Tax reform is in the news again, and while it will certainly have an impact on people, it is mostly tinkering around the edges as usual. When the federal government is spending about $4 trillion per year, it almost becomes a moot point to argue about little changes in rates and tax brackets. Either way, the federal government is going to continue to spend $4 trillion per year.
As a libertarian, I am generally opposed to taxation, at least in its current form. I am not opposed to voluntary taxation, but some would argue that it would cease to be taxation at that point if it is all voluntary. For the number of rich businessmen and Hollywood stars who promote big government, they could fund the federal government all by themselves if they so chose. But that would require a substantially smaller federal government, and many of these people really just want to see other people forced to pay more.
Warren Buffett wants higher taxes, but when asked why he doesn’t contribute more voluntarily, he says that his money is better spent going to charity. In other words, he thinks of himself as wise enough to donate money to the “right” charities, but he deems it necessary to force others to contribute to the charity that is government.
Given that we are a long way off from voluntary associations and voluntary taxation, there is a much better way for the federal government to collect taxes, at least for the general population. To be sure, it wouldn’t be better for the politicians and bureaucrats in Washington DC who seek to control us.
I have, at times, been critical of the U.S. Constitution. I think we would have been better off with the Articles of Confederation. The Constitution was a centralization of power. But with that said, it wasn’t exactly drafted overnight with little thought given. There is some cleverness to the whole document, even somewhat in defense of liberty.
We have to remember that the United States was not originally considered to be one entity. It was originally formed by the 13 colonies, which were really like their own countries. But since the 13 colonies had similarities and wanted open trade, they formed a confederation. Even though the Constitution centralized power, it was still largely respectful of the states as distinct and separate.
The United States was originally thought of as a plural term (as opposed to singular). Today, you would say, “The United States is a great place to live.” Back in the late 18th century, you would say, “The United States are a great place to live.”
In terms of taxation, the Constitution did not allow direct taxes. There were excise taxes allowed. There were tariffs allowed, which are taxes on imports. In fact, the issue of tariffs was one of the major problems in the United States in the early days, with the other being slavery. It was really these two issues which led to the improperly named Civil War.
Article 1, Section 2 of the Constitution addresses taxation. It actually gets more attention from its reference to slaves as three-fifths of a person. But a lot of people who reference this do not fully understand that it was for purposes of the census, which dictated two things primarily: the amount of representation for each state, and a state’s share of taxes if there were any imposed.
Article 1, Section 2 states: “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined…”
In other words, if the U.S. government wanted to impose direct taxes on the people, it had to be done via the states. The U.S. government could not impose an income tax (legally speaking), which is why it was necessary for the 16th Amendment in 1913.
It was up to each state to collect any taxes imposed. If the government wants to spend $100 billion and New York has one-tenth of the total population of the states, then New York would pay its share of $10 billion. But it would be up to the state legislature (or whatever is decided in that state) on how the $10 billion would be collected. It could impose its own income tax or collect the money through some other method.
This not only was supposed to prevent direct taxation from the federal government, but it also was a mechanism in place that helped keep taxes down. It shows what a joke it is today to hear politicians arguing about class warfare and how to best tax 325 million people. If the original Constitution had stayed intact, then no such arguments would be necessary. It would fall to the state level, if anywhere at all.
This ties into the whole idea of federalism. It ties into the idea of independent states and the fact that each state had equal representation in one house (the Senate) and according to population in the other house (the House of Representatives).
The incredible brilliance of Article 1, Section 2 is that, within the same sentence, it says that representatives and direct taxes will be apportioned according to population. They are offsetting to a large degree. A state wants more representatives, but it also wants less taxation. Therefore, there was less incentive for a state to lie about its census. They wanted a higher population reported for representatives, but they wanted a lower population reported if they were going to be taxed based on it.
It makes it easier to see the difficulty in counting or not counting slaves in the census. While people will say today that slaves only counted as three-fifths of a person, it was actually the northern states with little or no slavery that tended to prefer to not count slaves at all in the census. It would have been the southern slave-holding states that tended to prefer that slaves count the same as any other person, especially if taxation remained low. In other words, this could have been a difficult issue even for abolitionists back then.
While we can be thankful for change in many ways, particularly in the recognition of the immorality of slavery, it is unfortunate that some of the good parts of the Constitution have been changed or ignored. One of those things is taxation.
The Constitution set up a good framework for tax collection. It was far from perfect, but it would be much preferable to the disastrous tax code we have today.
This would actually be a good incremental step for libertarians to support in favor of smaller government and decentralization. If the federal government wants to take our money, make them do so through each individual state.