Taxes, taxes, taxes
How we can hate them less
The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing. ~ Jean-Baptiste Colbert
English constitutional history, and hence American constitutional history, began in a fight over taxes. King John needed money to fight an unpopular war, and to get it he turned to the barons he nominally ruled. They balked, and John lacked the power to coerce them. A negotiation ensued, in which they agreed to give him money and he consented to the principle that taxes would not be levied except through a council of their representatives. Later the pact was branded Magna Carta—Great Charter—and its promise of no taxes except by representative government became a cornerstone of England’s unwritten constitution.
The principle surfaced early in the troubles between Britain and the American colonies in the 1760s. James Otis, Patrick Henry and other Americans denounced the Stamp Act for levying taxes on Americans without the Americans’ consent. In speeches, resolves and broadsides (posters), American leaders declared, “Taxation without representation is tyranny,” and vowed, “No taxation without representation.”
The slogans rallied American opposition to Britain. Nobody likes taxes, and many find it easy to condemn those who try to collect them. But once the Americans achieved independence, tax collection became America’s problem.
It wrecked America’s first national government. The Articles of Confederation denied taxing power to the central government, which was restricted to requesting money from the states. They found reasons to deny the requests, and the government foundered.
In its place was erected a new government. The Constitution of 1787 was explicit on taxing authority: “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."
The authority to tax having been won, the collection of taxes became an issue. Events revealed that the American colonists hadn’t merely been upset about taxes without representation; they disliked taxes of any kind. Congress levied a tax on whiskey, and immediately whiskey distillers rose in rebellion. George Washington felt compelled to reprise his role as commanding general; he mounted up and led into the field a force as large as his Continental Army during the Revolutionary War.
The whiskey rebels dispersed but the problem didn't go away. For several decades it was mitigated by the fact that the scope of the federal government was small, and so therefore were the revenues it required to operate. Until the Civil War the federal government got by on excise taxes, import duties and proceeds from land sales. All three were relatively easy to collect, at point of purchase or landing. Bootleggers and smugglers evaded them but only at the margins.
The Civil War dramatically increased the demands on the federal government, which levied an income tax to meet the need. This was harder to collect, as it required self-reporting of income by those being taxed. It lapsed after the war before being declared unconstitutional by the Supreme Court in 1895, for not being “uniform throughout the United States”—that is, apportioned among the states by population.
This difficulty was remedied in 1913 by the passage of the Sixteenth Amendment, the most important measure in the history of American taxation. Not only did the amendment guarantee a new revenue stream for the federal government, it also allowed the injection of extraneous policy considerations into tax policy as never before. Progressive reformers had advocated an income tax as a way of ameliorating the inequality in wealth and income that accompanied industrialization. The amendment let them write policy to that end, and they did so with a vengeance. In a few years tax rates ranged from zero percent on the lowest incomes to almost eighty percent on the highest. This rate scheme was called "progressive" both on account of its origins in progressive politics and because the rates advanced—or progressed—with income.
The argument that the rich could afford to pay more in taxes than the poor was unremarkable, but the same argument could have been satisfied with a flat-rate scheme, under which a person who made twice as much money as someone else would pay twice as much in taxes. The escalating rates, however, afforded greater satisfaction to the soak-the-rich desire of the progressives.
Yet it was a devil's bargain. It tempted those in the upper brackets to cheat on their taxes—or if not to cheat, to adjust their finances so as to minimize taxable income. A whole industry in law and accounting emerged in response. Moreover, once tax policy became so clearly associated with a particular political agenda, individuals and groups with other agendas began to calculate how to turn tax policy to their ends.
A chief advantage of using tax policy to further other ends was that it allowed an off-the-books disbursal of government largesse. To win votes for the Sixteenth Amendment, its backers had promised to deduct mortgage interest payments from taxable income. This was of immediate benefit to the people with mortgages, but it also boosted banks and the real estate market by making mortgages and therefore homes effectively cheaper to the buyers.
This favored treatment evoked envy in other industries and interest groups, which lobbied for and won comparable favors. Farmers received tax breaks, as did churches and charities. Investors paid a lower rate on capital gains than on ordinary income. Corporations moved profits overseas to dodge taxes, with the permission of Congress.
As the tax code grew more complicated, the tax lawyers and accountants became more necessary. They united to frustrate reform of the code, lest the market for their services diminish.
They had allies on the anti-tax right. Opponents of bigger government had long resisted any measures that made the payment of taxes less painful. They lamented the withholding of taxes from paychecks, instituted in the 1940s. They especially despised the idea of tax refunds, which many people received when their withheld taxes exceeded the taxes they owed. Millions of Americans looked forward to April 15 as the day the government wrote them a check; to the opponents of big government this demonstrated the insidious ability of Big Brother to turn lies into truth.
Would-be reformers pondered repairs to the damage the tax code did to notions of fairness and efficiency. But with reason they feared even raising the issue of tax reform, lest the lobbyists hijack the effort and win more favors for the groups they represented.
Yet if the tax code could be reformed, what might reform look like? If one could start anew, what principles might a better code be based on?
First, the system should be simple and transparent. Inequity and inefficiency hide in complexity and obscurity.
Second, taxes owed should be be hard to avoid. Simplicity and transparency would help make violations obvious. Better still, the tax code should enforce itself, as much as possible. Income taxes long struggled to pass this test, but better reporting of income to the Internal Revenue Service now makes concealing income harder than in the past. Sales taxes and value-added taxes have a built-in advantage on this score, because the fact that there are two parties to any transaction means that each reports on the other.
Third, tax policy should be divorced from other policies. This would be a prerequisite to any really simplifying reform. Start with a flat-rate income tax, assuming an income tax is retained. And eliminate all deductions. If poor people need more money, let the government write them checks rather than hide redistribution in the tax code. If Americans want to promote home ownership, again do it with cash rather than tax breaks.
Finally, don’t listen to Jean-Baptiste Colbert. The finance minister to Louis XIV reformed the French tax code against bitter opposition from French aristocrats. He eased Louis’ problems, but his artfulness in feather-plucking merely bought time, which ran out when the French Revolution swept away the ancien régime. A quiet goose is not necessarily a happy goose.