Our current political culture has become one of ever-changing buzzwords. Currently the phrase “fundamental tax reform” is one that has gained quite a bit of traction on both sides of the political aisle. From Republican Senator Orrin Hatch UT, to the Committee for Economic Development, or even the White House this phrase is permeating our political discourse. Of course, each of the aforementioned parties would take drastically different approaches to the reform and as complicated as our current system is they tend to focus on small portions of a 70,000 plus page tax code. However, the problem that exists within those pages is not merely the corporate tax rate or the rate paid by millionaires and billionaires. It is not just the collection method or income that is taxed more than once. The problem is an overbearing and far-reaching system that has far outgrown its original intent.
In discussing the problem and a probable solution it is best to examine the past. By learning more about the idea that created our current system it can help us to forge a new path and not retread some of the same areas that led to an unwieldy oppressive tax code that punishes success and prosperity.
To gain this historical perspective we need only to venture back to 1861. In an effort to raise funds for the Civil War the congress passed the Revenue Act of 1861. It created a flat tax of 3% on annual income exceeding $800. This was replaced by the Revenue Act of 1862. This act introduced a graduated tax of 3-5% on incomes exceeding $600. An important aspect of this law is that it was written to expire in 1866.
There are two very important historical notes here. First note that it took only one year for a flat tax to turn into a graduated tax. Also note that the definition of who would be taxed also changed within a year’s time. The 1862 Act also required the employer to withhold the tax from the employee, marking one of the first major assaults on private property in our history.
After 1866 these taxes dissipated as promised however any casual student of history knows that once the government develops a means to tax, it is very hesitant to let that revenue stream disappear. Almost 30 years later the Wilson-Gorman Tariff Act in 1894 lowered the tariff rates and attempted to implement a 2% flat tax on income exceeding $4000. (approximately $88,100 in 2010.) It has always been more popular to propose new taxes on the wealthy even when lowering the taxes on the masses. The arguments are heard for similar proposals today.
The most important historical note of the Wilson-Gorman Tariff Act is that the income tax provision was ruled unconstitutional in 1895 by the United States Supreme Court. The case was Pollock v. Farmer’s Loan and Trust Co. 157 U.S. 428 (1895). The direct taxes on properties that were not apportioned in regards to the states violated the powers given to congress by the constitution.
Since the specter of an income tax, flat or graduated, rose in the early 1860’s the idea of an income tax had gained support from a variety of areas. In 1887 the Socialist Labor Party voiced their support for a graduated income tax; in 1892 the Populist Party joined the cause. In 1908 the Democrat Party placed an income tax in their party platform. The movement did not subside and was not dismayed by the Supreme Court decision. In fact in the election of 1912 all three candidates for President supported an income tax. When the dust settled in the three-way race between Woodrow Wilson, Theodore Roosevelt and William Howard Taft it was Wilson and the Democrats who won and were responsible for passing the Revenue Act of 1913. It instituted a 1% flat tax on everyone and a graduated tax up to 7% for those making above $500,000. To answer the Supreme Court’s objections the Sixteenth Amendment to our Constitution was also passed. This amendment gave the congress the power to tax income “from whatever source derived”. A far cry from the limited and specific powers granted in the constitution, this nonspecific broad power has morphed into an ever-expanding right of the government to take income at every level.
All of these decisions served as the genesis for the system that we currently endure. Our country was founded in 1776 on the principles of life, liberty and pursuit of happiness. Some rightly include the addition of property. In 1913 our right to our own property was taken away. Before we are even able to see the product of our efforts the government takes whatever it deems to be necessary from our paychecks before handing us the remainder. Even after this process is completed we must all work for the government at least one day a year to deduce if they have taken the correct amount. If we find that they have not we must dutifully pay the difference. This is not the government envisioned by our forefathers. It is a system that oppresses; we suffer under an overbearing government that only seeks to broaden its reach. It is time for a return to our founding principles and documents. There is a method and a way, it is called the FairTax.
For further reading please check back next week or read H.R. 25 to see the bill that has the ability to turn back the tide.