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Wednesday, February 20, 2013

It’s Your Money

“But with respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years.” — Thomas Jefferson, letter to James Madison — 1789

At the founding of our republic Congress had two ways to raise money to pay for the federal government and the things they had a constitutional warrant to do under Article I, Section 8. The first way was to raise money through excise taxes and customs revenue. They were able to raise revenue by placing taxes on commodities. The most used taxes were those on whiskey and tobacco. In fact the 1791 Whiskey Rebellion was a tax protest in the United States beginning in 1791, during the presidency of George Washington. Farmers who used their leftover grain and corn in the form of whiskey as a medium of exchange were forced to pay a new tax. The tax was a part of treasury secretary Alexander Hamilton's program to increase central government power, in particular to fund his policy of assuming the war debt of those states which had failed to pay. The farmers who resisted, many war veterans, contended that they were fighting for the principles of the American Revolution, in particular against taxation without local representation, while the Federal government maintained the taxes were the legal expression of the taxation powers of Congress.

The Whiskey Rebellion demonstrated that the new national government had the willingness and ability to suppress violent resistance to its laws. The whiskey excise remained difficult to collect, however. The events contributed to the formation of political parties in the United States, a process already underway. The whiskey tax was repealed after Thomas Jefferson's Republican Party, which opposed Hamilton's Federalist Party, came to power in 1800.

The second and perhaps the most distasteful means of raising revenue was to borrow the money. The First Bank of the United States was a central bank, chartered for a term of twenty years, by the United States Congress on February 25, 1791. Establishment of the Bank was included in a three-part expansion of federal fiscal and monetary power (along with a federal mint and excise taxes) championed by Alexander Hamilton, first Secretary of the Treasury. Hamilton believed a central bank was necessary to stabilize and improve the nation's credit, and to improve handling of the financial business of the United States government under the newly enacted Constitution.

Officially proposed to the first session of the First Congress in 1790, Hamilton's Bank faced widespread resistance from opponents of increased federal power. Secretary of State Thomas Jefferson and James Madison led the opposition, which claimed that the bank was unconstitutional, and that it benefited merchants and investors at the expense of the majority of the population.

Today the federal government has four major means to raise revenue to feed its needs; excise taxes and customs duties, borrowing, and taxes on people’s income.

The excise taxes of today are similar to the original excise taxes of our Founders except the list taxable items has grown considerably. We not only tax whiskey and tobacco, but now we tax jewelry, luxury items, fuel oil and gasoline, and health care under ObamaCare. There is literally no item the federal government cannot tax if it so wishes.

The second means of raising revenue is through borrowing. Today’s borrowing is quite different for the first days of the Hamilton’s central bank. Today approximately 40% of the money spent by the federal government is borrowed from other countries, mainly China, or from the American people and American banks. Money borrowed from the Americans in the form of government bonds. We call them savings bonds — you know those $50 or $100 dollar bonds you pay $25 or $50 dollars for and give to the grandkids for Christmas and birthdays. The problem with these bonds is they don’t mature in 20 years the $50 or $100 dollars does not have the purchasing power of the original price due to inflation.

The third way is for the federal government to print money. We have heard of terms like QE2, QE3 and know QE4. The QE stands for something called Quantitative Easing” QE is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to change money supply, in order to keep market interest rates at a specified target value. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield.

Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates. However, when short-term interest rates are either at, or close to, zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by the monetary authorities to further stimulate the economy by purchasing assets of longer maturity than only short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve. In essence it’s the federal government printing more money, not with a printing press but with bits and bytes or ones and zeros on the linked computer systems.

Consider you are playing the game of monopoly. You have some luck with the roll of the dice and are able to purchase Boardwalk and Park Place. With people landing on your properties you can garner enough money from rents to build hotels on these properties. You are on the way to winning the game as other players land on your properties and pay a tremendous amount of their money for the rent. As the other players are running out of money someone opens another box of monopoly and takes out the packs of money and passes it out to the other players so they can remain in the game and possibly beat you. This is quantitative easing. Alexander Hamilton would be aghast at these banking policies and Washington, Jefferson, and Madison would have revolted against them.

The fourth and most egregious means of raising money is the income tax. The United States never had an income tax until the passage of the 16th Amendment in 1913 except for a brief period during the Civil War. Our Founders believed that an tax on income was a tax on property and that went against the rights to your property as expressed in the Declaration of Independence and the Constitution.

The 16th Amendment allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results. This amendment exempted income taxes from the constitutional requirements regarding direct taxes, after income taxes on rents, dividends, and interest were ruled to be direct taxes in Pollock v. Farmers' Loan & Trust Co. (1895). It was ratified on February 3, 1913.

The text of the Amendment reads:

“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.”

Article I, Section 2, Clause 3 states:

“Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.”

Article I, Section 8, Clause 1 states:

“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”

Article I, Section 9, Clause 4 states:

“No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.”

This clause basically refers to a tax on property, such as a tax based on the value of land,as well as a capitation.

To raise revenue to fund the Civil War, Congress introduced the income tax through the Revenue Act of 1861. It levied a flat tax of 3% on annual income above $800, which was equivalent to $20,693 in today's money. This act was replaced the following year with the Revenue Act of 1862, which levied a graduated tax of 3–5% on income above $600 (worth $13,968 today and specified a termination of income taxation in 1866.

The Socialist Labor Party advocated a graduated income tax in 1887. The Populist Party "demanded a graduated income tax" in its 1892 platform. The Democratic Party, led by William Jennings Bryan, advocated the income tax law passed in 1894, and proposed an income tax in its 1908 platform.

Prior to the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co., all income taxes had been considered indirect taxes imposed without respect to geography, unlike direct taxes, that must be apportioned among the states according to population.

It should be noted that the legislatures of the following states rejected the amendment without ever subsequently ratifying it: Connecticut, Rhode Island, Utah and Virginia and the legislatures of Florida and Pennsylvania never considered the proposed amendment.

The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 ($7,000 today) with a 6 percent surtax on incomes of more than $500,000 ($11,000,000 today).

Over the years the marginal tax rates rose and fell with the various congresses.


Number of Brackets

Highest Marginal Tax Rates
























































































A few notable comments on these income tax rates are:

During the Woodrow Wilson era (1913-1921) the income tax rates jumped from 16% to 73%. This was primarily due to our participation in World War I, but it was also due to Wilson’s policies for the growth of the administrative state.

When Warren Harding and the Republicans took over the government the rates dropped to 58% and during Calvin Coolidge’s term (1923-1929) the rates plummeted to 20% and the United States experienced a period of unprecedented growth. Economic growth was present and visible during the period of 1920-1929. The unemployment stayed low- 5.5% or less during the period of 1923-1929. It decreased dramatically from the rate of 11.9% in 1921 to 3.2% in 1923. The new technologies were implemented and the production rates increased dramatically. In fact, the production was increasing at such fast rates, that demand was simply unable to grow at the same speed. Although the prices were increasing during the period of 1921-1923, it was only the sign of recovery from previous collapse. Real GNP growth during the 1920s was relatively rapid, 4.2 percent a year from 1920 to 1929 according to the most widely used estimates. (Historical Statistics of the United States, or HSUS, 1976) Real GNP per capita grew 2.7 percent per year between 1920 and 1929. By both nineteenth and twentieth century standards these were relatively rapid rates of real economic growth and they would be considered rapid even today. Click here to see the growth charts for the “Roaring Twenties”. Most of this was due to Coolidge’s dramatic tax reductions and his “hands off” economic policies.

After the 1929 stock market crash growth continued albeit at a slower rate. But when Franklin Roosevelt took office with his New Deal and his draconian tax increases growth stopped and we entered the Great Depression. Even with FDR’s constant tax increases the depression worsened until the outbreak of the Second World War.

It does not take a trained economist to see the correlation between tax rates and economic growth.

The passage and ratification of the 16th Amendment gave Congress and the Executive a blank check to spend money. This money was needed by progressives to institute their social programs like the New Deal and the Great Society. For the purpose of this blog I am only talking about direct taxes and not Social Security or Medicare programs as they are funded out of a different pot of money that comes from the contributors through direct payroll contribution and under law are not supposed to be used for any other purposes.

In his recent State of the Union Address President Obama gave us a laundry list of programs he wanted to institute and fund from the federal coffers. One of those programs is universal preschool. First of all there is absolutely no enumerated power in Article I, Section 8 of the Constitution for the federal government for fund education at any level. This includes the Department of Agriculture providing school breakfasts and lunches. If our Founders wanted the federal government to fund education they would have enumerated that power in the Constitution. They did no such thing. They wanted education left to the states and the people. Having said that I still have to deal with the real world of 2013.

We do have a Department of Education that takes taxpayers dollars to fund education programs. Here is how a program like universal preschool would work. The taxpayers of the various states would send their tax dollars to Washington, D.C. There they would go into the big pot of federal money. The department of Education would submit a budget for the program and if Congress approves the expenditure these dollars would go back to the states to fund the universal preschool program. Of course the Department of Education would keep some of those dollars for “administrative” purpose, i.e. salaries and benefit programs for the employees overseeing the program along with some monies to pay for the building and facilities housing the employees. Of course there would also be training programs and seminars.

The Department of Education would send the money back to the states and local municipalities minus the federal government’s share, which could reach 25%. Along with the money would come a myriad of federal regulations and guide lines as how to run the programs. One these regulations would no doubt be the requirement for the teachers at these preschools that would no doubt mandate that teachers be members of the teachers unions, which would add to the cost of the program. And I am not arguing the efficacy of the program which is dubious at best.

The people at the state level would be ecstatic at the fact that the federal government was funding the program and they would not have to ask local citizens to fund the program through an increase in property taxes. The entire program is a sham.

It would be far more efficient and constitutional for the local municipalities to fund this program on their own. If they believed the preschool was a worthwhile program the local officials would go to the citizens and ask for local funding through and increase property taxes. If the local citizens bought into the program they would vote to fund it. If they did not they would vote no and that would be the end of it. Why would a municipality like the Villages in Florida, where the population is mainly seniors and retirees want to raise their taxes for a preschool program? I would imagine they would be in favor of facilities dedicated to seniors.

Programs like this proposed universal preschool are shams where local politicians can hide behind the federal government to institute programs they know their constituents would not approve. This works not only for preschool but foe many other federal programs like mass transit, title 8 housing, and federal assistance programs that are funded out of the income tax pot of money.

Most politicians, especially progressives, take a cavalier attitude towards the taxpayers’ dollars. They want to provide what appears to be more fee stuff — stuff that is hardly free. They believe that by offering this free stuff that sounds good to the feel good part of the populace they will maintain their power and longevity in office. This was something our Founders feared. As Alexis de Tocqueville stated in his 1835 book Democracy in America: ”The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”

Today we have a cadre of progressive politicians, statist, and masterminds in Washington that are very experienced at bribing the public. They have been doing it since the era of Woodrow Wilson. There have been very few exceptions to this — on being the administration of Calvin Coolidge where he cut federal spending and reversed the federal government’s intrusiveness into the lives of the people. He did this to the detriment of legacy by progressive academics and historians.

Today we have an electorate with a majority voters who have been indoctrinated by a progressive education system at K-12 and college level to believe in government. Marl Levine calls them drones. They believe that the government can provide free stuff and continually support those politicians that can so easily bribe them with their promises. Once politicians to get votes in places like New York City would go to the bars and taverns on Election Day and offer free beer to those who would vote for them. Now the politicians offer free health care food stamps, free college tuition, and cell phones to get the votes of these drones.

These drones buy into the unconstitutional social programs offered by the government. They want to feel good about the society they live in. If you oppose any of these programs you are labeled as mean and selfish. You are considered a nihilist. As Frederick Bastiat stated over 100 years ago:

“Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain."

Bastiat’s words were true when he wrote them and they are true today. Unless we return to the constructional government of our Founders this Republic will be lost.

In closing I refer to the words of George Washington from his 1796 Farewell Address when he said this about political parties and class warfare:

“The alternate domination of one faction over another, sharpened by the spirit of revenge natural to party dissention, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries, which result, gradually incline the minds of men to seek security and repose in the absolute power of an Individual: and sooner or later the chief of some prevailing faction more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of Public Liberty.”

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