I don’t like paying taxes. Do you? Silly question, right. But in the world of taxes, some are merely bad and others are downright ugly. Let’s focus on two types of taxes–consumption taxes and income taxes. Consumption taxes are merely annoying. I want to swat them like mosquitoes. But the income tax resembles the bite of a life-sucking tick that is never satisfied. It has the potential for real harm. Let me explain.
Consumption taxes are taxes added to the price of specific products we use, such as gasoline, cigarettes, liquor, and even movie tickets. Yes, they are unpleasant, and because they are hidden, politicians can increase them sometimes without your noticing. All of that is negative. Interestingly, the Founders, who disliked taxes, favored consumption taxes as the least egregious of the lot because consumption taxes were more consistent with liberty than other alternatives.
In explaining that point, Alexander Hamilton said (in Federalist #21), “The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources.” In other words, we can choose to smoke and pay cigarette taxes, or we can abstain from both. Then Hamilton added, “If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great.” Interesting. Hamilton says if politicians try to jack up the tax on whiskey or gas, we consumers will drink less or drive less and deprive the Treasury of revenue. That’s almost a fun thought, but it also means that politicians have incentives to keep consumption taxes low while looking for other areas of federal revenue.
History has shown income taxes to be different. Ever since the 16th amendment passed in 1913, politicians have had trouble restraining themselves from taxing a small group of rich people to give subsidies to larger groups of grateful voters. The temptation to use the income tax for redistributing wealth and for buying votes has proven to be irresistable for many politicians.
Let’s look at the facts. The top rate of the federal income tax was 7%, under the first tax bill passed in 1913. Congress increased that rate to 15% three years later. Then in the 1920s, the top rate was hiked to 25%; in 1932 it went up to 63%. In 1935, FDR raised it to 79%. Finally in 1944, the top rate was 94%, and the government also began the practice of withholding from our monthly paychecks. And we still had the consumption taxes as well.
Just after World War II ended, a few determined members of Congress said, “Enough is enough. We have to lower taxes to give American citizens the opportunities they need to succeed.” Congress slashed taxes (see Chapter 9, FDR Goes to War) and the U.S. economy soared. In 1945 and 1946, unemployment was only 3.9%, despite the millions of ex-servicemen who were back in the private sector and looking for work. American business employed those people, and the doomsayers who had predicted another depression were proven wrong.
Americans currently pay way too much in taxes, and those taxes are sucking the life out of our economy. We need to oppose all tax increases, especially increases in the income tax.