What Went Wrong? Identifying Root Causes
Their Lips Are Moving—Requiem For The Income Tax
Part 2 of 6
 

The beginning of the twentieth century saw several fundamental ideological changes. Intellectuals argued that the allocation of rewards under the free enterprise system was unfair. Government policies, they said, should be directed to supply necessities for certain basic human needs to specified categories of people, namely the poor and the disadvantaged. Calls for equality of opportunity were soon superseded by demands for equality of results.

Congress at first offered little more than sympathy, being restrained by the twin traditions of free enterprise and fiscal responsibility. Even the passage of the Federal Reserve Act in 1913 and the addition of the so-called income tax amendment to the U.S. Constitution failed to move them to further action. There was little precedent then for government involvement in business or the economy and high taxes were politically unfeasible. The Great Depression, Keynesian economists and World War II prompted the emancipation of the lawyer-politicians.

The Great Depression devastated much of America’s faith in the free enterprise system. Both state and federal governments responded with pro-labor and liberal welfare policies.

John Maynard Keynes, the English economist, advocated deficit spending in times of depression. Congress happily obliged and, with the advent of World War II, continued the practice. Later, as circumstances improved, they would conveniently overlook the fact that Keynes recommended surpluses in times of near full employment. Obviously, at least for purposes of their reelection, it was much better to give than to receive.

And Congressmen could afford to be very generous. After all, it was not their money and there was so much of it. In 1942 they had passed the Victory Tax. “The reason the levy was called the Victory Tax was precisely because it was a temporary exaction to fight an emergency. Section 476 of this temporary, emergency law said as follows: ‘The taxes imposed by this subchapter shall not apply with respect to any taxable year commencing after the date of cessation of hostilities in the present war.’”[1]

The Victory Tax concept was accompanied by the idea of withholding a percentage of a worker’s earnings, initially set at 5 percent. Chairman of the Senate Finance Committee, Senator Walter George said, “The bill approaches the maximum direct tax which can be levied on the taxpayers during the war.”[2]

Because it imposed a direct tax on the American worker, the bill was unlawful, meaning that it was unconstitutional. Article I, § 2, cl. 3 of the Constitution provides that “Representatives and direct taxes shall be apportioned among the several states.” Article I, § 9, cl. 4 states that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” All direct taxes imposed by the federal government must be apportioned, each state collecting and paying its proportionate share to the U.S. Treasury. Congress, with its usual high percentage of lawyers, either knew or should have known that the tax was unlawful. Of course they would also have every expectation of getting away with passing it, knowing that no patriotic American would challenge the law during time of war.
 

Historically, lawyer-politicians follow this pattern. The law, according to their way of thinking, is what you can get away with. It was said that England was never conquered by force of arms but through the finesse of the Norman lawyers.[3] America would fall to the same tactic, although not immediately. Congress repealed the Victory Tax in 1944 but only after passing, in 1943, the Current Tax Payment Act making withholding an integral part of the national tax system. The new scheme found immediate application in the collection of a general income tax on investment income, purportedly made taxable by the Sixteenth Amendment.

The march from a tax on investment income to a general tax on wages proved to be only a short slide down a slippery slope with the lawyer-politicians supplying extra grease. The Constitution provides in Article I, § 8, cl. 1 that “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.” Duties are taxes on imports. Imposts are taxes levied for divers reasons. Excises are taxes imposed with respect to certain activities and privileges, the amount of the tax being measured by reference to the income that their exercise produces. These are all categories of indirect taxes, taxes that can be passed on by the persons taxed to others who ultimately pay them as consumption or sales taxes.

Treachery lay in the mere shifting of the definitions of a few words. The personal income tax, recognized for over a hundred years as a direct tax, suddenly changes into an indirect tax. Confusion sprouts overnight like mushrooms in the front yards of the United States circuit courts. The income tax is a direct tax, an indirect tax, or neither depending on which circuit court hears the case.[4]

One can surmise from its operation that the personal income tax must be an unapportioned excise tax. All Americans are taxed for allegedly participating in some unspecified activity or for exercising an equally unspecified government-granted privilege. Neither Congress nor the courts has ever adequately explained how a tax upon an individual’s wages, payment received for the free exchange of his or her own labor, is an indirect tax. Perhaps they believe that working for a living is a government-granted privilege, not a natural right. Legal finesse triumphs every time.

Congress coupled the vast sums of money expropriated by the income tax to a liberal interpretation of the term ‘general welfare,’ now stretched to cover any program the legislators might imagine. And over the years, with the help of a multitude of special interest groups, they managed to display an impressive imagination. Reelection went hand-in-hand with satisfying the perceived needs of numerous groups of Americans now voting for a living: 18.5 million direct government employees, 33 million people below the poverty line, 12 million educational workers, 6 million small business owners, 2 million health care workers, 7 million people over 80 years old, 16 million union members, 3 million agriculture workers, 9 million unemployed, and more—.

The abandonment of fiscal responsibility and the policy of free enterprise resulted in a level of general taxation exceeding 50 percent and a government addicted to deficit spending. Congress now has an inclination to micro-manage the economy and the means to finance it through monetary and fiscal policy. The American people, at their own expense, were given a midnight ride on a runaway horse through the cactus patch.
 

1 Alan Stang, Tax Scam, (1988, Mount Sinai Press, P.O. Box 1220, Alta Loma, CA 91701), p. 96 
2 Ibid., p. 96 
3 “The liberties of Englishmen are not (as some arbitrary writers would represent them) mere infringements on the King’s prerogative, extracted from their princes by taking advantage of their weaknesses; but a restoration of their ancient Constitution, of which their ancestors had been defrauded by the art and finesse of the Norman lawyers, rather than by the force of Norman arms.” William Grimshaw’s History of England, (1839, Philadelphia),  p. 61; Quoted by Bill Avery in The Dispatch of Merchants (1976, Bill Avery Memorial Library, 1633 174th St., Hammond, IN), p. 37 
4 Vern Holland, The Law That Always Was (1987, F.E.A. Books, 8141 E. 31st St., Suite F, Tulsa, OK 74145), p. 3