Some Thoughts on Taxation
Gary Hunt
Outpost of Freedom
November 24, 2010
Introduction
Taxation is often considered one of the most burdensome and oppressive duties of government. “There are only two things certain; Death and Taxes”, quite adequately describes the effect of taxes upon our daily lives.
Though far from truth, schoolbooks have, for generations, proclaimed that “No Taxation without Representation” was the cause of the Revolutionary War. There is no doubt that the fact that the colonies had no representation in Parliament was one of many points of contention between colonies and Crown. This very fact was the subject of many speeches, on both sides of the Atlantic.
It has been suggested, on the western side of the Atlantic, that if the colonies were allowed to raise their own taxes, based upon both their needs and requisitions from Parliament, this objection would have been overcome. So, let’s keep that thought in mind as we look at our history with regard to the subject of taxation.
We need to understand that the Framers had to deal with the touchy subject of taxation based upon the role it played in leading up to separation from England as well as the brief history and problems posed between Independence and the Constitution. The former has just been addressed, so we will look at the later.
Two situations provided the Framers some concern in dealing with the subject. The first was that the requisitions imposed by the Continental Congress, both before and under the Articles of Confederation were ignored by a number of states, ultimately resulting in abandoning efforts to collect the requisitions and relieving those debts not paid.
The second situation was known as Shay’s Rebellion [1787]. Farmers in Western Massachusetts had been taxed by the State, the purpose being for the State to be able to pay its obligations to the Congress, as well as have operating funds for the function of the Massachusetts government. This was compounded by the absence of specie (gold or silver) through the colonies. Repayment of debt on foreign loans required specie.
Now, to source documents:
Constitution
Article I, Section 2, clause 3:
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons…
Article I, Section 7, clause 1:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.
Article I, Section 8, clause 1:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence 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 1:
The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.
Article I, Section 9, clauses 4 & 5:
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
No Tax or Duty shall be laid on Articles exported from any State.
Article I, Section 10, clauses 1 thru 3:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;
No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.
No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.
Amendment 16 [1913]:
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.
Amendment [XVII] [1913]
The Senate of the United States shall be composed of two Senators from each State, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each State shall have the qualifications requisite for electors of the most numerous branch of the State legislatures.
Amendment 19 [1964]:
Section 1–The right of citizens of the United States to vote in any primary or other election for President or Vice President, for electors for President or Vice President, or for Senator or Representative in Congress, shall not be denied or abridged by the United States or any State by reason of failure to pay any poll tax or other tax.
Federalist Papers
The Federalist Papers are accepted as an indication of the intent to the Framers, and, of those who ratified that Constitution.
Federalist Papers #12, Alexander Hamilton:
The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares…. It has been found in various countries that, in proportion as commerce has flourished, land has risen in value.
***
The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.
***
But it is not in this aspect of the subject alone that Union will be seen to conduce to the purpose of revenue. There are other points of view, in which its influence will appear more immediate and decisive. It is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained empty.
***
No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.
***
Revenue, therefore, must be had at all events. In this country, if the principal part be not drawn from commerce, it must fall with oppressive weight upon land.
Federalist Papers #30, Alexander Hamilton:
Let us attend to what would be the effects of this situation in the very first war in which we should happen to be engaged. We will presume, for argument’s sake, that the revenue arising from the impost duties answers the purposes of a provision for the public debt and of a peace establishment for the Union. Thus circumstanced, a war breaks out. What would be the probable conduct of the government in such an emergency? Taught by experience that proper dependence could not be placed on the success of requisitions, unable by its own authority to lay hold of fresh resources, and urged by considerations of national danger, would it not be driven to the expedient of diverting the funds already appropriated from their proper objects to the defence of the State? It is not easy to see how a step of this kind could be avoided; and if it should be taken, it is evident that it would prove the destruction of public credit at the very moment that it was becoming essential to the public safety.
Federalist Papers #45, James Madison:
If the federal government is to have collectors of revenue, the State governments will have theirs also. And as those of the former will be principally on the sea-coast, and not very numerous, whilst those of the latter will be spread over the face of the country, and will be very numerous, the advantage in this view also lies on the same side. It is true, that the Confederacy is to possess, and may exercise, the power of collecting internal as well as external taxes throughout the States; but it is probable that this power will not be resorted to, except for supplemental purposes of revenue; then an option will then be given to the States to supply their quotas by previous collections of their own; and that the eventual collection, under the immediate authority of the Union, will generally be made by the officers, and according to the rules, appointed by the several States.
***
The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs; concern the lives, liberties, and properties of the people and the internal order, improvement, and prosperity of the State.
Constitutional Intent
“Representation and Direct Taxes shall be apportioned among the several States” provides an insight into one of the methods of funding for the federal government. Representation was to be based upon population, and, the funds needed in excess of those derived by other means were to be supplemented proportioned on the strength of voting power of each state in the House of Representatives.
Let’s look at the relationship between taxation, spending, and representation. First, we have “All Bills for raising Revenue shall originate in the House of Representatives“, giving that representative body the exclusive power to raise taxes, though concurrence by the Senate and the President were still required.
Now, let’s look at the Senate. Senators were appointed by the State legislatures, prior to the adoption of the 17th Amendment, and, consequently, would look out for the interest of the State, while the representatives would look out for the interests of the people who comprised their constituency. So, we have both the people and the state with representation to look out for their respective interests.
If the Representatives felt a need for raising revenue, the would “originate” a bill to that effect. The Senate, if the burden were put upon the states to raise the revenue, might be concerned and refuse to approve the bill, saving the respective legislatures from having to raise taxes to raise revenues to meet the needs of the federal government.
In a sense, we would have three, independent bodies exerting caution over any increase in revenue; the House of Representatives ; the Senate; and, the respective state legislatures, which would have the responsibility of raising additional revenue, as well as the ire of the people in so doing.
If we delve a bit deeper into this concept, we can see that there is a consistency with the feelings of the Founders when they coined the phrase, “No Taxation without Representation“. If we equate the Parliament with the Congress, and, the state legislatures with the colonial assemblies, we can see a parallel, which would require the state legislature (colonial assembly) to enact revenue laws based upon requisitions by the Congress (Parliament). Clearly, this concept has strong support from our history books.
To address the Founders concerns, perhaps it would be appropriate to have representatives in the Congress to enact and approve revenue bills, and then, requisition to the states; the state legislature to raise the revenues so required.
Also, the intent of the involvement of the states in collecting the revenue was made clear by James Madison (FP #45), when he said, “It is true, that the Confederacy is to possess, and may exercise, the power of collecting internal as well as external taxes throughout the States; but it is probable that this power will not be resorted to, except for supplemental purposes of revenue; then an option will then be given to the States to supply their quotas by previous collections of their own.”
We need not wonder why this method, of the state paying quotas, was not primary. The experience of the recent past had proven, under the Articles of Confederation, that collection would be, at best, difficult. There had been no experience under the Constitution and strengthened federal government to dispel such concern. Recent history, however, has demonstrated that the federal government is quite able to enforce compliance, which makes moot this concern.
Madison also points out, in the same number, that the primary need for additional revenue would be consistent with, “The powers delegated by the proposed Constitution to the federal government [which] will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected.”
Subsequently, in 1913, this whole concept of taxation was turned on end. With the enactment of the 16th and 17th Amendments to the Constitution (coincidently, the same year that the Federal Reserve Act and currency contrary to the Constitution) were ratified, changing our whole economic structure by rendering gold and silver equal to, or subordinate to, promissory notes (Federal Reserve Notes). Money was relegated to a system without value.
Clearly, the type of expenditures we have today were not within the scope imagined by Madison. Quite possibly, if the tax structure was maintained along the original concepts, we would not have the enormous debt to repay.
Continuing on with the subject, let’s see what Alexander Hamilton thought should be the primary source of revenue.
In Federalist Papers # 12, he said, “The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares…”
He continues, “The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. Commerce, contributing to both these objects, must of necessity render the payment of taxes easier, and facilitate the requisite supplies to the treasury.”
He then advises that, “[i]t is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation…”
In support of the use of commerce as the primary source of revenue, he says, “No person acquainted with what happens in other countries will be surprised at this circumstance. In so opulent a nation as that of Britain, where direct taxes from superior wealth must be much more tolerable, and, from the vigor of the government, much more practicable, than in America, for the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description.” Included in this is a comparison to England, where the rich are well defined, and a source of revenue. Something that might be worthy of consideration.
Finally, in this number, he concludes with the significance of the burden on other sources than revenue, when he says, “Revenue, therefore, must be had at all events. In this country, if the principal part be not drawn from commerce, it must fall with oppressive weight upon land.”
To demonstrate the nature of change in how government operates, we can look at the concerns that Mr. Hamilton placed upon the ability of the country to borrow money, should the need arise, in Federalist Papers #30:
Let us attend to what would be the effects of this situation in the very first war in which we should happen to be engaged. We will presume, for argument’s sake, that the revenue arising from the impost duties answers the purposes of a provision for the public debt and of a peace establishment for the Union. Thus circumstanced, a war breaks out. What would be the probable conduct of the government in such an emergency? Taught by experience that proper dependence could not be placed on the success of requisitions, unable by its own authority to lay hold of fresh resources, and urged by considerations of national danger, would it not be driven to the expedient of diverting the funds already appropriated from their proper objects to the defence of the State? It is not easy to see how a step of this kind could be avoided; and if it should be taken, it is evident that it would prove the destruction of public credit at the very moment that it was becoming essential to the public safety.
Clearly, times have changed. The ability of the government to borrow money on the “public credit” is, without question, indisputable. So, many of the concerns of the Framers have fallen by the wayside. Perhaps legitimate under the then circumstances, times, and the new federal government under the Constitution, have changed. Perhaps, now, it is time to reevaluate the method of federal taxation to be consistent with what was expressed, then, though not put into service because of those concerns.
Some Definitions
From Webster’s 1828 Dictionary:
Apportion, v. t.
To divide and assign in just proportion; to distribute among two or more, a just part or share to each; as, to apportion undivided rights; to apportion time among various employments.
Duty, n.
Tax, toll, impost, or customs; excise; any sum of money required by government to be paid on the importation, exportation, or consumption of goods. An impost on land or other real estate, and on stock of farmers, is not called a duty, but a direct tax.
Impost, n.
1. Any tax or tribute imposed by authority; particularly, a duty or tax laid by governments on goods imported, and paid or secured by the importer at the time of importation.
Excise, n.
An inland duty or impost, laid on commodities consumed, or on the retail, which is the last stage before consumption; as an excise on coffee, soap, candles, which a person consumes in his family. But many articles are excised at the manufactories, as spirit at the distillery, printed silks and linens at the printers, &c.
Capitation, n.
1. Numeration by the head; a numbering of persons.
2. The tax, or imposition upon each head or persons; a poll tax.
Income, n.
That gain which proceeds from labor, business or property of any kind; the produce of a farm; the rent of houses; the proceeds of professional business; the profits of commerce or of occupation; the interest of money or stock in funds.
Tarif, n.
1. Properly, a list or table of goods with the duties or customs to be paid for the same, either on importation or exportation, whether such duties are imposed by the government of a country, or agreed on by the princes or governments of two countries holding commerce with each other.
2. A list or table of duties or customs to be paid on goods imported or exported.
Considerations
There can be little doubt that the structure of government and apportionment had a purpose, in the minds of the Framers. At the time of the Federal Reserve Act, 16th and 17th Amendments [1913], the national debt had remained relatively level with that of just after the Civil War, about 2.5 billion dollars. Within just a few years, it has gone from that stable 2.5 billion to nearly 5,000 times that amount in 2010. Can there be any question as to the ability of the government to borrow money. The problem remains, however, that as we continue to borrow, can that debt be repaid. Taxation has become a means to pay the interest, though it is not sufficient to retire the debt.
By having direct taxes, without apportionment, easily imposed upon us, we have implemented a direct line from our wallets to the government. Considering that all direct taxes were intended to be apportioned, we can look at the Sixteenth Amendment to see what it really says. Remember, the Constitution required apportionment, and, it anticipated that direct taxes would be on land, not on the earnings of a workingman. 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.
Rather than going in to the legal ramifications of the Amendment, which has yet to be resolved by the courts, we can wonder what “gain” (definition of income) meant, then, as well as, if it was a direct tax upon something not previously granted, why it had to include the exclusion of apportionment.
If our debt had not grown since the civil war, and there was no need for additional revenue, why would Congress propose, and the states ratify, an amendment that created a completely new method of taxation. After all, they had not exercised all of those taxes anticipated by the Framers, though in the slow evolution of the “income tax” to what it has become, invading our private records for information; multitudes of new officers to seize our property. After all, from an historical perspective, we can look to the Declaration of Independence to see that such a means as was to be used to collect this new tax was well defined in the objections to the British Rule that resulted in our independency. From the enumerated complaints in the Declaration, “He has erected a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance”. What conceivable method of taxation could require more new offices and officers to harass our people and eat out their substance?
Now, with this in mind, what impelled Congress to establish the most burdensome and intrusive means of tax collection possible? Duties are based upon tariffs, and easily collected at ports of entry. Excise taxes are collected by those licensed for the particular activity upon which the tax applies. Finally, land, which doesn’t move, is already assessed as to value, and has collection methods in place. Instead, the Congress established a new form of taxation, never before conceived as to being practical, and at present, requiring review and collecting from over two hundred million people, along with the forces necessary to review, audit and collect those taxes. To add to the idiocy of that system, how many of the people’s own hours of life are committed, each year, to the production of the necessary records to satisfy those tens of thousands of agents, taking that time away from them, their families, their leisure, and their productive pursuits?
We need to consider, too, a couple more events in our history that reflect on taxation. First was the excise tax on WHISKEY, resulting in the Whiskey Rebellion in 1791. The country needed money. They imposed a tax on the production of whiskey. Whiskey was a product of surplus grain. Since the producers of whiskey in Pennsylvania had very little in the way of circulating money, they were unable to pay the taxes. So, they would either have to stop producing, which meant that they could not barter with the whiskey, or they would have to find some “hard currency” to pay the taxes. They were put down by force, and all we have to gain from this event is the experience of the effect of misplaced excise taxes.
The other situation lead to the bloodiest war in our history. Contrary to popular belief, the slave issue was not the primary event leading to the Civil War. Slavery did not become an issue until well into the war, though states had seceded from the Union even before Lincoln was inaugurated.
Congress, however, had enacted tariffs that were unequal, and detrimental to the South and its economy. High important tariffs forced them to buy manufactured goods from the North, paying more than what overseas source would require for the same products. It was based upon forms of taxes more than slavery that forced the disjointing of the Union.
Conclusion
Federal taxes must be Constitutional, and should be as little burden on the people as possible. Regardless of what the tax is imposed on, the people will ultimately be the source of that revenue. If on import duties, the people will pay higher prices. If on excise taxes, the people will pay higher prices. The importers and manufacturers will simply add the cost to the product to recover the cost of the taxes.
Excise, impost and duties can be applied in an equitable manner if due consideration (not benefit for contributions to campaigns) of their source is considered.
Let’s look at Duty taxes. If the duty is on a product produced in a foreign country, and also produced in the United States, a duty tax that penalized the foreign importer in favor of the American producer might be warranted, unless it was high enough to be protective of the American product, allowing excessive profit to the American Manufacturer. Balance of trade should also be considered with regard to import duties. If we allow too many imports and reduce our exports, we create an imbalance of trade whereby we owe foreign nations more than they owe us. Ultimately, this will have a detrimental effect on our whole economy.
Consideration should also be made as to whether a product is a necessity, or, for comfortable life, or, a luxury, something only desired by a small portion of our population. Consideration of the circumstance that lead to the Civil War, where the duties tended to place an economic burden on an entire region should be avoided.
To provide fairness in such taxes, perhaps a list of general categories could be developed and all products within that category be taxed at the same rate, or a very small range within that category.
Excise taxes pose a different sort of problem. When the tax is applied to one object, the price of that object is increased. In many instances, today, the tax on an item may well exceed the cost to produce, distribute, and sell that item. This amounts to an extremely unfair burden on those who use that product. It might also provide an economic favor to a similar item that is not subject to the same excise tax.
* * *
Now, let us look at the direct taxes. At the time of the Constitution, there were two forms of direct tax. One was on land; the other was a capitation tax, which was an equal tax on each ‘head’. One form of capitation tax was the poll tax, which was made illegal by the 19th Amendment. The only tax even remotely similar to the Capitation Tax, that we have, today, though not envisioned by the Framers, is the income tax. It is not apportioned, though the Framers considered apportioning to be absolutely necessary in both direct taxes and representation. Surely, the impracticality, along with the expense associated with collecting the income tax, makes it a likely candidate for history, not for a means of efficiently and effectively raising revenue.
Perhaps an alternative in the method of collection, consistent with what Mr. Madison gave us, would be in order. Suppose we realize that the federal government will never again face the difficulty in receiving monies due from requisitions to the states. Can there be any doubt that the means, and, more than likely, the willingness to “pay up”, by the states, exists? Especially, if the 17th Amendment is repealed, thereby returning to the state legislatures the means to resist excessive taxation that they will have to eat out [the] substance of their constituent’s pockets? Clearly, they understand more than the federal government the economic abilities of their own state. Clearly, they would best represent us in defending against excessive spending by the federal government.
We can include another benefit to this method of collection. Today, the federal government collects taxes through their burdensome system. They then establish a bureaucracy, which is assigned the responsibility to determine redistribution back to the states, based upon evaluation of need determined by people appointed, not elected, into that capacity. How susceptible to undue influence is such a system? And, how many dollars are squandered in the re-administration of funds that left the state only to be returned to them? Finally, how much influence has the redistribution given to the state and local government by simply putting conditions, probably detrimental to the people, on those agencies that are the beneficiary of these returned funds? Are not our local and state governments more qualified to determine where this money should go to support the needs of the state? Need we pay federal people to ask state people, whom we also have to pay, to decide the what, where and how much will come back to the state, and pay both ends of this middleman when he is not even necessary if the State collects the funds before settling the requisition, and then retains that which is left?
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