Our democratic republic was founded by courageous revolutionaries whose passions for freedom were ignited by a loathing of “taxation without representation”. While we have enjoyed political representation for 238 years, our freedoms have been incrementally eroded by a patchwork quilt of government “security” programs. Each “socialistic panel” of this “subservience quilt” promises to only slightly affect individual freedom in return for increased “entitlements”. The cumulative affect of this “subservience quilting bee” undertaken by politicians affected by the contagious influence of socialists within our nation for over a century threatens to ultimately replace the “dignity of self-reliance” enjoyed by previous generations with the “naked embarrassment of dependence”… socialism, the “equality” that is poverty itself.
Because taxation and deficit spending (pre-taxation of the yet unborn) have been employed to fund these socialistic government programs, any discussion regarding the erosion of freedoms must logically begin with a sound understanding of taxation.
The subject of taxation is examined by first recounting the advice of liberal (in the classic sense) “trailblazers” such as Scotsman Adam Smith, Frenchman Frederick Bastiat, Austrian Friedrich Hayek, and America’s Founders, along with contemporary voices such as the late Milton Friedman. Secondly, legitimate spending priorities of government are presented in their rough order of importance to the Founders. Consumption-based, Income-based, Wealth-based, Commerce-based, and Hidden taxation are then discussed, pointing out advantages and disadvantages of each individual tax within these five major categories. Lastly, the relative merits of each individual tax are rated in terms of the advice of the “trailblazers”.
The late Milton Friedman was, in 1976, a recipient of the “Prize in Economic Sciences in Memory of Alfred Nobel” for his achievements in economics.
Friedman served on President Reagan’s Economic Policy Advisory Board. He was most proud of his role in eliminating U.S. conscription (the military “draft”); an idea that has resulted in the most professional and technologically advanced military in history.
Milton Friedman vigorously opposed activist Keynesian government policies. Even Keynes* himself, just before his death in 1946, stated "I find myself more and more relying for a solution of our (England’s) problems on the “invisible hand” which I tried to eject from economic thinking twenty years ago.” That “invisible hand” was Scottish philosopher Adam Smith, free market advocate and author of “An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. Adam Smith planted the seeds of understanding that have nurtured the concept of “limited government” ever since.
Smith emphasized that consumption is “the sole end and purpose of all production”. He stressed that true wealth comes from labor with land playing only a minor role. He saw no value to the economy of “hoarding” anything and reviled the tendency of the wealthy to “waste” their wealth on personal servants (unproductive labor). Perhaps most importantly, Smith understood that economic growth is inhibited by government spending for unproductive labor (that which produces no tangible product of use to consumers), so it is better to have less government and consequently lower taxes on the capitalists so that they may accumulate more capital to be used for production of goods to be consumed.
*Keynes also thought that it would be a mistake to let government get too large and understood the theory of the Laffer curve, believing that 25 percent of Gross Domestic Product (GDP) was the maximum tolerable proportion of taxation.
Milton Friedman’s quotations on taxation are a fitting beginning to this analysis of the relative merits of various methods of taxation:
“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible… because I believe the big problem is not taxes, the big problem is spending. I believe our government is too large and intrusive, that we do not get our money's worth for the roughly 40 percent* of our income that is spent by government ... How can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes.”
- Milton Friedman - As quoted in Conservatives Betrayed : How George W. Bush and other big government Republicans hijacked the conservative cause (2006) by Richard A. Viguerie, p. 46
* Total government spending peaked at 42.83% of GDP in 2009, a peak exceeded only during World War II (50.02% and 52.99% of GDP in 1944 and 1945 respectively). In year 2010, 40.97% of GDP (actual reported) was spent by all levels of government. Estimated total government spending for year 2013 will represent 38.01% of GDP. This level is still far in excess of Keynes’ recommended maximum of 25% of GDP.
“If a tax cut increases government revenues, you haven't cut taxes enough.”
- Milton Friedman - As quoted in "Milton Friedman's Last Lunch" at Forbes.com (11 December 2006)
What did our founders deem to be the role of government?
Thomas Paine most eloquently expressed the proper role of government in “Common Sense”, as follows:
“SOME writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness POSITIVELY by uniting our affections, the latter NEGATIVELY by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher.
Society in every state is a blessing, but Government, even in its best state, is but a necessary evil; in its worst state an intolerable one: for when we suffer, or are exposed to the same miseries BY A GOVERNMENT, which we might expect in a country WITHOUT GOVERNMENT, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built upon the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in every other case advises him, out of two evils to choose the least. Wherefore, security being the true design and end of government, it unanswerably follows that whatever form thereof appears most likely to ensure it to us, with the least expense and greatest benefit, is preferable to all others.”
“Here then is the origin and rise of government; namely, a mode rendered necessary by the inability of moral virtue to govern the world; here too is the design and end of government, viz. Freedom and security.”
James Madison stated “The powers delegated by the proposed Constitution to the federal government are few and defined [and] will be exercised principally on external objects, as war, peace, negotiation and foreign commerce”.
Milton Friedman understood that the ONLY way to FORCE SPENDING CUTS is to “TURN OFF THE SPIGOT” with tax cuts.
But which taxes should be cut and in what order?
Part I - Legitimate Government Taxation
Taxation has been imposed throughout history to fund the efforts of legitimate government. Those efforts, in rough order of importance to the population as a whole, are:
A. National Security (intelligence, army, navy, air force, coast guard, etc.)
“Constitution of the United States, Article I, Section 8… The Congress shall have the power to declare war…”
If a country’s citizens are slaves to a foreign power, its government is useless.
B. Commerce (roads, bridges, airports, waterways, seaways, etc.)
“Constitution of the United States, Article I, Section 8… The Congress shall have the power to regulate commerce…”
The protection of commerce is closely linked to national security.
C. Protection of Life and Property (fire, police, public health, water purification & distribution, sewage and garbage collection and disposal)
Citizens’ desire for “security” must be deemed secondary to their rights to “freedom”.
D. Enforcement of laws and contracts that promote public order (judicial/penal system)
“Constitution of the United States, Article III, Section 1… The judicial Power of the United States, shall be vested in one Supreme Court, and in such inferior Courts as the congress may from time to time ordain and establish.”
“Constitution of the United States, Article I, Section 8… The Congress shall have the power to constitute Tribunals inferior to the Supreme Court”
Without law enforcement and penalties for wrongdoing, chaos, disorder & anarchy rule.
E. General Welfare Preamble to the Constitution of the United States: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote* the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity**, do ordain and establish this Constitution for the United States of America.”
* The verb “promote” as applied by the Founders in the General Welfare Preamble, in contrast with the stronger verbs “form”, “establish”, “insure”, “provide”, and “secure” used to describe the other elements supporting establishment of the constitution, suggest a government role that encourages private philanthropy. The General Welfare Preamble, therefore, may logically be argued to provide legitimacy to the concept of tax exemptions for philanthropy only.
**All future generations.
Justice and licentiousness are inversely proportional (as one ascends, the other descends), representing good and evil in mankind’s infinite struggle to evolve to a higher plane. The confusion of “liberty” with “licentiousness” has and always will be a key element in the downfall of individuals and ultimately, societies. Are you listening, Libertarians?
It is not difficult to imagine the views of Paine, were he present in our modern world, concerning the difference between taxes and tithes; the difference between charity and government entitlements; and the difference between the “inevitable indoctrination” in public schools versus the “morality and ethics” presented by private (especially private “parochial”) education.
A. National Security: Federal involvement in publicly funded transportation is not included in the Constitution, although the federal responsibility to “provide for the common defense” has been deemed legitimate to allow federal funding (Federal Highway Administration 90% matching grants from the “Highway Trust Fund”) for construction of the “Dwight D. Eisenhower National System of Interstate and Defense Highways”. Our national railroad funding experience is, conversely, a condemnation of that particular government involvement.
B. Commerce: The “commerce clause” has been stretched to the limits of rational thought, leading to federal incursion into almost all aspects of life, including regulation of agriculture, energy, housing, and small businesses.
Government sponsored enterprises (GSEs) Fannie Mae (Federal National Mortgage Association, created in 1938) and Freddie Mac (Federal Home Loan Mortgage Association, created in 1970) are examples of federal incursion into private home lending markets. Even after these federal agencies were found guilty of accounting fraud and paid fines of $400 Million (FNMA, 2006) and $50 Million (FHLMA, 2007), and are in conservatorship, there are no substantive discussions in Congress toward privatizing Fannie and Freddie.
C. Protection of Life and Property: Local government officials almost routinely defend property and sales tax increases by claiming that police, fire, and public health efforts would necessarily be cut without the increase in taxation. The same officials’ efforts to enrich their “friends” (those in business and labor who aided in their election) are likely to have (at least partially, if not fully) caused the “need” for increased taxation. The most obvious examples are unnecessary public expenditures within economic areas better served by private enterprise, including ventures into sports, the arts, advertising, and research that are much more efficiently undertaken by private or nonprofit entities.
When any local government official wishes to enter into collaborative ventures with private and/or nonprofit entities, be assured that such activity is either for the purpose of getting their (or their friends’) name placed on a public building or, in some other way, to be “rewarded” to the detriment of taxpayers. This is rightly identified as “legal plunder”.
D. Enforcement of laws: Debtors' prisons were prevalent throughout the colonies. The federal government eliminated the imprisonment of debtors under federal law in 1833, leaving the practice of debtors' prisons to states. The states continued this practice through the mid–1800s.
E. General Welfare: At the time of the birth of our nation, the least legitimate reason for taxation, “general welfare”, consisted of “poor houses” located on the grounds of “poor farms”. Poor farms were county or town-run residences where paupers (mainly elderly and disabled people) were supported at local government expense. Poor farms declined in use after the Social Security Act took effect in 1935, with most disappearing completely by about 1950. The “general welfare” provision in the preamble has also been stretched to the limits of rational thought, leading to excessive federal incursion into education, human services, and other areas that beg “local control” (and reluctantly, state “funding involvement”) to insure optimum efficiency.
Because people live longer, adjustments to Social Security will need to be implemented for those contributing involuntarily but not yet receiving benefits. Personal retirement savings accounts that permanently set aside 12.4% of gross wages up to the annually increasing cap ($113,700 in 2013) should be allowed to replace employee and employer contributions directly into Social Security, essentially exempting individuals from Social Security, making the system voluntary by allowing private options for those who wish to manage their own money.
Thomas Jefferson to William Branch Giles, 1825. The Writings of Thomas Jefferson, (Memorial Edition) Lipscomb and Bergh, editors, ME 16:146
“I see,… and with the deepest affliction, the rapid strides with which the federal branch of our government is advancing towards the usurpation of all the rights reserved to the States, and the consolidation in itself of all powers, foreign and domestic; and that, too, by constructions which, if legitimate, leave no limits to their power… It is but too evident that the three ruling branches of [the Federal government] are in combination to strip their colleagues, the State authorities, of the powers reserved by them, and to exercise themselves all functions foreign and domestic.”