The"American Wisdom Series"

Pamphlet #334

Taxation: Restoring the Original Intent
by: Vince Page

And yet some have concluded ... that in order to render the people industrious they should be loaded with taxes.
                                         - Montesquieu

                                           The Spirit Of the Laws, 1748

Most Americans have forgotten about the tax freedoms contained in the Constitution, tax freedoms which were enjoyed by American citizens for 126 years prior to ratification of the 16th amendment in 1913. Today, while we wrestle with a tax code which has grown to tens of thousands of pages, the starting point for the debate should not be the latest fad idea or patch for our quiltwork of tax laws. Rather, the debate should begin with a thorough knowledge of the original tax laws contained in the Constitution, their original intent, an understanding of our present situation and a plan for restoring our original freedoms -- a plan which makes sense to someone other than a politician.


After the Boston Tea Party and the Revolutionary War, Americans had no stomach for creating another centralized government with the power to collect and disperse vast amounts of money. The Articles of Confederation, therefore, contained no taxation power since each State retained its own sovereignty. Monies required by the Union had to be requested from the States, who were not obliged to pay. This led to a series of tax revolts in the States, the most famous of which was Shay's Rebellion in Massachusetts, which was still ongoing in 1787, the same year that the Constitutional Convention was convened.

At the Convention, the Founding Fathers were very much aware of the anti-tax sentiment in the land and knew that a compromise had to be struck. The lack of any taxation power under the Confederation made the United States weak and vulnerable to enemy attack, since sufficient funds could not be raised for defense purposes. But Americans had just freed themselves from European taxes of every description, which effectively confiscated the fruits of their labor and resigned them to a life of serfdom. They were not about to duplicate the mistakes of the European monarches, aristocrats and "enlightened" despots.

Of all the types of taxes loathed by the Founding Fathers, direct taxes were at the top of their list. These taxes on income and property allowed a federal government to have vast power over the electorate since, in order to assess these taxes, the federal government had to pry into the private lives of the citizenry. It was agreed that any such direct taxation power would be reserved to the States, where the representatives are closer and more accountable to the people.

The federal government would limit its sources of income to indirect taxes, such as import duties and excise [luxury] taxes. The Founding Fathers reasoned that such taxes could be avoided by citizens simply by not purchasing the taxed items. In Federalist #21, Alexander Hamiltion -- who would become Secretary of the Treasury under George Washington -- said:

The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. ... It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. ... If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them. Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country. Those of the direct kind, which principally relate to land and buildings, may admit of a rule of apportionment.
And Hamilton made it clear that such a tax would not be laid on items of necessity when he wrote "...private oppression may always be avoided by a judicious selection of objects proper for such impositions...".

The rule of apportionment mentioned above by Hamilton was the exception to indirect taxation that the Founding Fathers intended to include in the Constitution. They were aware that import duties and luxury taxes would be sufficient for the federal government to carry out its Constitutional responsibilities, but in the event of war, the federal government would need more money. Still loathing a direct tax of any kind by the federal government, they decided that Congress could only levy this type of tax by passing legislation describing the exact amount to be taxed, the purpose of the tax, and then apportioning -- or dividing -- the total tax bill among the States according to population. By definition, this could only be performed at periodic intervals. The purpose of these tax laws was to constrain the federal government to its Constitutional duties by limiting its funds to a commensurate level -- unless there was a dire emergency. The result is probably the most perfect taxation system ever devised, ensuring that the federal government would never have the wherewithal to outgrow its Constitutional bounds.

There are three critical references to taxation in the Constitution. Article I, Section 2 of the Constitution states that " Taxes shall be apportioned among the several States...". Article I, Section 8 states that "The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises ... but all Duties, Imposts and Excises shall be uniform throughout the United States...". and Article I, Section 9 states that "No Capitation, [a head tax, or poll tax] or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

Using their typically simple and elegant prose, the Founding Fathers had limited the continuous taxation power of the federal government to indirect taxes and made the States responsible for the collection of any direct taxes, which would be divided, or apportioned, among the States by population.

The Constitution was obeyed in this respect until the outbreak of war between the North and the South. Thomas Jefferson even went so far as to repeal all luxury taxes, funding the federal government on import duties alone. But when the nation's fourth direct tax revenue bill was proposed in 1861, Congress re-defined an income tax as an excise tax, ignoring the fact that the Founding Fathers had intended excise taxes to be luxury taxes. It was clearly unconstitutional, but politicians wanted continuous access to vast sums of money during the war and were willing to violate their Constitutional responsibilities to obtain it. To their credit, however, the income tax bill was allowed to expire in 1872, seven years after the end of the war.

By this time, politicians had been given a taste of the way things could be, and thereafter regarded Constitutional limitations on federal taxation power as a thorn in their side. In 1893, President Grover Cleveland wanted Congress to lower import duties and make up for the loss by taxing the income of corporations. Congress jumped at the chance to get their foot in the door on an income tax and expanded the bill to include a personal income tax as well. The bill passed in 1894, but was declared unconstitutional by the Supreme Court in the case of Pollock v. Farmer's Loan and Trust Company in 1898. The Supreme Court upheld the Constitution and declared that an income tax -- and any other tax which cannot be avoided -- is a direct tax. As such, it must be a periodic tax in accordance with the Constitution, duly defined as to its purpose by appropriate legislation, divided among the States by population and collected by the States themselves. The court stated that:

... Ordinarily, all taxes paid primarily by persons who can shift the burden upon someone else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect to their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes ... A tax upon one's whole income is a tax upon the annual receipts of his whole property, and as such falls within the same class as a tax upon that property, and is a direct tax, in the meaning of the Constitution...
Undaunted by this initial setback, the federal government then set out to collect an income tax in the only Constitutional way possible -- by amending the Constitution. Such an amendment was put before Congress in 1909. It is not surprising that the amendment passed overwhelmingly in the House and Senate, given that the federal government was in effect voting for its own pay raise, but an informed electorate should have been more skeptical, if not cynical. The debate surrounding ratification of the 16th amendment centered on the appropriateness of taxing the wealthy individuals and corporations who had engineered the Industrial Revolution. The destructive philosophy of class envy was successfully employed to sell the amendment to the American people, who were assured that the wages of the working man would never be taxed.

In 1913, three-fourths of the States ratified the 16th amendment, which reads "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment to the several States, and without regard to any census or enumeration." In large part, the income tax has only survived since that time with the aid of the class envy philosophy.

The top tax rate in 1913 was 7%. The top tax rate in 1998 is about 40%. And the federal government, instead of having all the money it needs, has exploded past its Constitutional bounds in such a vast multitude of areas that the American people face a debt which would make the Founding Fathers faint -- literally. From 1992 to 1996, the national debt grew from $4 trillion to $5 trillion. From 1996 to 1997, the debt grew from $5 trillion to $5.5 trillion. In all probability, the debt will reach $6 trillion in 1998. As of 1997, therefore, a debt in excess of $21,000 had been incurred for every man, woman and child in the United States, while the debt continues to grow exponentially.

We are certainly responsible for paying off this debt. The United States has always honored its obligations. When our Founding Fathers signed the Declaration of Independence, they pledged their lives, their fortunes and their sacred honor for the principles described in that document. They did not make this pledge lightly; many of the signers were wiped-out financially in the Revolutionary War. After the war was over and after the Articles of Confederation had outlived their usefulness, the Founders wanted it known that the new government defined by the Constitution would honor any previous debts; therefore, Article VI of the Constitution states that "All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation". These debts were eventually paid by an apportionment to the States in accordance with the Constitution. Today, the measures employed in Washington to pay off the debt are woefully inadequate, as was illustrated in the preceding paragraph. To succeed, we need to combine sound economic principles with the original intent of the Constitution.

The Federal Government

Before we payoff our existing debt, we must stop the federal government from incurring further debt. We must therefore limit the federal government to its Constitutional responsibilities and we must limit its taxation power to indirect taxes in accordance with the original intent of the Constitution. How do we make this happen? Repeal the 16th Amendment -- it's just that simple.

The Constitution itself contains all of the tax laws under which this country was successfully run for 126 years prior to ratification of the 16th Amendment -- namely tariffs and periodic taxes apportioned among the States by population -- and the Constitution stands ready to serve us well once again. To resurrect these Constitutional provisions like a Phoenix from the ashes, all we have to do is repeal the Amendment that lit the torch of destruction. No further flat taxes, national sales taxes or five tier flat-as-a-staircase taxes are required.

For the federal government to live within its means, it will then be forced to divest itself of the authority it has usurped from the States. The responsibilities of the federal government listed in the Constitution do not include such things as Social Security, Medicare, Medicaid, nor the Departments of Energy, Education and Environmental Protection. The Founding Fathers were wise to make the States responsible for those powers not enumerated in the Constitution, since competitive State-run programs will be neither insufficient nor excessively generous. The former may cause people to leave a particular State, whereas the latter may cause a large enough influx of people to justify a State tax increase -- which may also drive people from a particular State.

In conjunction with the return of Constitutional rights to the States, the federal government must erect a structure of indirect taxation which will allow it to meet its original Constitutional responsibilities. Taxes on luxury items are well understood, but how do we go about erecting a tariff structure that will not be so onerous as to alienate our business partners around the world? The solution is quite simple.

Rather than bestowing Most Favored Nation trading status on the undeserving, and complaining when the tariffs of foreign nations virtually shut the door on American products, we can let foreign nations set our tariff rates -- within limits. For every foreign nation on earth, the value of items exported to them from the United States can be ranked in decreasing monetary value, just as the value of their imports to us can be ranked. Therefore, every nation has a #1 import with us that yields more money for their coffers than any of the other commodities which they are able to sell to us. Likewise, we have a top money-maker in our trade with them. It would be a simple matter to tell all of our trading partners that, henceforth, our tariff on their top import to us will be the same as their tariff on our top export to them -- down to a floor level which Congress needs to run the country. And the same holds true for their #2 commodity (in dollar value), their #3 commodity, and so forth. Their tariff is our tariff. We're all just one, big happy family.

This does several things. First, it gets us out of the ridiculous Most Favored Nation sham that no longer has meaning. If other nations want our tariffs reduced, all they have to do is reduce theirs. Second, Congress retains control by establishing the floor value below which tariffs may not be reduced. This gives Congress the control they need to meet their Constitutional obligations while giving them incentives to avoid raising the floor level too high, lest they incur the wrath of other nations. And third, it stops the deplorable unfair trade practices which have kept the United States out of so many markets.

And the last act of the federal government, in the effort to put us back on a firm Constitutional footing, is to apportion the huge national debt to the States by population. As mentioned previously, this means a tax bill of about $21,000 for every man, woman and child in every State, after which no further income taxes need be collected for the federal government.

The States

It should be clear by now that the responsibilities of the States will increase when the federal government adheres to the original intent of the Constitution. The States will be responsible for paying off the national debt and running or abolishing Social Security, Medicare, Medicaid and a whole host of other programs which the federal government had no business implementing in the first place. Under the Constitution, therefore, the discussion of income taxes moves from Washington to the fifty States, and what we get for our efforts is fifty competitive systems of taxation as well as fifty competitive Social Security, Medicare and Medicaid systems which, over time, will produce the most efficient system possible.

Our analysis must therefore give some thought to the best possible system of taxation for use by the States, and that analysis must necessarily begin with a review of the current federal income tax.

Many analyses performed on current tax rates in the United States have shown that we are nowhere near the optimum point on the marginal cost and marginal revenue curves, which you may remember from an economics class as the rate or price which produces the greatest revenue. These studies show conclusively that tax receipts would rise if current tax rates were reduced. And we don't necessarily need to believe the studies, because this theory has been validated several times in the past. In the 1920's, Warren G. Harding slashed income tax rates from 65% to 25%. The result was the "Roaring Twenties" -- economic growth of 7% coupled with increased revenue for the treasury. Jack Kennedy learned from history and reduced taxes again in the 1960's. The increase in revenue to the treasury is a matter of public record. A similar rise in treasury receipts occurred after Ronald Reagan's tax cut, although Congress managed to spend much more than the additional revenue received by the treasury.

Unfortunately, all of the budget scoring entities in Washington use -- and Congress is obliged to act upon -- a childishly simple static model which infers that when tax rates are reduced, Americans will not spend the money they keep on anything that generates additional tax revenue for the treasury. Under the static model, a dollar not taxed is a dollar lost, and the perfect scenario as far as the federal government is concerned is a 100% tax rate.

But the real world just doesn't work that way. It doesn't take a CPA to figure out that the economy will slow to a crawl if the tax rate is 100% or 75% or even 50%. In such a scenario, everyone will be hard pressed to obtain the basic necessities of life. The lack of money in the private sector will cause a decrease in demand for goods and services provided by companies, causing a slow death for the economy.

Many so-called "think tanks" have been involved in determining the optimum tax rate for maximum revenue to the treasury, and most agree that it is in the 17 to 20% range on a "flat" tax basis. But there's a catch -- this rate assumes that those with income below about $30,000 would not pay any tax at all. At first, this seems like the best of both worlds, but it is the fatal flaw which will ensure the corruption of the system. Any time a system is erected which allows one group of Americans to profit at the expense of other Americans, the clamor will always be there to take more. Americans will act like warring classes instead of one people -- just like they have every since the progressive income tax was introduced in 1913. Eventually, the flat tax rate will once again reach 40% to satisfy the demands of those who are not taxed. This something-for-nothing philosophy must stop in America or we will never proceed into the future as one people.

Others have proposed a national sales tax -- or consumption tax -- to overcome this problem. The historical evidence not only shows that consumption taxes will be applied to the necessities of life, but that the rate structure will become extremely complicated. Every manufacturer will want a special rate for their particular product. The lobbying involved will be too massive to resist, and politicians will eventually cave-in to the demands of those who fund their re-election campaigns. Small and large businesses alike will be required to keep reams of records on the different tax rates applied to each commodity -- a simple percentage of total sales will not suffice. A huge government agency will be required to determine if it has all been done correctly. The economy will then be bogged down in a bigger bureaucratic mess than the original income tax ever thought of making. Europe is a testament to this fact. England, for example, thought that a flat consumption tax would cure all ills and is only now recovering from a horrible confusion of consumption and income taxes -- at one time incorporating a top income tax rate of 95%.

A possible solution for this problem would be a system of taxation that we might call the "One People Tax" for purposes of discussion. It is a simple tax to minimize the cost of collection. The OPT is a single-percent income tax like the flat tax but without any exemptions, deductions, lower income levels or loopholes -- all Americans pay the same tax. This kind of tax fosters the idea that we are all one people who are in this together, helping each other as Americans into the future. And when the One People Tax rate is adjusted for maximum revenue to the treasury, the tax rate falls to 10 percent. This, without any incentive for one sector of society to live off of another, because any program which causes taxes to rise will increase taxes on the very people who requested it. In such a system, only the Constitutional expenses of government will be tolerated by the people. The One People Tax contains the natural checks and balances which our Founding Fathers insisted upon.

There are more reasons to opt for the OPT. The One People Tax -- while requiring an equal percentage from everyone -- does not place an undue burden on the poor because it derives the vast majority of tax dollars from those in higher income brackets. A person who makes $100,000 per year will pay 10 times more tax than someone making $10,000 annually -- and he won't be able to weasel out of it with mortgage deductions, personal exemptions or any other loophole. This is as it should be. We all should pay the same percentage because we are all one people, but most of the tax dollars should naturally come from those who earn more. Under this system, no one has any incentive to be lazy or to ask for a government handout, because tax rates would rise and they will only hurt themselves. Rather, everyone has every incentive to be industrious and to achieve the American dream. And who among us -- the poor included -- would not be willing to pay 10% to take advantage of the opportunities in America. There is no better deal on the face of the earth. By opting for the OPT, we will be choosing a system of taxation that automatically brings about many other needed changes in society and in government, not the least of which will be the idea that Americans should move forward into the future as one people while retaining as much of their income as possible.

This, then, is the type of tax the States should use when it comes time to payoff the national debt and fund those programs like Social Security that should operate under the auspices of State legislatures. This system will provide the benefits of making taxes as simple as possible to collect, thus freeing up the $5 billion currently spent every year on the preparation of tax forms while turning tax collectors into productive members of society. And secondly, if we are to ever succeed in reducing the growth of government; in returning Constitutional power to the States and to the people; in giving Americans the incentive to work -- the system of taxation we choose must not only end the taxpayer-funded indolence which is so prevalent today, but it must support the ideal that we are all one people in America, and we are all in this together. Our system of taxation, therefore, must not allow one segment of society to rob, take or otherwise demand gifts of other Americans for the purpose of supporting indolence. Indolence is a sin; it has no place in America and should not be tolerated by any American. Certainly there will always be those who are not physically able to work, and we have a moral obligation to care for these people -- but there is much more indolence than physical disability in America today. The system of taxation we devise, therefore, is a moral as well as a financial choice.

Righting the Wrong

Knowing all of this, how do we get out of the mess we're in? How do we obtain for ourselves the freedoms which the Founding Fathers intended for us? It will take a three step process, the first of which is to limit spending by the federal government to the amount of tax money gathered from tariffs and luxury taxes. This single step will ensure that the federal government limits itself to its Constitutional responsibilities so that import duties and excise taxes do not become unreasonable. It will also ensure that Americans keep more of what they earn than ever before.

The second step on the road to restoring our Constitutional tax freedoms is to pay off the debt by an apportionment of the debt to the fifty States as described above. If we pay this off using something like the One People Tax, it will not be a hardship for anyone.

The third step to the restoration of our Constitutional tax freedoms is to repeal the 16th amendment. The explosive growth of the federal government beyond Constitutional bounds can be traced back to the passage of the income tax provision in the 16th amendment. It held no checks and no balances for the unrestrained concentration of power in the hands of the federal government unless, of course, you count the politicians who were expected to police themselves. It fostered class envy and led directly to government handouts. The 16th amendment is a study in the futility of amending the Constitution without understanding its original intent. A return to the original intent of the Constitution is the only way the federal government can ever be expected to limit itself to its Constitutional responsibilities. Clearly, the tax structure contained in the Constitution -- prior to the passage of the 16th amendment -- was devised by our Founding Fathers to ensure that the federal government did not have the means to outgrow its Constitutional boundaries and strip us of our freedoms, and we voted it away by ratifying the 16th amendment. Why? 

Copyright 1998, VINCE PAGE

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