Tax Rates for Limiting the Leviathan
In McCulloch v. Maryland (1819), Chief Justice John Marshall wrote: "A right to tax, without limit or control, is essentially a power to destroy."
President Obama has talked a lot lately about the wealthy paying their "fair share" of the tax burden. Who could argue that anyone should be exempted from paying his fair share? But almost half of Americans pay no federal individual income tax, and the bottom quintile "pays" a negative income tax. What about their "fair share"?
Fair-minded folks must surely think that all taxpayers should be allowed to keep half of what they earn. What's fair is fair, right? But keep in mind that for decades before 1982, the top federal individual income tax rate was way above 50 percent.
However, if Hauser's Law is correct, tax rates make little difference in determining tax revenue. In "You Can't Soak the Rich" (which originally appeared in The Wall Street Journal on May 20, 2008), economist David Ranson wrote:
[Kurt Hauser] stated that "no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of GDP." ... The chart on this page, updating the evidence to 2007, confirms Hauser's law. The federal tax yield (revenues divided by GDP) has remained close to 19.5 percent, even as the top tax bracket was brought down from 91 percent to the present 35 percent.
Ranson's chart is something to behold, with tax rates bouncing around all over the place while the line for federal revenue as a percentage of GDP is basically flat. But as Ranson's article makes clear, Hauser's Law doesn't mean that government can be unconcerned about the effect of tax rates on the taxpayer's economic behavior.
The Fifth Amendment (1791) forbids government from taking private property through eminent domain without "just compensation." But there aren't any limitations restricting how much of one's income that government can take through taxation. After all, the top federal individual income tax rate alone has been 94 percent. What law forbids the feds, or government at all levels, from taking 100 percent of one's income?
The Constitution had to be amended in order to accommodate the current federal income tax. With the Sixteenth Amendment (1913), Congress has the power to take 100 percent of one's income. Though the Constitution protects private property from government seizure, it doesn't protect income by setting limits to taxation. Obviously, income isn't considered private property. And if government can take all of one's income through taxation, then one is going to have a difficult time acquiring private property.
If We the People wanted to put a limit on what government could take of our income, amending the Constitution is the right way to go. However, the amendment process is an ordeal; the last amendment (#27) took almost 203 years to be ratified. Not only that, but it seems highly unlikely that an amendment that would limit Congress's power, especially the power to tax, would be initiated by Congress. (Leviathans aren't disposed to limiting themselves.) An unprecedented Article V convention initiated by the states also seems a nonstarter, as the states would be limiting their power.
So we seem to be left with a government whose power to tax is unlimited. Which might explain why money is fleeing America. Now that Japan has lowered theirs, America has the highest corporate income tax rate in the world. Ranson again: "capital migrates away from regimes in which it is treated harshly and toward regimes in which it is free to be invested profitably and safely."
It is astounding that the citizens of a nation that began in a tax revolt would have become so docile as to accept statutory tax rates of 90+ percent. Americans should never have countenanced a tax rate of more than 50 percent, even when it hits only the wealthy.
Although the federal government has had horrendously high statutory tax rates for the individual income tax, few if any actually paid at those rates. Nevertheless, it is pernicious to have such high statutory rates in peacetime. Such rates tell the taxpayer that he is a tax slave, and that his income belongs to the government.
The reason no one pays at the official statutory rates is, of course, because of all the exemptions in the tax code. The current buzz to "broaden the base and lower the rates" is all about ending exemptions so that the statutory rates can be brought down. This is very positive development, and could make the tax code fairer.
Progressives have urged that Congress hike the top federal individual income tax rate back up to what it was in the 1990s -- 39.6 percent. But the highest effective tax rate for the top 1 percent of taxpayers in the 1990s was 24.2 percent. That was the top effective rate during the only period in the last 42 years when Congress lived within its means and ran a budget surplus. The Bowles-Simpson commission recommended a top statutory rate of 25 percent, just 0.8 percent above that oh-so-effective rate in the halcyon 1990s.
One value of a statutory tax rate is that it allows the taxpayer to know a very reassuring thing: x percent is the most that government can take. The rest stays with the taxpayer, which he can use as he pleases, perhaps to expand his business and grow the economy. So a fixed statutory tax rate gives a little certainty, allowing folks to make plans.
But in America, the taxpayer cannot really have this reassurance. That's because tax rates can change at any time, even retroactively -- and there is no limitation on how much of one's income government can take. Which means that in today's America, there is no such thing as a "fair share."
If the power to tax is indeed the power to destroy, then taxation must be done with much more "care" than government has been exercising since 1913. To get more care, America must wait for January 2013.
Jon N. Hall is a programmer/analyst from Kansas City.