Inflationomics

Tax Reform

Have you ever wondered how we got to the point where we need tax reform?

Several things have happened along the way to get us here:

  1. Wars, starting with the war-between-the-states, gave the U.S. government an excuse to stop gold payments, adopt a fiat currency, and borrow and print as much money as was needed to win the war.  Subsequent wars added to the financial burden of the federal government, making it virtually impossible to limit government spending and the need for additional tax revenue.
  2. It was probably a result of the war-between-the-states, when government and politics became the overriding factor in the public decision-making process (how do we handle those rebels and their slaves?).  As an instrument of force, the federal government was able to dispense favors at the expense of some to the favor of others (northern cronies).  This practice ultimately led to a jealousy of those who had been favored and thus were better off than others.  Seeing the injustice in this arrangement, voters elected politicians who promised to “correct” the situation by passing new laws limiting/taxing the rich.  The flip side of the same coin was to elect politicians who promised to favor the poor.  Thus began the redistribution of wealth in the United States.  Some examples of legislation designed to limit/tax the rich were the anti-trust laws, income tax laws, and estate tax laws.  Some examples of laws designed to help the poor were the Food Stamp Act, Temporary Emergency Food Assistance Program, and the Social Security Act and its amendments, where some seniors have been able to take out many times more than what they contributed.
  3. The welfare state.  Someone had to pay to support all the people who couldn’t or wouldn’t work (because they were paid not to work).  Naturally, the burden fell on the taxpayers; i.e., the productive members of society.  In time, those taxpayers assumed the duty of supporting the poor and downtrodden.  When the United States attracted too many people for the welfare system to handle, the U.S. government had to borrow and/or print more fiat money to cover the burden.  This is not meant to over-shadow the cost of additional wars and the ever-expanding government bureaucracies needed to administer the government’s uncontrollable spending habits.

Of course, the problem with taking 7% of a wealthy person’s income (as the first income tax did in 1913)  is that it’s hard to know when to stop.  If 7% is good, why not 94% (the top marginal tax rate in 1944)?  Furthermore, “wealthy” is a relative term.  Someone making $50,000 today is poor, compared with someone making $50,000 in 1913, while they would be considered rich when compared with someone in China who makes $2.00 per hour now.

If we consider the effects of inflation, that push everyone (except those on fixed income) into a higher tax bracket, we’ll all be “wealthy” at some point.  It becomes harder and harder to make people envious of a couple earning $50,000 per year.  Thus, once every 50 years or so, the tax system needs a major overhaul to re-align the tax takings with popular jealousies and sympathies.  This is what we call tax reform, and why we “need” it now.

Robert F. Sennholz

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