigger fright lines may have come in last week’s address to Congress: “Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.” What’s scary here to European ears is…the idea that tax policy is now fair game when it comes to global competitiveness. …One of the biggest political gifts Barack Obama gave European leaders was support for their notion that low tax rates are unfair and that taxpayers who benefit from them are somehow crooked.

Europeans pushed that line among themselves for years, complaining about low Irish corporate rates, for instance. The taboo on tax competition is central to the political economy of Europe’s welfare states… Mr. Obama…backed global efforts against “base erosion and profit shifting,” meaning legal and efficient corporate tax planning.

The goal was to obstruct competition among governments… The question now is how much longer Europe could resist widespread tax reform if Mr. Trump brings in a 20% corporate rate alongside rapid deregulation—or what the consequences will be in terms of social-spending trade-offs to a new round of tax cutting. Dare to dream that Mr. Trump manages to trigger a new debate about competitiveness in Europe.”

Amen. I’m a huge fan of tax competition because it pressures politicians to do the right thing even though they would prefer bad policy. And I also like the dig at the OECD’s anti-growth “BEPS” initiative.

P.S. I want government to collect less revenue and spend less money, so the fact that a lower corporate tax rate might boost revenue is not a selling point. Instead, it simply tells us that the rate should be further reduced. Remember, it’s a bad idea to be at the revenue-maximizing point on the Laffer Curve (though that’s better than being on the downward-sloping side of the Curve, which is insanely self-destructive).

Reprinted from International Liberty.

Daniel J. Mitchell

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review. 

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