February 3rd marks 100 years since the 16th Amendment was adopted to the U.S. Constitution which allowed Congress to impose taxes on income from any source without having to apportion the total amount collected from each state according to population in proportion to the total national population. Confused? I was too when I first started reading about this, but I think a little background on direct and indirect taxes will help your understanding of the topic.
Prior to the 16th Amendment, most tax revenue at the federal level was derived from excises, tariffs, and sales taxes; in other words, indirect taxes. Indirect taxes are essentially taxes that can be avoided legally. If you don’t want to pay high cigarette taxes, don’t smoke. Bottom line, the individual can control how he spends his money and, in essence, how much tax he pays. Freedom of choice was the central tenet of this idea and the Founders believed it to be the essence of liberty.
Since market forces would determine how much money would be taken in yearly (after all, people still smoke, buy and sell goods, pay tariffs on trade, etc), it forced the Treasury to be fiscally prudent and kept the federal government small. THIS WAS BY DESIGN.
On the other end were direct taxes. This should be read as taxes you could not escape, i.e., taxes based on ownership or existence (property and capitation). The Founders were wary of such a tax because they had just rebelled against a king who was imposing taxes of all kinds on a whim and understood the dangerous nature of such power. Chief Justice John Marshall acknowledged such when he stated, “The power to tax was the power to destroy.”
While the Constitution did allow for direct taxes, it stipulated that they be apportioned among the States and their populations, which in layman’s terms translates to a flat tax. And you had to have a specific reason to impose it, such as to fund a war.
Now this idea of freedom of choice is also embedded in the composition of our Republic. The Founders designed the political system to mimic the most successful economic system they had encountered, a free market. See the 10th Amendment. With a small federal government and the powers not delegated to it reserved to the States respectively, each state could be a localized experiment, a petri dish in which to create laws reflective of the desires of its people. For example, don’t like what New York is doing right now with respect to high taxes and gun control? Vote with your feet. Currently (in theory), there are 49 other petri dishes out there that might fit your style. I’m partial to New Hampshire and Virginia. But that option, that freedom of choice, dissolves the more control is ceded to the Federal Government.
The Founders were also men that understood history and military strategy (as I do) and incorporated that knowledge into their new system. If you pursue a retreating military force, but leave them an escape route, they will take it. Press an opposing force with their backs against “death ground” (to be read as no way out but through you), and they are coming back at you 10 times as fiercely, because you’ve cornered them and forced them into a fight for survival. At the end of the day, as long as men have the freedom to choose, they have an out. The more federal laws are imposed, the more choice is reduced. Do you see the parallel now? Does the importance of a small federal government now make sense?
Which brings us back to the 16th Amendment. Once ratified, it opened the flood gates for rampant taxation of every kind without constraint which inevitably provided the initial seed money for the Leviathan that Thomas Hobbes warned us about. Over the past 100 years, the additional funds begat additional agencies providing additional promises and additional services and those services began to outpace the money necessary to pay for them, so more taxes needed to be levied. But more taxes are unpopular, and politicians seeking to raise money to pay for their pet programs found themselves getting booted from office. Then they found the credit card. Now, the programs expand and the people are happy, but the debt grows. However, that only works as long as the Chinese and Japanese and everyone else continues to buy our bonds and lend us money. Once they figure out they aren’t getting paid, we crash and burn.
On that, buy yourself a beer or two this Sunday to celebrate this historic occasion—–and be sure to use the credit card.