Shaking Up the System Instead of Shaking Down the People

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Ask anyone who has ever been mugged or burglarized and they will tell you that the experience wasn’t pleasant.  Ask anyone that was cheated out of their savings by Bernie Madoff and they will tell you that his serving time in prison is not as satisfying as getting their money back.  What if I told you that you were the victim of a ponzi scheme and that every April 15^th your wallet was being pick-pocketed?  If you are a taxpaying citizen, then you probably are.

The first part of this article addresses the problems imposed by the current tax system, an unstable currency, and government program in the red.  The primary purpose of these reforms is to give Americans more control of their finances and provide more security for dollars invested.

A. ESTABLISH A TAX THAT IS FAIR

President Kennedy once stated that “Our present tax system…exerts too heavy a drag on growth…it reduces the financial incentives for personal effort, investment, and risk-taking…the present tax load…distorts economic judgments and channels an undue amount of energy into efforts to avoid tax liabilities.”[1] At the time of his statement, Kennedy did not know that an efficient, growth-encouraging system called the Fair Tax would present a real possibility for America to abolish the IRS and its punishing tax code in just half a century.

When the United States was born, the federal government raised much of its revenue through taxation of a few items such as alcohol and tobacco.[2] During times of war, additional taxes were levied to cover the costs.[3] It was understood that those taxes would disappear afterwards because most governing in times of peace was expected to be done at the state and local level.

In 1894, politicians in Washington introduced a bill entitled “An Act to reduce taxation, to provide revenue for the government, and for other purposes.”[4] This act created a 2 percent tax on everyone with an income greater than $4,000 a year.[5] Additionally, government officials were exempt from the tax.[6] President Grover Cleveland believed the law was unconstitutional and let it become law but did not sign onto it.[7]

The United States Supreme Court in Pollock v. Farmers’ Loan & Trust Co. heard a case about the Constitutionality of the newly imposed income tax and decided that it was in violation Article 1, Section 9 of the Constitution.[8] Farmers’ Loan & Trust Co., in compliance with the act, announced that they would be providing the names of all of those liable under the act to the Department of the Treasury.[9] Charles Pollock, owner of 10 shares of Farmers stock, sued to enjoin the company from paying the tax.[10]

The Court held that a number of the taxes in the act were direct taxes.  As such, the tax imposed on the incomes of real estate and of personal property is a direct tax and is therefore unconstitutional and void because it is not apportioned according to representation.[11] All of those sections, constituting one entire scheme of taxation, are necessarily invalid.[12]

Undeterred, Congress decided to amend the Constitution.  The amendment passed in both the House and the Senate and then three-fourths of the states ratified the Sixteenth Amendment, making it law on February 12, 1913.  Today, nearly two-thirds of income tax revenue comes from the top ten percent of wage earners and 52 percent of wage earners pay nearly 100 percent of all personal income taxes collected by the Internal Revenue Service.[13] To the 52 percent of Americans shouldering the burden of government spending, this does not seem like a very fair tax.

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[1] President John F. Kennedy, November 20, 1962

[2]James Hines Jr., “Taxing Consumption and Other Sins,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 51

[3] Hines, p. 52

[4] Charles Dunbar, “The New Income Tax,” The Quarterly Journal of Economics, Vol. 9, No. 1 (Oct., 1894), p. 26

[5] Dunbar, p. 31

[6]Edwin R. A. Seligman, “The American Income Tax,” The Economic Journal, Vol. 4, No. 16 (Dec., 1894), p. 644

[7]Gerald G. Eggert, “Richard Olney and the Income Tax Cases,” The Mississippi Valley Historical Review, Vol. 48, No. 1 (Jun., 1961), p. 25

[8] Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895)

[9] Pollock, 157 U.S. at 430

[10] Id.

[11] Id., at 434

[12] Id.

[13] Michael Graetz, “Tax Reform Unraveling,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 81; Neal Boortz & John Linder, The Fair Tax Book. (New York: Harper Collins Publishers, 2005) p. 16

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