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A Century of Economic Servitude

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Americans pay taxes all year round — sales taxes, tolls, investment taxes, user fees, estimated taxes, et cetera. And most of them were paying more on April 15 one way or the other.

That’s because at the tax-filing deadline, a slight majority of Americans owed more, according to the annual Capital One Tax and Savings Survey. Some 51 percent of Americans were sending more money to Uncle Sam under a system of income tax that began a century ago with the passage of the egregious Sixteenth Amendment.

Uncle Sam wins both ways. On April 15 he gets still more from millions of Americans. But what about the people who are getting money back? Certainly they are getting a fair deal, defenders of the system might say.

On the contrary, the government is also getting a great deal on the rest of Americans who, according to information provided to Capital One by the IRS, will be getting an average tax refund of $2,803. They are paying more than they must with every slimmer paycheck. That happens, say Capital One officials, because of their fear and confusion about the tax system. These people often misunderstand the reason for a tax refund, a Capital One official explains.

“People tend to think of their refund as free money or an annual bonus, which makes it very tempting to spend it right away, but remember that refund is your own money — without added interest,” according to Mickey Konson, managing vice president for Retail Banking at Capital One Bank.

How ironic. The American income-tax system has convinced tens of millions of Americans that they are getting something as a gift, a gift that belonged to them in the first place.

Millions of Americans are providing the government with $2,803 extra over the course of a year. That collectively represents an interest-free loan to the government in the billions of dollars.

How?

Each pay period, over the course of a year, taxpayers have shorted themselves of money they could have spent on themselves or saved and invested. And whether you are an employee or an independent contractor you are being cheated.

If you inadvertently underestimate your taxes, what happens?

You lose. You pay the tax, plus a penalty for underestimating. Indeed, the literary critic Edmund Wilson, who wrote about being harassed by tax officials more than half a century ago, was making the same complaint back then about the treatment of those with variable incomes.

“One is made to pay in advance every quarter for money one has not yet earned and to submit to being penalized at the rate of 6% if one falls short beyond a certain amount of guessing correctly one’s not yet future earnings,” wrote Wilson in The Cold War and the Income Tax: A Protest.

Wilson, once he ran afoul of the tax authorities, found himself subjected to endless oversight by government officials who made his life miserable. They wanted to know about his every expenditure. They even questioned him about a floor mat he bought for his dog. Their inquiries made Wilson feel as though he was living in a police state. His complaints will surprise no one versed in the history of the income tax. Let us consider the fears of two well-known 19th-century British prime ministers.

“The inquisition it [the income tax] entails is a most serious disadvantage, and the frauds to which it leads are an evil such as it is not possible to characterize in terms too strong” wrote William Gladstone, a British prime minister who tried and failed to abolish the income tax

“I have never denied that a good deal of inconvenience arises from enquiries … from the imposition of an income tax…. A certain degree of inquisitorial scrutiny is, therefore, inseparable from an income tax,” according to Sir Robert Peel. These are some of the reasons that Americans resisted the income tax for so long. The first one was enacted during the Civil War and was thought to be an emergency measure. It was revoked after the war, but later restored in 1913 along with the America’s central bank, the Federal Reserve, an institution much maligned by Jeffersonians.

These two institutions were and are essential to persistent and seemingly never-ending expansion of the federal government. They allowed the government to cheapen currency and at the same time reach directly into the citizens’ wallets by raising income-tax rates time and again. One American libertarian would write in the 1950s that imposing the income tax was a critical turning point in Washington’s centralization of American life and relentless assault on the power of states. For Frank Chodorov, there was only one solution to the problem — it wasn’t to reduce rates; it was to end the system of income tax.

“We cannot restore traditional American freedom unless we limit the government’s power to tax,” he wrote as a voice in the wilderness in the 1950s, a brilliant radical for liberty ignored by the mainstream press.

Still, for most Americans, and probably most editorial-page directors, his solution is too extreme. In part, implicit in their support for the income tax is that most people don’t think they’ll have ever the kind of problems of an Edmund Wilson. I’m speaking about those who never run afoul of the IRS. They paid their estimated taxes in the right amounts and then some. That is something that millions of Americans, both employees and independent contractors, are doing. I wonder whether they understand.

They also lose.

They’ve given their government what can amount to a huge interest-free loan. And by the way, either way, the government is forcing them to labor for it each year. They are required to act as a recordkeeper or hire someone to do so for them.

That costs lots of money and time. And even if, like me, you hire a CPA as your tax bodyguard at a considerable cost, you still have to assemble records and then work with your bodyguard. You do all that hoping to ensure that the government doesn’t make your life miserable, as it did in the cases of Edmund Wilson, Abbott and Costello, Joe Louis, Willie Nelson, and others.

And to verify what Gladstone warned about fraud, the taxpayer who complies with the system faces an incredibly complex and ever-changing system. He is also put in a morally questionable position. Does one tell one’s CPA to take all the deductions one seems entitled to or does one play it safe and pay more taxes? I know of several people who won’t take legitimate deductions because they fear the IRS. Yet some of them still end up with a tax refund

So why do Americans, paying more and more taxes every year, give the government, not known for low taxes, such easy loan terms?

Approximately 62 percent of respondents to the Capital One survey said that “they would rather be on the positive side of their taxes and said they do it because they were anxious about taxes,” Konson says. Konson agrees that they should adjust their take-home pay so they don’t, once again, give the government a zero-interest loan.

His advice to kindly loan providers: Save your $2,803 refund to build financial assets and don’t spend it all on a spending spree. But here, once again, our leviathan government, through its central bank, imposes a “heads it wins and tails you lose” system on the citizen. Why would anyone want to save a cent when the Federal Reserve has so distorted money markets that the interest rate is between zero and a quarter percent?

So how do we stop the income-tax madness?

The best place to start was explained by Chodorov in 1954 in his little masterpiece of a book, The Income Tax, the Root of All Evil.

“Repeal of the Sixteenth Amendment,” Chodorov wrote, “would not be a reform; it would be a revolution.”

Start the revolution.

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  • This post was written by:

    Gregory Bresiger, an independent business journalist who works for the Sunday New York Post business section and Financial Advisor Magazine, is the author of the book Personal Finance for People Who Hate Personal Finance.