MayerBlog: The Web Log of
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Those Damn Taxes!
April 15 is popularly known as “Tax Day,” for it is the day that personal income tax forms (and payments) are due at the Internal Revenue Service (or “Infernal Revenue Service,” as I often call it). The truly significant day, however, is so-called “Tax Freedom Day” – the day marking the lifting of the burden of taxation on the average American’s income. In 2000, Tax Freedom Day was celebrated May 3, the latest date ever. That meant that in that year, the average American had to work from January 1 to May 3 – a full five months of the year – in order to pay all his taxes (federal, state, and local), leaving to himself just the last seven months of his yearly earnings. A series of tax cuts between 2001 and 2003 – the “Bush tax cuts,” recommended by former President George W. Bush to Congress, which Democrats love to decry – pushed Tax Freedom Day up by more than two weeks, so it fell on April 16 in 2003 and April 17 in 2004. For the next three years, incomes and tax collections soared, pushing Tax Freedom Day back to April 26 in 2007. This year, according to the Tax Foundation (in its Special Report No. 165), Tax Freedom Day fell on April 13 – eight days earlier than in 2008, and a full two weeks earlier than 2007 – because of recently-enacted tax cuts and the reduction in income resulting from the recession. Nevertheless, Americans this year still will pay more in taxes than they will spend on food, clothing and housing combined. Moreover, an earlier Tax Freedom Day isn’t a trend that’s likely to continue. When federal budget deficit figures are calculated into the determination of Tax Freedom Day (in other words, if the projected deficit were counted as a tax), in 2009 it falls on May 29 – the latest date ever, under this alternative calculation, thanks to this year’s unprecedented $1.5 trillion deficit. (The only previous years when taxes and deficit spending comprised a similarly large share of national income were 1944 and 1945, at the peak of World War II. In the postwar era, this date has never fallen later than May 9 (in 1992).) With Democrats controlling both the White House and Congress (and with a president who has publicly stated his goal to use the federal government’s taxing and spending powers to “spread the wealth”), the future trend is indeed alarming. The $787 billion so-called “stimulus” legislation passed by the Democrat-controlled Congress and signed into law by B.O. – a.k.a. H.R. 1, the “American Recovery and Reinvestment Act of 2009” – will result in a massive increase in federal government spending this year and in future years. More ominously, B.O.’s proposed $3.6 trillion budget, according to the Congressional Budget Office, will produce record-breaking deficits of $9.3 trillion over ten years. This massive increase in federal government spending and, concomitantly, the national debt, raises the specter of burdensome taxation on future generations of Americans. Never in U.S. history has the future looked so bleak as it does now, as national policy-makers finally seem to be realizing the nightmare scenario that Thomas Jefferson warned about in 1816. To preserve Americans’ independence, he cautioned, “we must not let our rulers load us with perpetual debt”: “We must make our election between economy and liberty, or profusion and servitude. If we run into such debts, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they do now, on oatmeal and potatoes; have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers. . . . This example reads to us the salutary lesson, that private fortunes are destroyed by public as well as by private extravagance. And this is the tendency of all human governments. A departure form principle in one instance becomes a precedent for a second; that second for a third; and so on, till the bulk of the society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering.”
The “fore horse of this frightful team,” Jefferson warned, is “public debt. Taxation follows that, and in its train wretchedness and oppression.” (Jefferson to Samuel Kercheval, July 12, 1816.) Thankfully, a large number of Americans who do not want to be enslaved by their ever-growing government – Americans who refuse to be reduced to “mere automatons of misery,” with nothing left but “sinning and suffering,” as Jefferson put it – are participating in a nationwide tax protest on April 15 this year. Billed as a modern-day Boston “Tea Party” revolt by its organizers, the nationwide protest is scheduled to take place in 500 cities and towns all over the country. According to a recent article in USA Today (“Tax revolt a recipe for tea parties,” April 13), “What started out as a handful of people blogging about their anger over federal spending – the bailouts, the $787 billion stimulus package, and Obama’s budget – has grown into scores of so-called tea parties across the country.” The biggest demonstration so far drew 6,000 people in Cincinnati. The goal, as stated in the article and in a Heritage Foundation website focused on the “tea-party” movement (“Stop Spending Our Future”), is to pressure Congress and the states to reject government spending as a supposed way out of the recession and to build a national anti-spending grassroots coalition of taxpayers. It’s indeed time for Americans to stand up in opposition to the mushrooming growth of government – and to demand urgently-needed reform in the massive, bloated, unjust (and illegitimate) taxation system that threatens to tyrannize not just the people today but also future generations of Americans, in the years to come.
Taxation, Consent, and Legitimacy (and Illegitimacy)
The historic Boston “Tea Party” of December 1773 involved a group of Bostonian Patriots dumping chests of tea from East India Company ships into Boston Harbor, as a protest against the monopoly granted by the British government to the Company as well as against the British Parliament’s levying of a tax on tea imported into the American colonies. The American Revolutionaries’ argument, “no taxation without representation,” is justifiably famous, as a slogan of the Revolution – and one of the founding principles of the United States – but is often misunderstood or taken out of context. “No taxation without representation” is a corollary of the foundational principle of American government, stated in the Declaration of Independence, that governments derive their just powers from “the consent of the governed.” Government is not a natural entity; it is created by human beings, for a specific purpose – to safeguard, or “secure” their rights. Their rights, in turn, do not derive from government but from their nature as human beings; they exist independently of government, which is founded to “secure” (as the Declaration puts it) these natural rights of individuals. Yet even when exercising its legitimate function of securing rights, government cannot do whatever those in power want to do: it must exercise its power – the power to use force, or coercion, to compel people to do certain things or to refrain from doing certain things – according to law. Even before Revolutionary-era Americans created the device of a written constitution to limit government’s power, the rule of law (a bundle of associated principles constraining how government acts, how it wields its power) limited the exercise of political power. Written constitutions, like the Constitution of the United States with respect to both the national and state governments, and the various state constitutions with respect to state and local governments, provided simply an additional device for ensuring that government operated according to the rule of law. And for ensuring that government exercised only those powers that were legitimate – powers relating necessarily to government’s legitimate function of protecting individuals’ rights, and powers to which the people have consented to have government exercise, through the power-granting clauses of the constitutions. In the centuries-old Anglo-American constitutional tradition, the power to tax has always been regarded as a special governmental power, one that required not only “consent” by the people generally but also required the specific consent of those people paying the tax. Indeed, one of the complaints against King John in Magna Carta (1215) was that he had attempted to levy taxes beyond the bounds of his legitimate authority as feudal overlord of England, without the “common counsel” of the realm. Under his successors, especially under King Edward I, Parliament itself was created as an institution in order to provide a mechanism for the king to obtain the tax revenues he needed to fight his wars in Wales and Scotland, from the people who had “liquid capital” (as we would say today) in the early 14th century, the middle class, or the “commons” of England. In the parliaments held during Edward I’s reign, aristocrats were represented personally in the King’s Great Council, the institution that evolved into the House of Lords, while representatives of the middle class – the knights in the counties, the merchants in towns – joined the lords in an extraordinary assembly, a “parliament.” These representatives of the middle class eventually became known as the House of Commons. Together with the House of Lords, their consent to taxes or to a change in the laws (legislation through Parliamentary statutes) gave the king authority backed up by the “common counsel of the realm” – the aristocrats, represented personally in the Lords, and the middle class, represented by their chosen representatives in the Commons. That gave rise to the principle, by the 16th century, that whatever the King and Parliament jointly did, was done by the consent of “every Englishman,” actually (in the case of the personal assent of the King and the Lords) or “virtually,” by representatives in the House of Commons, who in theory were to represent the interests of the middle class throughout England. When the early Stuart kings, James I and Charles I, attempted to levy taxes without the consent of Parliament, Parliament objected – and eventually, during the English Civil War of the 1640s, levied war against the King himself, defeating Charles I and putting him on trial, and executing him, for treason against the people of England, for violating their rights (among them, their right not to be taxed except by their own consent, given in Parliament). The people who settled in the English colonies in America derived from English common law the fundamental right – a “constitutional right,” we would call it – not to be taxed, by the king or the king’s government, except by their own consent. Revolutionary-era Americans, however, went further than the traditional English concept of “no taxation without consent” by insisting on “no taxation without representation,” that is, consent given by their own representatives, personally chosen by them. The American understanding of representation differed from the “mainstream” 18th-century English view, which relied on the theory of “virtual” representation (the theory that all members of the middle class, no matter where they were situated in England, or indeed in the British empire, were “virtually” represented by the members of the House of Commons, even if they had no right to elect them). For nearly 150 years prior to the Revolution, colonial Americans had become used to the practice of “actual” representation – of directly electing their own representatives, in their own colonial assemblies or legislatures, and even of instructing their chosen representatives how to vote. Thus, when the Parliament of Great Britain in the years following the French and Indian War (that is, in the mid-1760s), attempted to levy taxes directly on people in the American colonies, Americans – through their delegates at the First Continental Congress in 1774 – objected that Parliament was violating their right, under the English constitution, not to be taxed except by their own consent. Because they elected no member of Parliament to represent them (and because they understood the British House of Commons to represent only the interests of the middle class in Britain itself and not in the colonies), they maintained that they could give their consent to taxes only through their actual representatives, in the various colonial assemblies (men who were their neighbors, whom they chose to represent them in the legislature because they trusted them to look out for their interests). Thus, by the time of the adoption of the earliest state constitutions and the U.S. Constitution, the principle had been established in American constitutional law that government may not tax the people without obtaining their consent, given either directly (by popular vote) or indirectly (by vote of the people’s representatives in the legislature). The framers of the U.S. Constitution, for example, assigned to the U.S. House of Representatives the exclusive power to originate revenue bills (that is, proposed tax laws) because the British House of Commons had – in recognition of this centuries-old principle of “no taxation without consent” – similarly the exclusive power to originate tax bills. The members of the U.S. House were meant to represent “the people” – that is, the people of the several states. Given this historical background, it is easy to see why consent of the people – and, specifically, the consent of those (or at least of a majority of those) on whom a given tax is to be levied – is a prerequisite for the government’s exercise of its taxation power, if it is to do so legitimately. Through the written constitutions, “the people” generally may authorize the government to levy taxes, to pay for the costs of government’s legitimate functions. But in addition to this general authority to levy taxes, government needs the specific authority of the people – that is, of the majority of the people (or of their representatives in the legislature) – to legitimize any particular tax levy. The necessity of consent to legitimize taxes does not fall entirely on this historical argument, however. It is also based on the fundamental principle that government is created in order to “secure” the people’s rights. One of the most important rights – certainly, one of the most fundamental, and arguably, the most fundamental right – is the right of private property, a right that is violated by the very act of taxation itself (because when governments collect taxes, they forcibly deprive individuals of their property), unless those on whom the tax is levied give their consent. That’s why – and here the historical practice in Anglo-American society meets the theoretical argument of the Declaration of Independence – government can legitimately tax the people only when they have authorized it to do so, by their own actual consent. As John Locke recognized in his classic Second Treatise on Government (1690) – a book that America’s Founders regarded as a textbook of fundamental principles of government – “The Reason why Men enter into Society, is the preservation of their Property; and the End why they chuse and authorize a Legislative, is, that there may be Laws made, and Rules set, as Guards and Fences to the Properties of all the Members of the Society, to limit the Power, and moderate the Dominion of every part and member of the Society. For since it can never be supposed to be the will of the Society, that the Legislative should have a Power to destroy that, which every one designs to secure, by entering into Society, for which the People submitted themselves of Legislators of their own making, whenever the Legislators endeavor to take away, and destroy the Property of the People, or to reduce them to Slavery under arbitrary Power, they put themselves into a state of War with the People, who are thereupon absolved from any further Obedience. . . .” (emphasis in original) Locke concluded that in such a situation, where the legislature levies taxes in an arbitrary way that in effect enslaves the people to the government, the legislature “by this breach of trust . . . forfeit[s] the Power the People had put into their Hands,” and the ultimate political power – the sovereign power – then “devolves” back to the people. Of course, by adopting written constitutions embodying the people’s sovereign power, America’s Founders sought to make unnecessary a resort to violent revolt, or revolution, in order for the people to take back the power they had entrusted to government. Through the process of constitutional change, or amendments, the people could peaceably alter, or even abolish and re-institute government, as we (the people of the United States) did in adopting the U.S. Constitution in 1787-88, or in the various amendments added to the Constitution in the two centuries since. Moreover, by allowing American judges to enforce the limits the Constitution (or the various state constitutions) placed on the government, through exercise of their power of “judicial review” (the power to void unconstitutional laws), America’s Founders sought to give the people an additional check against tyrannical laws, including arbitrary or tyrannical taxes.
The Pernicious, Invidious Personal Income Tax
The current occupant of the White House, B.O., said in his first address to Congress that the tax cuts enacted under his predecessor, “W.,” amounted to a massive “transfer [of] wealth to the wealthy.” This comment, the opening salvo in the president’s campaign to impose higher taxes on the wealthiest – that is, the most productive – Americans, is wrong (it is in fact a grossly misleading statement, a blatant lie), on at least two important counts. First, a cut in tax rates is not a “transfer” of wealth to taxpayers, for the simple and obvious reason that it’s not the government’s money, it’s the taxpayers’ own money, income they created by their own productive work. (It’s perhaps not surprising that B.O. fails to understand this simple fact, because he – like most professional politicians – hasn’t the faintest idea how wealth actually is created by the nation’s business-owners. His political constituency obviously aren’t productive Americans, the producers of wealth, but rather the “looters,” unproductive Americans who live off the wealth produced by others and redistributed to them by the forceful hand of government.) Second, “the wealthy” – that is, the most productive, upper-income Americans – already pay a disproportionately heavy burden of federal personal income tax revenues, under the so-called “progressive” rate structure of the income tax law. For years now, opponents of tax-relief proposals have continued to voice the tired objection that an across-the-board cut in income-tax rates would "favor the rich." Of course it would: it’s their money. The wealthiest 5% of taxpayers earn 36% of the nation’s income but pay a majority (60%) of federal income taxes, and the top 25% pay more than 80% of income taxes, according to the Internal Revenue Service. In contrast, those in the bottom 50% pay a mere 4% of all federal income taxes. So naturally the wealthy would get the most relief from a rate cut – and they should, because they pay a vastly disproportionate share. If the tax cuts enacted during former President Bush’s administration can be faulted for anything, it would be for not doing enough to redress this great imbalance. The Bush tax cuts in fact exacerbated the imbalance. As the Wall Street Journal noted in an editorial written after the Congressional Budget Office and IRS released tax numbers for 2005 (“Taxes and Income,” Dec. 17, 2007), the tax reductions of 2001 and 2003 actually resulted in “the rich” paying an even greater share of the nation’s tax burden: their share of taxes paid rose “at a faster rate than their share of income.” The richest 1% of Americans in 1990 earned 14% of the nation’s income but paid 25% of federal income taxes; by 2005, the richest 1% earned a greater share of the nation’s income (21%) but paid a disproportionately even greater share of federal income taxes (39%). For the richest 5%, who earned 27% of the nation’s income in 1990 and 36% of the nation’s income in 2005, the tax burden increased from 44% of federal income taxes in 1990 to 60% of federal income taxes in 2005. Yes, as the political left and the news media like to observe, this means “the rich are getting richer” – but they’re also paying an even more disproportionately heavy share of federal income taxes. How could this be? The Journal editors give two plausible explanations. First, the Bush tax cuts reduced the income tax liability of middle and lower income households by more proportionately than wealthier households. “The average family of four with an income of $40,000 saw its income tax liability fall by almost $2.052 a year from the 2001 and 2003 tax cuts.” Second, as the IRS statistics verify, America continues to be a society of upward mobility. “Over the past decade, millions of Americans have joined the once highly exclusive club of six- and seven-figure earners. Some 304,000 Americans earned $1 million or more in annual income in 2005, compared to 110,000 in 1996 and 176,000 in 2000. Because there is no cap on the top income share, this increase in millionaires pushes the top income (and taxes paid) share higher.” Left-liberals might decry this as proof of a new “gilded age,” the Journal editors note, but what it really means is that Americans are free to earn their way into the ranks of the affluent. “This is the kind of upward mobility that a dynamic society should want because it means that incomes aren’t stagnant and opportunity continues to exist.” The tax-cut debate has focused attention on the issue of fairness, and all Americans should seriously question whether the federal income tax is really "fair" at all. Under its so-called "progressive" rate structure, a minority of taxpayers in the upper income brackets are forced to pay the lion’s share of federal income taxes. Moreover, there is no correlation between the amount of taxes an American pays and whatever benefits, if any, he receives; indeed, a wealthy person may get fewer government services than a poorer person. As H. L. Mencken noted in 1925, "The intelligent man, when he pays taxes, certainly does not believe that he is making a prudent and productive investment of his money; on the contrary, he feels he is being mulcted in an excessive amount for services that, in the main, are useless to him, and that, in substantial part, are downright inimical to him." The history of federal income tax rates shows a constant temptation to raise tax rates on productive citizens to pay for new government programs. At the limit, persons with the highest incomes may face a marginal tax rate of 100%, while those with low incomes pay nothing. During the 1950s, indeed, top marginal tax rates exceeded 90% in the United States. The confiscatory nature of the federal income tax was lessened somewhat by the tax reforms of the 1980s, but it is still true that wealthy Americans pay a highly disproportionate share. Federal income taxes today are at an all-time high. The tax receipts of the federal government in 1998 were 26.4% of national income (and nearly 22% of gross domestic product), the highest level in American history. At their peak in 1945, the final year of World War II, federal tax receipts amounted to 23.4% of the national income—13% less than in 1998. And federal tax receipts rose sharply during the Clinton administration, thanks not only to the legislated tax increase in 1995 but also to the "unlegislated tax increase" which economist Milton Friedman attributed to "bracket creep" and to inflation. Wealthier Americans thus not only shoulder the vast bulk of the tax burden, but that burden increases disproportionately as the economy grows. A "progressive" income tax is not only unfair; it’s also contrary to America’s founding principles. Those principles include consent of the governed and equality under the law. As noted above, when the Patriots uttered their famous cry—"No taxation without representation!"— they were following the principles of John Locke, who recognized that consent was a necessary condition to legitimate government. Because the end of government is to protect individual rights, government must be formed by a procedure that does not itself violate those rights. "Men being ... by nature, all free, equal and independent, no one can be put out of this estate, and subjected to the political power of another, without his own consent," Locke wrote in the Second Treatise of Government. Moreover, he argued that consent was especially necessary to "take from any man any part of his property," given that the purpose of government is to preserve property. Taxes, to be legitimate, must be imposed with the consent of the people on whom they will be levied. Progressive income taxes, by their very nature, violate this fundamental principle of legitimacy. They represent the very worst sort of "tyranny of the majority," for they subject a small portion of citizens—those with the highest incomes—to taxes imposed by the "consent" of other citizens, the majority of voters, who do not pay taxes. Indeed, that was the story of the origin of the Sixteenth Amendment, which empowered Congress to levy taxes on income. When the Amendment was ratified in 1913, it was sold to voters in the western states as a way to soak "the luxurious incomes" of industrialists in the East. And very few people paid the first income tax, which was only 1% on the first $20,000 of taxable income, with the rate raised to only 7% on income above $500,000. As late as 1939, only 5% of the population filed returns. As journalist David Brinkley noted, the income tax "was voted into law by people who were confident it would punish the rich they despised while they themselves would never have to pay it. Envy and resentment [of wealth] carried the day." (Brinkley, “The Long Road to Tax Reform,” Wall Street Journal, Sept. 18, 1995.) It’s not surprising, then, that public opinion polls usually show little support among voters generally for easing the federal tax burden: a large portion of Americans continue to pay little or no income taxes at all! Because it discriminates against individuals simply because they have higher incomes, a progressive income tax also violates another fundamental principle of our constitutional government: that individuals are equal under the law. The minority of Americans who shoulder the federal income tax burden are denied the equal protection of laws. Moreover, when we consider the full impact of the federal budget, it is clear that the federal income tax is an integral part of a massive redistribution of Americans’ wealth. Thus, it constitutes "class legislation"—the type of law that "takes property from A. and gives it to B."—which, as Supreme Court Justice Samuel Chase noted in 1798, violates "the great first principles of the social compact." If we really care about fairness, legitimacy, and equality under the law, we need to abolish progressive taxation and institute a flat-rate tax, preferably applied to consumption rather than income. Proponents of the so-called “Fair Tax” – a flat-rate national sales tax, to replace the income tax – have strong arguments in support of their proposal. It would not only be fairer but also would be far less intrusive on the personal lives of Americans. Even the left-leaning USA Today, in a remarkable recent editorial (“Tax code: Too complicated, too costly, too unfair,” April 10, 2009), decried the complexity of the income tax – noting that the number of pages in the U.S. tax code has ballooned, from 400 in 1913 to 70,320 in 2000, and that the percentage of tax returns signed by paid preparers has increased from 46% in 1985 to 60% in 2006 – suggesting that the complexity has resulted from the lobbying efforts of “special interests” who have put various deductions into the law, or from politicians’ attempts to manipulate Americans’ behavior with various deductions or credits. It’s certainly an abuse of the tax laws to use them to try to manipulate people’s behavior, but elimination of all the special credits or deductions would still go only part way toward true tax simplification. Much of the complexity of the income tax code results from the difficulty in defining “income” itself and thus is inherent in the code, as is the government’s intrusiveness into the nature and sources of that income. A national sales tax, implemented through “piggybacking” on the mechanisms already existing in most of the states for the collection of state and local sales taxes, would make possible the elimination of both the incredibly complex income tax laws and the meddlesome I.R.S. that enforces them. True tax reform, by implementation of a national sales tax to replace the income tax, must also include the repeal of the Sixteenth Amendment, which grants Congress the power to levy a tax on income. Otherwise, members of Congress are likely to enact a national sales tax as just an additional source of revenue, on top of the existing income tax – an even more burdensome national tax regime than we have now. Again, H. L. Mencken has some important words of wisdom we must bear in mind as we consider major reform of the U.S. tax laws. He warned, “Where a new source of taxation is found it never means, in practice, that an old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had only one before.” (Mencken, in the [Baltimore] Evening Sun, Nov. 13, 1925.)
The Worst Ponzi Scheme of All
A “Ponzi scheme” is defined in Wikipedia as “a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned.” It “usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going,” until its eventual – and inevitable – collapse. Named after Charles Ponzi, an Italian immigrant who notoriously practiced the scheme in the early years of the 20th century, the Ponzi scheme has been in the news often over the past several months, as modern counterparts of Mr. Ponzi have bilked many gullible Americans of their hard-earned wealth – most notably, Bernard Madoff, who has been convicted of defrauding investors of tens of billions of dollars. Although some commentators have called Bernie Madoff’s operation not only the largest investment fraud ever committed by a single person but also the largest Ponzi scheme ever perpetrated, there’s one that’s even bigger. And it has been perpetrated by the U.S. Government for over 70 years, ever since Congress created it in 1935: Social Security. The Social Security program came into being in the late 1930s as part of Franklin D. Roosevelt’s so-called “New Deal” – the huge con game that FDR and his advisers put over on the American people. For the past three-quarters of a century, leftists have perpetuated the myth that New Deal policies and programs helped alleviate the economic woes of the Great Depression. Today, fortunately, the myth has been shattered: historians and other social scientists are beginning to acknowledge what conservative and libertarian critics of FDR have been arguing all these years – that the New Deal, rather than alleviating the Depression, actually prolonged and exacerbated it. (See, for example, Jim Powell’s FDR’s Folly (2003).) Social Security epitomizes the New Deal con game, at its worst. To disguise its true nature, the Roosevelt administration sold it to the American people by calling it an “insurance” program, masking the fact that it’s really a wealth-redistribution scheme. True insurance programs involve people voluntarily contracting for benefits based on the premiums they paid. As Jim Powell notes, With true insurance, premiums varied according to the policyholder’s age and how much retirement income they wanted. Insurance companies invested the premiums long term in productive assets, principally stocks, bonds, and real estate, so that individuals could cover the costs of their own retirement. In contrast, every “social insurance” scheme [like Social Security] had some people subsidizing others. Often such schemes started out or became pay-as-you go, meaning that current taxpayers covered the costs of people currently receiving pensions. Individuals, as taxpayers, didn’t contribute anything for their own retirement. The cost of their retirement became a burden for future generations. The assumption was that there would be enough taxpayers in the future to take care of all the retirees and that future generations would be willing to bear burdens. Nobody seems to have considered that such burdens might become heavier over time if the number of retired people grew faster than the number of taxpayers.
Indeed, as Powell also notes, FDR repeatedly misrepresented Social Security as an insurance program. The Roosevelt administration proposed paying for Social Security benefits with a payroll tax, even though such a tax is regressive, taking a higher portion of the earnings of lower-income people than higher-income people. “FDR apparently wanted a payroll tax because it made Social Security seem more like a self-financing insurance plan and politically more difficult to later repeal.” As FDR himself said, candidly, “`With those taxes in place, no damn politician can ever scrap my social security program.’” (FDR’s Folly, pp. 174, 179-80.) In my previous essay “Socialist Insecurity” (Feb. 15, 2005), I maintained that instead of being called “Social Security,” the program ought instead to be called “socialist, insecure, shitty” because it is each of those things. First, Social Security is socialist both in its origins and in its character. “Social insurance” programs like Social Security originated in one of Europe’s most autocratic regimes, Germany in the 1870s. As Jim Powell notes, “German socialists demanded that their government gain more power in the name of social justice, and German chancellor Otto von Bismarck saw that expanded government power would suit his very different purposes. In 1881, Bismarck said, `Whoever has a pension for his old age is far more content and far easier to handle than one who has no such prospect.’ Bismarck’s biographer A. J. P. Taylor added that `Social Security has certainly made the masses less independent everywhere.’” Germany’s government-run retirement system began in 1889; by the early 20th century, socialist governments in other European countries followed suit. In the United States, many European immigrants agitated for the same kind of government-run pension systems they had known in their “old country”; Russian immigrant Isaac Rubinow was the most prolific and influential author promoting “social insurance” as a scheme for redistributing income in the name of “social justice.” (FDR’s Folly, pp. 173-75.) Not only were the movers behind Social Security themselves socialist, but the program established by Congress in 1935 epitomizes socialism. Rather than being a true insurance program, where individual Americans own their own pension funds, Social Security is a government-run monopoly that is funded on a pay-as-you-go basis, taking the money paid in taxes by working Americans and redistributing it to retirees. No one “owns” their Social Security “account”; the “lock-box” that some demagogues imagine doesn’t exist, and the so-called “trust fund” also is a misrepresentation. In reality, the so-called “trust fund” is completely controlled by the government, which uses the fund to redistribute wealth, to make an increasingly large number of Americans dependent on the government for their basic needs in their retirement years. The system uses force (the coercive power of government) to take money earned by some Americans (younger workers paying FICA taxes) and redistribute it to other Americans (retirees and other “beneficiaries”). It is the epitome of a government program that takes property from A (one group of citizens) and redistributes it to B (another group of citizens). Architects of the system deliberately used the terminology of private pension plans – terms like contributions, benefits, trust fund, etc. – to mask the true nature of Social Security, to create the myth that it is an insurance program rather than being what it really is, a socialist wealth-redistribution scheme. Second, Social Security is insecure because it is a government-run scheme in which no American owns his or her own retirement fund. Rather, the entire scheme is at the mercy of politicians. As Alex Epstein wrote in a 2005 op-ed: Under Social Security, every aspect of the government’s “promise” to provide financial security is at the mercy of political whim. The government can change how much of an individual’s money it takes – it has increased the payroll tax 17 times since 1935. The government can spend his money on anything he wants – observe the long-time practice of spending any annual Social Security surplus on other entitlement programs. The government can change when (and therefore if) it chooses to pay him benefits and how much they consist of – witness the current proposals to raise the age cutoff or lower future benefits. Under Social Security, whether an individual gets twice as much from others as was taken from him, or half as much, or nothing at all, is entirely at the discretion of politicians. He cannot count on Social Security for anything – except a massive drain on his income. (Alex Epstein, “End Social Security,” The Ayn Rand Institute, January 18, 2005.) What could be more insecure than this Ponzi scheme that can be changed, by law, whenever Congress wishes! (In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled – correctly – that workers have no right to receive Social Security benefits. Note also that most of the proposals to “fix,” or “reform,” Social Security offered by politicians take the form of either an increase in payroll taxes or a cut in benefits, by raising the retirement age, for example, or some combination of these.) Income that derives from government largesse – in other words, income that derives from politicians using the coercive force of the law to transfer wealth from taxpayers to the “beneficiaries” of government programs – is based on nothing but the politicians’ promises. Third, Social Security is, to put it bluntly, shitty – that is, the return on workers’ “investments” – the payroll taxes they pay into the scheme – is indeed shitty. It offers a pathetically poor rate of return, compared to the other options individuals would have for investment if they controlled their own accounts. If a younger worker today would invest a small portion of his Social Security payroll taxes (say $1000) into a private retirement account, the results would be staggering. $1000 annually invested in the stock market, with its historical 10%-a-year average return compounded, would grow to more than $440,000 in 40 years. In 50 years it would balloon to more than $1.15 million. Those figures do not come from either a libertarian or conservative pundit; rather, they were cited by left-liberal Al Neuharth, founder of USA Today, in a January 7, 2005 editorial in his paper denouncing ad campaign then being run by AARP (against President Bush’s proposal to partially privatize Social Security) as “an abuse of power by AARP leaders” who were engaged in scaremongering. As Milton Friedman noted in his 1998 “Social Security Socialism” op-ed, a truly privatized system of individual retirement accounts would not only benefit participants in the system but the whole nation’s economy: “If the corresponding sums had been accumulated by private individuals and not used to finance government spending, they would have been a real addition to the nation’s capital and not just a bookkeeping entry. Those sums would have been invested in ways citizens or their advisers chose. The end result would have been more productive investment, a larger stream of income and a freer, more responsible, more productive society.” Instead, we have a socialist, insecure, and shitty program that is not only a drag on the nation’s economy but also is tantamount to grand larceny on an epic scale: a system that uses force to deprive productive Americans of a significant portion of their income, and of the full future earning capacity of that income, in order to fund a retirement system with a pathetically dismal rate of return. Social Security is not only socialist, insecure, and shitty. It is also unjust and unconstitutional. As a program that takes wealth earned by taxpayers and redistributes it to beneficiaries on the basis of their presumed “need,” Social Security also epitomizes the moral code of the 20th-century welfare state – a moral code based on the Marxist slogan, “From each according to his abilities, to each according to his needs.” In practice, implementation of that policy inevitably has lead to misery and destitution. (Witness the history of communist societies, whether based on Christian, Marxist-Leninist, or Maoist dogmas, from the 17th century to the present day. Or consider the parable of the “Twentieth Century Motor Company” in Ayn Rand’s epic novel Atlas Shrugged.) The moral code of the welfare state is at odds with human nature – with individuals’ inherent desires to be free and to better their own lives – as well as with our society’s private morality, based on individual responsibility. As David Kelley notes in his insightful book A Life of One’s Own, one of the tragic consequences of the welfare state is its basic assumption that the needs of recipients take precedence over the rights of producers – which means that “those with the ability to produce are obliged to serve, while those with needs are entitled to make demands” – resulting in “a public morality at odds with our private standards.” (Kelley, A Life of One’s Own: Individual Rights and the Welfare State (1998), p. 2.) Although the U.S. Supreme Court upheld the federal law creating Social Security, in its 5-4 decision in Stewart Machine Company v. Davis (1937), that decision was wrong, based upon an incorrect interpretation of the Constitution that ignored its essential context as a document creating a federal government of limited powers, enumerated in the Constitution. The majority of the Court held, essentially, that Congress had an unlimited power to levy taxes and to spend tax revenues on whatever purpose it wished, notwithstanding the explicit enumeration of federal powers in the text of the Constitution. A retirement system – whether a true insurance program or the kind of Ponzi scheme that Social Security really is – is not among the enumerated powers of the federal government. Social Security is doubly unconstitutional, when we consider that it not only exceeds the legitimate powers of the U.S. government as enumerated in the Constitution, but also deprives individuals of their rights (both their rights to property and to economic liberty), in violation of the Fifth Amendment due process clause of the Constitution. The Social Security scheme, as noted above, is the epitome of a government program that takes property from A (one class of citizens) and gives it to B (another class of citizens). In early American constitutional law, it was universally understood that such a law violates the essential rights that all individuals have in a free society. Supreme Court Justice Samuel Chase, in the landmark early Court case, Calder v. Bull (1798), observed that a law contrary to the principles of natural justice – “an ACT of the Legislature (for I cannot call it a law) contrary to the great first principles of the social compact” – cannot be valid; it “cannot be considered a rightful exercise of legislative authority.” Among the examples of such blatantly unconstitutional laws that he gave were: “a law that punished a citizen for an innocent action, or in other words, for an act, which, when done, was in violation of no existing law” [an “ex post facto” law]; “a law that destroys, or impairs, the lawful private contracts of citizens”; “a law that makes a man a judge in his own cause”; and – of course – “a law that takes property from A. and gives it to B.” Chase added, “It is against all reason and justice, for a people to entrust a Legislature with SUCH powers; and therefore, it cannot be presumed that they have done it.” Real reform of Security Security – meaning privatization and eventual abolition of this horrid Congressionally-created Ponzi scheme – is inevitable, if the United States is to avoid total economic collapse. Anyone who denies that Social Security faces fiscal crisis is in denial of reality, for the program is inevitably in conflict with demographic reality. When the program was first enacted by Congress in 1935, the average life expectancy for 65-year-olds was only about 13 years. The architects of Social Security assumed the program would remain solvent because they set the retirement age – the age at which benefits would begin to be paid – at 65, just a few years over the average life expectancy. Over the past seventy years, although the retirement age has remained largely constant (Congress increased it to 67 in 1983), the average life expectancy has steadily increased. In 1950, there were sixteen people working and paying Social Security taxes for every person receiving benefits. By 1997, the ratio had declined to 3.3 people for every beneficiary; by the year 2020, the ratio will be less than two to one. It’s plainly obvious that the system is a fiscal disaster; the only dispute is over exactly when the system will go bankrupt. As of May 2008 – that is, about a year ago, well before the explosive growth of the federal debt in recent months – an analysis by USA Today researchers estimated that the combined costs of federal liabilities to cover the lifetime benefits of everyone eligible for Social Security, Medicare, and other government programs totaled an unprecedented $57.3 trillion (that’s trillion, with a “t,” in other words, $57,300,000,000,000) – the equivalent of a $500,000 credit card debt for every American household. When obligations of state and local governments are added, the total rises to $61.7 trillion, or $531,472 per household – more than four times what Americans owe in personal debt such as mortgages. The $61.7 trillion liability is, as an earlier article explained, “the amount that government needs now, stashed away and earning interest, to generate enough cash to pay future obligations. The obligations are valued in today’s dollars and come due as early as in a few days, when Treasury bills mature, to as long as 75 years for Social Security and Medicare.” (“Bill for taxpayers swells by trillions,” USA Today, May 19, 2008, and “Retiree benefits grow into `monster,’” May 25, 2006.) The costs of Social Security and Medicare will skyrocket in the near future, as “baby boomers” – the 79 million people born between 1946 and 1964 – have already begun collecting Social Security, last year in 2008, and will begin collecting Medicare in 2011. That’s pretty pricey (to horribly understate the problem) for a scheme that has no legitimate foundation in the Constitution – for a program created under an unconstitutional law, sanctioned by an erroneous Supreme Court decision, and sustained by a propaganda campaign run by demagogic politicians in league with special interest groups like the AARP. It is a measure of how far the 20th-century welfare state has corrupted American constitutional principles – how far it has undermined our commitment to individual freedom and responsibility, the responsibility each of us has over our own individual lives – that Social Security today is seen by many people as a “sacred cow,” rather than as the horribly unjust, immoral, and unconstitutional program it really is. As Alex Epstein concluded in his recent op-ed, “Social Security in any form is morally irredeemable. We should be debating, not how to save Social Security, but how to end it – how to phase it out so as to best protect both the rights of those who have paid into it, and those who are forced to pay for it today. This will be a painful task. But it will make possible a world in which Americans enjoy far greater freedom to secure their own futures.”
| Link to this Entry | Posted Wednesday, April 15, 2009 | Copyright © David N. Mayer |
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