'Down, Down to Hell! and Say I Sent Thee!!'

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Testimony on Replacing the Income Tax Before the Committee on Ways and Means, U.S. House of Representatives, Washington D.C., June 6, 1995.

Mr. Chairman, my name is Charles Adams, author of a 20-year study, entitled, For Good and Evil: The Impact of Taxes on the Course of Civilization. History reveals that most great empires taxed themselves to death, while others became great because of the right kind of taxes — taxes that stimulated growth, peace and commerce. If the Congress decides it is time to replace the income tax, then history provides some wonderful guides on how to do so. Let me begin with the unusual repeal of the first modern income tax, almost two centuries ago.

European cartoonists in the 18th and 19th centuries loved to depict taxes the people hated as a many-headed monster, and the first modern income tax was no exception. Britain's most renowned cartoonists, Cruikshank, marked the repeal of the income tax in 1816 with the following cartoon. A battered Britannia on the ground is told, "Rise Britannia! The Monster that so long oppressed and trampled on you is at last Subdued. Members of Parliament wielding their clubs on the monster, shout: "Down, Down to hell! & say I sent thee!!"

No doubt a great percentage of American taxpayers would like to send their Internal Revenue Code, "Down to Hell, and say I sent thee!"

This British income tax with its many schedules and concept of income was the forerunner of modern income taxation today. It was the tax that beat Napoleon. But when the Corsican general was finally put away and the political issues settled at the Congress of Vienna, The British people let their government know they despised the tax, but accepted it for 18 years as a wartime measure only. In the debates over retaining the tax, the leader of the opposition to the tax received a rousing ovation when he proclaimed:

"He hoped that the country would rise up as one man against it… This extension of bureaucratic power into everyday life might be the herald of an all-embracing tyranny."

The Crown followed with a motion to retain the income tax. When the Speaker announced the defeat of the motion, there was "the loudest exultation ever witnessed" within the halls of Parliament. A motion then followed to have all the records of the tax destroyed. It was carried — burned tax records, like dead men, tell no tales. The Crown was a bad loser. The Chancellor of the Exchequer is said to have stoked the fires as the records were being burned, while secretly retaining a duplicate copy of the records hidden away in the basement of the Exchequer Court.

Seventeen years later the famous Reform Parliament (which abolished slavery), considered instituting an income tax. Even the Chancellor opposed the idea with these words:

"If inquisitorial powers are spoken of, where will you find inquisitorial powers greater than those which were then [ Napoleonic times] exercised. The tax was — detested by the whole country."

The entire generation of Britons who lived under that first income tax had to pass away before the Crown could pass another income tax law. In 1842, to put the government's finances in shape, Sir Robert Peel pushed through Parliament a simple, 3% flat tax, with stoppage at the source. To allay any fears this tax might become permanent, Peel promised its repeal in a few years once the government's finances were in balance. Of course, that never happened. The tax has continued to this day. But the low rate, flat tax, lasted for almost 70 years, and became a shining example for proponents of income taxation everywhere, and played no small role in the adopted of income taxes in the U.S.

In 1911, Professor Edwin Seligman came forth with a book, The Income Tax, which extolled the virtues of income taxation. He dismissed the experiences under the Napoleonic tax, "Early complaints against the inquisitorial character of the tax have long since well-nigh completely disappeared." That observation looks ludicrous today, but in 1911, with 70 years of tolerable experience under Britain's modest flat tax, how could anyone have predicted otherwise?

But all was not entirely rosy. Germany had instituted an income tax in the late 19th Century which involved extensive audits (like today), which prompted one German legislator to acknowledge, "The country is covered with a perfect system of espionage." But German tax oppression would not happen in America, said Professor Seligman, "Nowhere else are people so meek in the face of officialdom. In no other country in the world would it be possible to enforce so inquisitorial a procedure as we have learned to be customary in Prussia." And what was the procedure? The audit. The inquisitorial procedure the proponents for the 16th Amendment said would not happen here has become a way of life for all America, and today, most American taxpayers want out, like the British did in 1816.

"A disgrace to the human race"

Our income tax code has been in disrepute for decades. In President Carter's acceptance speech at the Democratic Convention in 1976, he called for major tax reform, labelling the Internal Revenue Code "A disgrace to the human race." No one objected on the Republican side, yet no significant tax reform came about. The whole issue seemed to degenerate into a national debate in our major periodicals over the deductibility of the three-martini lunch. Carter's condemnation of the tax code was almost 20 years ago. The Internal Revenue Code and Regulations today are almost twice as thick and certainly twice as complicated and down right unintelligible. One of our most respected income tax scholars, Professor James Eustice, of NYU, when asked about certain new provisions of the tax code, said, "About all I can do is laugh."

Polybius, the great Greek historian of the second century B.C., said that the best preparation for politics was the study of history — in order to avoid the disasters of others. And one of our most revered thinkers in the 20th Century, Oliver Wendall Holmes, echoed the same idea in a 1922 case, "A page of history is worth a volume of logic." However, history gives us a mixed voice when it comes to income taxes. The early British income tax, the German income tax, and our own income tax monster all attest to the dangers inherent in income taxation. On the other hand, the simple flat British tax in the latter half of the 19th Century suggests that, with the utmost care, an income tax can be administered consistent with the spirit of a free nation. But if not controlled, the tax, like fire, can burn down the very civilization we seek to perpetuate. Our income tax is a monster because of our zeal for revenue; we ignored the lessons of history — what Polybius called, "The disasters of others."

Getting rid of our current income tax may seem like an impossibility, considering the huge national debt and deficits, but the seemingly impossible may turn into reality if the American taxpayer, like our cousins in Britain in 1816, has a say. Actually, the Congress and the Treasury have been, unwittingly, digging a grave for the income tax code for over 30 years. President Ulysses S. Grant, said that the best way to get rid of a bad law, is to strictly enforce it, and that has been happening to the income tax law for the past three decades. For the first 50 years, the income tax in America was an honor system. In my first tax audit as a professional, some 30+ years ago, a veteran IRS agent on the eve of retirement, said to me, "You know, our income tax system is an honor system, which is the only way it will work in a free society." Today, the honor part is gone. Does that mean the free society is gone as well? In a sense, yes — although no one wants to accept that painful judgment.

Thirty years ago the ubiquitous information return was almost unknown, and that is why it was an honor system. Today, besides mandatory reporting on just about every aspect of one's financial life, everything going through one's bank account is photographed and held in storage for the tax man to see. Our tax administration is now a spy system, not an honor system. Does that mean there has been a tragic decline in the honor and integrity of our citizens? Or, is there another explanation?

Almost 50 years ago, Supreme Court Justice Jackson, who was formerly chief counsel for the Internal Revenue Bureau, wrote, praising the tax integrity of the American taxpayer:

The United States has a system of taxation by confession. That a people so numerous, scattered and individualistic annually assess itself with a tax liability often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of government.

This praise was repeated by many others at that time. But in 1983, Richard Neely, Chief Justice of the West Virginia Supreme Court, made this disturbing observation:

Cheating on federal and state income tax is all-pervasive in all classes of society; except among the compulsively honest, cheating usually occurs in direct proportion to Opportunity.

Justice Jackson spoke of the rare instances of self-serving mistakes and outright evasion — and that was when the income tax was indeed an honor system. Justice Neely, writing almost 40 years later, saw such misdeeds as the norm if people have the opportunity. The government has two choices: cover the nation with even more espionage against taxpayers as the Germans did, or get rid of the monster.

What has gone wrong?

Rather than attack the integrity of the people, what we are experiencing is a broad, non-violent revolt against the tax system. Wealthy citizens are revolting with their shoes — they take flight to more gentler tax climes; others, not so fortunate, resort to just about anything that works: legal, and not-so-legal. To add even more extensive surveillance, more and more penalties, and even worse, more savage punishments, is like adding gasoline to a smoldering fire. The better solution is to bring in a wrecking crew and tear down the whole disreputable edifice. The American people have had a belly-full of a bad tax law; they are fed-up with it and with the many phoney attempts at tax reform. They want out, and their defiance and rebelliousness is a warning to tax policy makers. In fact, politicians who fail to see this sign-of-the-times, had better prepare for a short-lived political career, as George Bush learned. We saw that happen last November. Fortunately, it was a lynching by votes. In other times past, when taxpayer representatives approved taxes the people didn't want, they were lynched by ropes or the headsman.

History has not been kind to governments that taxed too much, or in ways the people disliked. The American Revolution is a reminder we can hardly ignore. In the French Revolution angry, over-taxed Frenchmen hauled every tax man they could find down to the guillotine and cut their heads off. No tears were shed when their heads flopped into the basket. Thomas Jefferson wrote that a government needs a rebellion every 20 years or so, and that the governors should not punish the rebels severely, for the rebels are pointing out sicknesses to which the government needs to give attention. Looking at Jefferson's historical frame of reference, we discover something other writers who quote Jefferson have ignored. There were about a dozen revolts in Europe and America when he lived — and all of them were over taxes. His was an era of violent tax revolts. Ours is an age of tax revolts by everything but violence. But the revolt is real, and the message the same.

These hearings on replacing the Federal Income tax should be the most important fiscal inquiries since the debates in the nation at the turn of this century over the income tax Amendment. The outcome will determine what kind of civil liberties we will pass on to our children in the next century: i.e., whether or not we pass to them a tax system that is unintelligible, corrupt, and tyrannical; or a system in which all citizens will know that the Costs of running the government are apportioned among the people by a standard of fairness they can understand and see. Today, they can neither understand it, nor see it. "Duty, honor and country" have been replaced with beating Uncle Sam out of every penny you can, and this, to a large extent because the tax law is, as President Carter charged, "A disgrace to the human race." How can you expect rational Citizens to support a law with such a condemnation?

What should be done?

Nero in one of his fits of madness, said that he wanted to abolish all taxes and make a beautiful gift to the human race." Not a bad idea, unless you want civilized life. For taxes are the fuel that makes civilization run. But if you have bad fuel with impediments, or not properly designed for the engine, then civilization will run badly, and that has happened too many times in history to need explaining

Our income tax can be likened to a dirty industrial smelter that pollutes the air, poisons the streams, and kills the forests. It will be tolerated so long as nothing else has been invented, and the smelter is essential for society. Like a dirty smelter we pollute the social order with our income tax system. We seek a society in which equality, integrity, and liberty abound, but our current tax system pulls us in the opposite direction. Instead of equality, we have inequality, intentionally and deliberately fostered upon us. Instead of integrity, we have fraud. Instead of liberty we have totalitarian surveillance and inquisitions. In short, our income tax is a dirty tax and the more we demand of it the dirtier it becomes. We are stuck with it because we haven't taken the time to develop something better. Now is the time. We need heroic leadership in matters of taxation and expenditure. Hopefully, that leadership will begin with this Committee.

What guidance can the past give us?

There are both positive and negative lessons. Taxes that wrecked empires, tell us a great deal about human nature, and about taxes that produced the "disasters" Polybius warned us about. And then there were taxes that were compatible with liberty, democracy and repeated private property. We need to focus on those taxes as well. Besides these historical examples we have the marvelous wisdom of the great minds of the past; of men who pondered the wreckage bad taxation had wrought, and sought out answers for the best way to tax and spend. We need to look to these great sages of the past, and fortunately, so many of them were prominent in the formation of the United States 200 years ago. They spoke our language. We don't need a translation. All we need to do is listen.

1. Any permanent forms of taxation should be as indirect as possible.

The condemnation of direct forms of taxation as the archenemy of liberty, is a truism over 2500 years old. It came from the Greeks and Romans who taught that direct taxation produced tyranny. They came to that conclusion from history — from examining the tax systems of the great empires of their day and their past — Assyria, Babylon, Persia, and Egypt. These were Civilizations that were devoid of liberty and respect for private property. The Greeks concluded from history that tyranny was the consequence of the wrong kind of taxes, and liberty came from the right kind of taxes, like sales, imports, or taxes on Commerce.

Cicero, the great Roman lawyer, wrote that direct taxes should be instituted only if there was no alternative other than complete national collapse.

When Rome declined and fell in A.D. 476, direct taxes had been in operation for over 175 years, and, at the same time, all forms of liberty had been taken away, starting with the Emperor Diocletian, who enslaved the Roman world to make the tax system work.

The Founders were schooled in classical history, and their greatest sage was from Europe, Baron du Montesquieu. His The Spirit of Laws was quoted more than any other writer by the Founders. He picked up the Greek and Roman theme and said that direct taxation was natural to slavery, but indirect taxes, like those on merchandise, were more compatible to liberty, "because it has not so direct a relation to the person."

I have searched through the debates at the Constitutional Convention and the debates in the state legislatures, and there is not one word of support for direct taxation. Madison and Hamilton wanted the power of direct taxation in the Constitution but only for "extraordinary emergencies." James Wilson, from New York, whom some believe was the primary architect of the Constitution stated that direct taxes were for "all cases of emergency." Luther Martin, a delegate from Maryland, said direct taxes "should not be used but in cases of absolute necessity." In the state debates, a representative, Alexander Hanson, reasoned that direct taxes were to be held in reserve, "nothing but some unforeseen disaster will ever drive them [the federal government) to such ineligible expedients."

It is clear from the writings and thinking of the Founders and of the ancient Greeks and Romans, that a nation bent on preserving liberty should avoid direct taxation and rely on indirect taxes, like sales and import duties, taxes on commerce, not the individual. Add to that historical wisdom the experience of the British under the Napoleonic income tax. They tried to pass on to later generations that the income tax they had experienced over 18 years was a tyranny of the worst kind, and by destroying all the records of this hated tax, they left a message for future generations to come. A message, we might add that never got through to our tax makers a hundred years ago. In this century, we have confirmed, the hard way, that the British in 1816 were right.

2. Taxes, whatever the format, must not be excessive.

The Founders and the men of the Enlightenment, condemned taxes that were "excessive." Unfortunately, they did not define the term, but they did explain the consequences. Montesquieu, who relied on history for his judgments, said excessive taxation resulted in "extraordinary means of oppression." Now, that's worth thinking about. What he seems to be telling us, is that human nature rebels against excessive taxation. It may be a violent revolt; it may be emigration to avoid tax; it may be evasion or fraud of some sort — but it is an iron law of history you cannot legislate against human nature. When a government does, in the tax field, it has to resort to "extraordinary means of oppression." But Montesquieu does not end there; for the inevitable consequence was, "the country is ruined."

The best definition of excessive comes from a leader of the British House of Commons at mid-18th Century, following the excise tax revolts against Sir Robert Walpole. The government had to do a lot of thinking about what had happened, and Henry Fox summed up the wisdom learned with this observation:

All governments must have a regard not only for what the people are able to pay, but what they are willing to pay, and the manner in which they are willing to pay, without being provoked to a rebellion.

3. Most important, the tax system as a whole, must be moderate.

There is an ancient Asian proverb, "It is not the heavy taxed realm that executes great deeds, but the moderately taxed one." This is consistent with the Greek doctrine of the "golden mean," propounded by Aristotle. Virtue is the middle ground between extremes. Tax policy should follow a moderate course in all respects: tax rates, surveillance, privacy, punishments, even equality. It is, in my opinion, no virtue to exempt any citizen from some tax. In the New Testament, even the Widow paid her mite. In the Roman Republic, the taxes of widows and orphans, however small, were set aside for the cavalry. Taxes were paid with pride, and love of one's Country.

Tax rates should pass the smell test, and not reek of plunder against any minority class of citizens, like our estate taxes which today confiscate over half the accumulated (and taxed) wealth of the rich. No wonder they take flight and leave, for patriotism, like it or not, is soluble in taxes. Not even a half-starved crow will sit around to be shot at.

Intrusions should show some respect for privacy and due process. Photographing everything in every bank account is looked upon by other Western societies with horror, like something out of Orwell’s 1984.

Our savage punishment of tax sinners is not only out of step with Western Civilization, it was condemned by the great writers of the Enlightenment. Not only Montesquieu, but William Blackstone in his Commentaries, and Adam Smith in The Wealth of Nations. They all condemned making tax evasion a felony. The tax evader, said Adam Smith, was:

"In every respect, an excellent citizen, had not the laws of his country made a crime which Nature never meant to be so. In those corrupt governments where there is at least a general suspicion of much unnecessary expense, and great misapplication of the public revenue, the laws which guard it are little respected."

Montesquieu and Blackstone in one voice, both said, you must not treat tax offenders as villains.

4. There is no single form of tax Nirvana.

Around 1750, the famous British Poet, Alexander Pope, gave us this wise couplet:

Whoever hopes a faultless tax to see, hopes what ne'er was, is not, and ne'er will be.

Reliance upon any single form of taxation has not worked well in history. Alexander Hamilton saw this and he pushed hard at the Convention to give Congress broad authority to tax in any number of ways. He argued this point in The Federalist to overcome the popular view that the federal government should only be able to tax imports. His argument was sound. He said that if great revenues are needed, as they will be at certain times of emergency, then a single tax will become excessive and this will injure commerce and foster evasion with the high tax rates that will be necessary. Better to have the power to tax all kinds of sources, not just one source, so the rates can be moderate.

Historical examples are easy to find. The Spanish Empire and later the super-Dutch empire both went into decline because of heavy excise taxes that crippled trade. The Netherlands, the superpower of the 17th Century, was unable to compete with lower-priced, and lower taxed British goods. An English diplomat in Holland wrote home: "When in a tavern, a certain dish of fish is eaten with the usual sauce, about 30 several excises are paid." Said another English writer, "Should we in England be obliged to pay the taxes that are here imposed, there would be rebellion upon rebellion." As British merchants underpriced Dutch goods, Leiden was a desolate town, its once flourishing cloth industry in a depression. The linen industry of Haarlem had similarly shrunk. As a modern Dutch historian has observed about the decline of the super-Dutch, "Taxation meant the strangling of trade."

The British eclipsed both the Spanish and the Netherlands in world markets, supporting the government with a broad range of taxes on all aspects of commerce and wealth. The tax philosophy of Britain's rise to superpower status was to avoid a single primary tax, which, in the words of one British tax writer 200 years ago, "ought to be most sedulously avoided."

The wisdom of Hamilton has been proven by our reliance on a single, primary tax to carry most of the country's revenue needs: it has fostered evasion and hurt commerce just as he predicted. There is no single tax Nirvana, if history is to be a guide. Such schemes have had disastrous results in the past.

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What should be done? Should the present income tax be abolished? Yes — definitely so. It has been misused; the American taxpayers have been abused; they are fed up with it and want a real change. A flat income tax has merit as long as it is moderate, as indirect as possible, and as long as the Orwellian powers of the tax man are rooted out. We may not be able to "Subdue" the tax monster as the British did in 1816, but we must tame the beast before the faith of the people in federal taxation can be restored.

What about a national sales tax? A VAT? A GST like Canada, or some other form of tax on commerce. All these forms of taxation are indirect, and conform to the best tax wisdom of the past 2500 years. The Greeks, Romans, the Enlightenment, the Founders, all would favor such taxes. They have history on their side, as long as they are not too excessive or extensive as was the excise with Spain and The Netherlands.

What else? We need to explore other tax ideas, even novel or ideas that may appear crackpot. We want a tax that conforms to and does not buck the Wisdom of the past. This story from Henry Ford's search for a safer car, may have some merit in our search for better ways to tax:

Henry Ford wanted to protect lives and injuries from shattered auto glass. He asked the world's glass experts to make unbreakable glass for his new models. The world's glass experts said it couldn't be done. They knew too many reasons why it couldn't be done. Henry Ford said to his aides, "Bring me eager your fellows who do not know the reasons why unbreakable glass cannot be made. Give the problem to ambitious young fellows who think nothing is impossible." He got the unbreakable glass.

America needs a new tax invention, something that might be possible with our modern technology and be compatible with the temper of a free people. In our Search for a new tax system every idea and plan to replace the income tax, must be measured and tested against these four criteria of a bad tax system, given to us by Adam Smith in The Wealth of Nations:

  1. The tax must not foster a large bureaucracy.
  2. The tax must not discourage enterprise, and thus deprive jobs from the multitude.
  3. The tax must not encourage evasion — legal or illegal.
  4. The tax must not put taxpayers through odious and vexation examinations by the tax gatherer.

Add to Adam Smiths four signs of a bad tax system, the four positive factors set forth in this treatise:

  1. A permanent tax system should be as indirect as possible.
  2. The tax must not be excessive; i.e., not only what the people are able to pay, but What they are willing to pay.
  3. The system as a whole must be moderate: no savage punishments; no totalitarian intrusions and surveillance; uniform and equal rates.
  4. No reliance on a single form of tax — taxes should cover a broad range of the national wealth and commerce.

If we measure our current tax system by the above eight principles, it fails miserably. It might be necessary, if we are to have a good tax system, to give the problem to ambitious young fellows (and gals) who think nothing is impossible.

October 21, 2006