The year 1913 was one of the most revolutionary years in American history. Two things dramatically changed the nature of American society and the philosophy of freedom under which Americans had previously lived: the 16th Amendment to the Constitution and the passage of the Federal Reserve Act.
Since the time of the founding of the United States in 1787 until 1913, Americans were free to accumulate unlimited amounts of wealth, for there was no taxation on income, and even indirect taxation (i.e., tariffs) was extremely limited. Americans believed that individuals had the natural, God-given right to live their lives the way they chose (liberty), engage in economic enterprises with others without governmental restriction (free enterprise), accumulate the fruits of their earnings (property), and decide what to do with their wealth (free choice). Unlike their European counterparts, our American ancestors refused to permit their governmental officials to have omnipotent power over their earnings.
Moreover, Americans knew from history the dangers that direct taxation posed to individual liberty. If public officials — whether democratically elected or not — had the power to directly confiscate the wealth of the people through direct taxation, there would never be a stopping point. Americans knew that taxation would never cease to rise because the needs and crises of government are always never-ending.
Thus, from the start in 1787, the national government’s operations were funded by indirect taxation — the tariff — and even then, the total tax probably never exceeded about one percent of people’s income.
Why didn’t the national politicians and bureaucrats simply impose income taxation on the American people? Because everyone understood that the government’s powers emanated from the Constitution — the document that the American people had used to bring the national government into existence. If a power was not listed in the Constitution, the national government was not permitted to exercise it. And the power to levy an income tax was simply not listed.
There was one attempt to violate the constitutional restriction on income taxation. During the Civil War, President Lincoln knowingly and deliberately violated the law — the higher, constitutional law that applied to him as president — by imposing an income tax to help fund the war. But when the case reached the United States Supreme Court, the tax was held to be unconstitutional. The Court examined the Constitution, found that the power to levy a tax on income was not listed among the powers granted to the national government, and declared the tax null and void.
It is impossible to understate the significance of the American way of life before 1913. Americans were free to accumulate unlimited amounts of wealth. And there was nothing public officials could do about it. Imagine: no income tax, no Internal Revenue Service, no income-tax returns.
This is what it once meant to be free — to live your life the way you chose (so long as it was peaceful), to engage in economic enterprise without licenses or other governmental permissions, to accumulate unlimited amounts of wealth, and to decide what to do with that wealth.
All of that changed in 1913. The Sixteenth Amendment to the Constitution permitted the national government to impose income taxation on the American people. It almost boggles the mind — Americans went through all of the time and effort required to amend their Constitution in order to permit their politicians and bureaucrats to have control over the fruits of their earnings!
Life has not been the same since. Taxation at all governmental levels, including income taxation, now takes close to fifty percent of people’s income. In other words, modern-day Americans are required by their government officials to work half their lives for the sake of their rulers.
But the real significance of the 1913 income-tax revolution does not lie in the percentage of people’s income taken by public officials. No, the real significance lies in the revolutionary transformation in the nature of the relationship between the American people and their governmental officials.
Before 1913, the individual was sovereign and supreme. He was the boss. He worked for himself and for his family, and public officials could not force him to work for the government. In other words, he was a free man. Government officials were the servants.
With 1913, the American people’s relationship to their government was dramatically changed. The relationship became the same as that which had existed in Europe and all over the world throughout history. Government officials, not the individual, were now in charge. If public officials ordered people to work only three percent of their lives for the government, they were considered more benevolent. If they ordered the people to work fifty percent of their lives for the government, they were considered less benevolent.
But what mattered was not the percentage but rather that the relationship of master and servant had reversed. Government officials were now in control. They were now the masters. The people were now the serfs.
In other words, freedom does not depend on whether a person is being forced to pay three percent of his income to government or forty percent of his income to government. Freedom is an absolute. One is either free or not free. It is only slavery that comes in degrees. In the Old South, some plantations were more pleasant to work on than others. But that certainly did not change the nature of the slave’s relationship to his master.
If I have the power to order you to work for me, you may be happy that I require you to serve me only one day a week. You may be less happy if I make you serve me six days a week. But regardless of the length of time I order you to wait on me, neither of us can dispute the essential nature of our relationship: You are my servant, and I am your master. You will obey when I order you to obey.
And that is the crux of 1913. Americans today are the servants and public officials, albeit democratically elected, are the masters. Sometimes, they order us to work just a few months each year to sustain the political bureaucracy; other times, we have to work longer and harder. But make no mistake about the revolutionary nature of what happened in 1913: Public officials are the masters; we are the servants. They set the orders as to what percentage of our lives must be devoted to them. And we obey, because that is what servants do.
And political elections have become one gigantic quest in which some of the serfs devote their monies and their energies not to become free, but rather in a desperate attempt to become one of the periodic rulers.
Why in the world did 20th-century Americans do this? For over 125 years, Americans had lived a life of freedom — a life without income taxation. Why did they amend their Constitution in order to live a life of serfdom — a life of constant terror and fear of agents of the Internal Revenue Service?
I don’t know the answer to that question. It has befuddled me ever since I learned what the American people did in 1913. Envy and covetousness had to have played major roles. Every human being suffers from these sins. No one is immune from resenting those who have more when he has less. No one is immune from coveting the things that belong to others.
But the bad consequences of envy and covetousness are minimized when they are limited to private dealings between people. We may wish we had our wealthy neighbor’s money, home, car, and boat, but we recognize that it is morally and legally wrong to transform our envy and covetousness into theft and robbery.
That changed in 1913. The ideal, of course, would have been never to have passed the Sixteenth Amendment in the first place. But notice that there were various options that could have been used once it was decided to permit the national government to impose income taxation. One option would have been the addition of the following clause: “Everyone will be taxed at the same rate.” Another clause could have been: “Under no circumstances will the rate of taxation ever exceed 5 percent.”
Instead, the Sixteenth Amendment permitted government officials to tax people at different rates — what was called progressive or graduated income taxation. And there was no ceiling to the rate.
This was the crucial method by which politicians and bureaucrats were able to sell the American people on income taxation — by appealing to the envy and covetousness that existed within the American people. Americans were promised and told that the tax would never exceed two or three percent and that it would be imposed only on the wealthiest people in society.
What a bonanza for those who resented the tremendous wealth that had been accumulated during the Industrial Revolution! Never mind that the standard of living of the American people — and especially those at the bottom of the economic ladder — had soared. Never mind that middle-class Americans were living better than some of the wealthiest kings in European history. Never mind that the wealthy were creating the jobs and building the universities, museums, opera halls, libraries, and hospitals. All of that was irrelevant. All that mattered was that for the first time in history, “regular” people were extremely wealthy, and other, less wealthy “regular” people hated it.
The graduated income tax permitted the less wealthy to satisfy their envy and covetousness under the guise of European “respectability.” After all, this was simply taxation — what the enlightened governments of Europe had done throughout the ages. Even more important, it was being done democratically.
The idea was that what was admittedly an immoral act — envy, covetousness, and stealing — could be converted into a moral act through the simple sanction of the voting process. How could all of this violate God’s Ten Commandments, the reasoning went, when it was simply a part of America’s political system? Surely, God would understand and agree, especially when He read the Federal Register.
The irony is that a nation of people who pride themselves on being God-fearing Christians tithe a maximum of ten percent of their incomes to God and almost fifty percent to Caesar. And what is amusing is how these God-fearing Christians never tire of telling us how the Lord is the most important thing in their lives!
The progressive income tax did not come from Jefferson, Washington, Madison, or any of America’s Founding Fathers. Of course, the omnipotent governmental power to take people’s property and income has existed throughout the ages. But the progressive income tax — the power to take from those who have more — was a primary feature of the 19th-century European socialists. In fact, it always shocks Americans who have been educated in public schools to discover that one of the ten planks of Karl Marx’s Communist Manifesto was the graduated income tax.
And it is this truth that makes present-day Americans so uncomfortable. They have a difficult time confronting that their parents and grandparents abandoned the central ideas of life, liberty, and property in the Declaration of Independence for the sake of the old, bankrupt European ideas against which our ancestors revolted in 1776.
What makes present-day Americans even more uncomfortable is the knowledge that they themselves share the convictions of their parents and grandparents rather than the convictions of America’s Founding Fathers. The evidence for this continued abandonment — and the primary reason for it — is also listed in Karl Marx’s Communist Manifesto: a central bank as well as public schooling.