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HOW A NATION BORN OUT OF A TAX REVOLT has—and especially hasn’t—solved the problems of taxing its citizens
May/June 1996 | Volume 47, Issue 3
How did a country born out of a tax revolt and still the most tax-aversive major power on earth get into this situation? Simple. You take constitutional language that none of the Founding Fathers apparently really understood, a very conservative Supreme Court in the 1890s, an increasing public demand that the rich pay income taxes, and a very gifted lawyer who happened to be President of the United States. You mix them all together, and the result is two completely separate income tax systems, one corporate, one personal, that were never integrated or even designed to work smoothly together.
Then, no sooner are the two systems in place than two world wars and a Great Depression utterly transform the revenue needs of the federal government and raise taxes to levels inconceivable a few decades earlier. These levels provide powerful incentives for tax avoidance, and other gifted lawyers (and gifted accountants) play one tax system off against the other for the benefit of their clients, while the IRS tries to keep up, using ever more complicated regulation.
And, of course, in Congress it has been politics as usual. One squeaking wheel—or, in this case, hissing goose—after another has been paid attention to politically with favorable changes in the tax code, while more and more money has been funneled to interest groups via “tax expenditures—deductions and credits for favored activities. Meanwhile, the general interest in an equitable, comprehensible tax system has been ignored.
How do we get out of this mess? For this student of the system, the answer to that question is also simple, at least to state, if not politically to achieve: We have to abandon the very idea of tax reform and design a whole new system from the ground up. There is no reforming a system that never made sense to start with.
This year it appears that the process is under way. In the 1992 presidential campaign only the former California governor Jerry Brown advocated fundamental change of the tax system. This year every major candidate for President has put forth or endorsed a plan for exactly that. Thus it is increasingly likely that a serious debate on taxes will be a major feature of this year’s final campaign, and the results of that debate could be turned into law in the next Congress.
The result, if done properly, would be not only a lot of happier geese but a flood of additional golden eggs from the American economy once it is freed from a misbegotten tax system that has become a disgrace to democracy and capitalism alike.
In ancient Egypt landholders had to pay 20 percent of their normal crops, plus 20 percent of all other household production, to the government. Even if crops were way down, however, the taxes remained the same. Tax inspections were frequent, and those deemed to be cheating, it is safe to assume, did not fare well. On the other hand, tax inspectors who were found to have abused their power had their noses and ears cut off, a practice many a survivor of a modern tax audit would be happy to see revived.
In the early days of Rome, the state relied as much as possible on tribute from conquered provinces and arbitrary direct taxes (taxes laid directly on individuals), such as forced loans and requisitions, which are demands by the state for particular goods and services. Requisitions, among the most arbitrary, capricious, and regressive of all taxes, would not disappear until modern times. As recently as 1791 the Third Amendment to the U.S. Constitution restricted the last common form of requisition, the billeting of soldiers in private houses.
One of Rome’s earliest indirect taxes (taxes laid on economic activities, such as manufacturing and selling, rather than on individuals) was a 5 percent tax on the value of manumitted slaves, imposed in 357 B.C. By the end of the empire, Rome had created virtually all the taxes known today, on land, income, sales, imports, inheritances, and capital, among others. The ever-increasing tax burden and evasion of it by those in a position to do so were no small factors in the final collapse of Roman power.
With the end of the Roman Empire in the West came the end of most taxes there, largely replaced by feudal obligations that were not altogether dissimilar to the Egyptian system of three thousand years earlier. It was only after kings had once again begun to mint coins in quantity sufficient to provide an adequate money supply, after the year 1000, that feudal obligations slowly began to transmute into monetary obligations, or, in other words, into taxes.