Opponents of the Republican-sponsored tax relief legislation which passed both houses of Congress this summer have raised the usual objection that an across-the-board cut in income-tax rates would “favor the rich.” An analysis published by the Clinton administration’s Treasury Department and reported in a Knight-Ridder Newspapers wire story, for example, noted that 67% of the tax breaks in the bill would “benefit” the richest 20% of American families—those making more than $82,000 a year, according to the Department.
Two obvious points should be noted in response to this objection, as philosopher David Kelley has observed. First, a tax cut does not confer a “benefit” on taxpayers, as if the money belonged to the government. Rather, when government lowers the tax rate, it is simply refraining from taking from taxpayers as much as it used to. And what government takes in income taxes is wealth that taxpayers have earned by producing it. “People are not passive recipients of an income distribution,’” Kelley notes. “They acquire money by trading with others, earning income in diverse ways.” And an economy is “not a competitive scramble for shares of a fixed pool of wealth, but a process of producing wealth on an ever-increasing scale.” Thus, a tax cut simply permits Americans to keep more of what they’ve earned from the wealth they’ve produced.
The second point is that wealthy save the most from a lower tax rate because they pay the most in taxes. The wealthiest 5% of taxpayers now pay a majority of federal income taxes, and the top 25%—in 1996, those with incomes above $46,000—pay more than 80% of income taxes, according to the Internal Revenue Service. In contrast, those in the bottom 50%—with incomes below $23,000—pay a mere 4% of all federal income taxes. So of course the wealthy would get the most relief from a rate cut—and they should, because they pay a vastly disproportionate share.
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 that under progressive taxation, there’s 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.
Moreover, taxes on the rich have risen more sharply than for any other income group since 1993. Bruce Bartlett, a senior fellow with the National Center for Policy Analysis, reports that according to the Congressional Budget Office, “those with incomes above $200,000 saw their share of total income taxes rise to 37.2% in 1997 from 29.5% in 1993, although this group represents just 1.5% of all taxpayers. Those with incomes above $1 million increased their share of the total tax burden to 16.6% from 11.3% over the same period, although they represent a scant 0.1% of taxpayers.”
Federal taxes today are at an all-time high. The tax receipts of the federal government last year 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 have risen 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 has 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.
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 has 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.” It’s not surprising, then, that public opinion polls today 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.
David N. Mayer is Professor of Law and History at Capital University in Columbus, Ohio, and an Adjunct Fellow at the Ashbrook Center.