Restoring Liberty With Three Short Laws
by Gary North
Let us assume that at some point in the future, Congress will pass and the President will sign three bills. These three laws would strip power from the United States government on a scale inconceivable even to the Tea Party's hard core members. They would be very short laws.
The United States Government hereby abolishes the Federal Reserve Act of 1913 and all subsequent laws relating to that Act.
The deadline for filing all Federal income taxes will shift in the next fiscal year from April 15 to the second Monday of November.
Withholding for all Federal taxes is hereby abolished.
Think of what this would mean. First, the central bank of the United States would become just one more over-leveraged bank – the most over-leveraged bank in the country. It would no longer possess a grant of privilege from the United States government. Members of the Board of Governors would no longer be paid by the U.S. government, nor would any other employees of the Board. The Board would have to abandon its Web address: www.federalreserve.gov. No more ".gov."
Second, the voters would be reminded in every Congressional election year just how much money the government is costing them. They would no longer have from mid-April to early November to forget.
If all Federal income taxes were due on the same day, this day would become the most feared and hated day of the year, assuming that it isn't already. I ask: Why not have this day fall on the day before Federal elections?
Personal income tax forms must be mailed by April 15. Think about this date. Before they vote in November, taxpayers have almost seven months to forget about tax misery day the previous April, and their next form-filing day will not come for almost six months. Out of sight, out of mind.
I say, let every citizen recall his previous day's tax filing and check-writing experience when he steps into the polling booth to cast his vote. Let democracy speak!
Third, taxpayers would have to adopt a program of personal voluntary thrift in order to set aside the money they owe to the government. Every payday, they would have to take steps to prepare for the Day of Reckoning. No longer would the government get the use of the public's money interest-free for a year. No longer would the government be able to position itself as a provider of nice refunds: "free money!" No longer would the government force people to reveal their whereabouts in order to get their refunds.
The withholding tax program makes it easier for governments to collect taxes. The system was invented by Rockefeller agent Beardsley Ruml. When, in 1942, he came up with a plan to sell Congress on the idea of income tax withholding, he understood exactly what this would do for revenues actually collected: multiply them.
Here was the government's problem in 1942: only about five million out of the 34 million Americans subject to the income tax were saving to pay it on March 15, 1943. This presented a big problem for tax collectors, now that wartime taxes had been hiked dramatically. Ruml, formerly the director of the Laura Spelman Rockefeller Foundation, in 1942 was chairman of the New York Federal Reserve Bank. He was also the treasurer of R. H. Macy & Co., the department store. As Macy's treasurer, he well understood that most people resist saving for known expenditures. He asked: Why not get employers to deduct their employees' income tax liabilities? He recommended this to Congress in 1942, and Congress in 1943 passed a tax collection bill that included Ruml's withholding provision: the Current Tax Payment Act.
The Treasury Department went to work defending this program. It used staff economist Milton Friedman to do much of the research.
Did the scheme work? Beyond the politicians' wildest expectations. In 1942, the U.S. government collected $3.2 billion from income taxes. It 1943, before the law was fully operational, it collected $6.5 billion from income taxes. In 1944, it collected $20 billion. ("Historical Statistics of the United States," Pt. 2 , p. 1105.)
The withholding tax was passed as a wartime measure. Naturally, it was not repealed in 1945.
The withholding tax system is popular with the Federal government for four reasons. First, the government deliberately over-withholds. This forces taxpayers to file their forms to get their refunds. They must identify where they live. Second, it creates a "free money from the government" emotional response when the refund check arrives. Third, the government gets to use this money, interest-free, during the taxable year. Fourth, it makes income taxes and Social Security taxes less painful and therefore more acceptable.
If withholding were abolished, the decline in revenues would be both immediate, permanent, and spectacular. Then, on the second Monday of November, there would be desperation across the land. Hardly anyone would have saved all of the money owed during the year. Where would they get the money to pay? They wouldn't. So, many would not file. There would be no way that the Internal Revenue Service could follow up on all the non-filing residents.
As soon as the taxpayers realized that there are too many people to convict, they would understand the enormous power they possess. Congress could do nothing. It would have to cut taxes to such a degree that people will set aside money to pay. It would have to issue high-interest tax prepayment bonds.
The government would have to default on its other debts.
I mention this just as a reminder: the entire system of Federal power rests on three laws, two of which are essentially technical, namely, the date for tax filing and tax withholding. These two technical laws are the foundation of the modern welfare-warfare-nanny state. Remove these two pillars, and the whole Federal system will come down.
WHY DEFAULT IS INEVITABLE
There is no school of academic opinion except for Austrian School economics that seriously suggests that the Federal debt should ever return to zero, as it was for just one year: 1836. The idea of debt-free civil government is universally regarded as utopian.
Some members of the Tea Party say that the government's debt is too large, but no one will gather Tea Party votes by calling for permanent budget surpluses sufficient to reduce the debt to zero over the next 20 or 30 years. That would require spending cuts that voters today will not tolerate: Social Security, Medicare, and Medicaid.
All three of these programs will eventually be cut, either by piecemeal cuts, or by hyperinflation, or by an outright default by the government. But today's politicians deny this, so most voters imagine that, somehow, these promises will not be broken by long-term fiscal crises in the future. It is not that a sucker is born every minute. On the contrary, voters who will someday demand that Congress default are born every minute. In contrast, suckers retire every minute. They are the sure losers.
"We owe it to ourselves" is a popular slogan of the defenders of the Federal debt. It has been ever since the New Deal of the 1930s. It is a nutty idea. Specific borrowers owe specific amounts to specific creditors for a specific time period. Nobody assumes that, under private debt, we owe it to ourselves, yet the idea is taken seriously by a large percentage of the voting the public when they think of government debt.
As the debt builds up relentlessly, and because nothing is done to stop this, the statistical probability of default increases. A statistician can see what is coming. A politician can too, but he is not going to admit this in public. An older voter should see it, but he has a built-in preference for not seeing it. He thinks, "I have paid so much money into the system. I deserve to be repaid." This is the "just deserts" theory of politics. It leads to ever-greater Federal debt based on ever-more preposterous denials.
It is not a question of default vs. no default. It is a question of which kind of default and when. It is a question of whose ox will get gored.
Liberty is possible. I do not think it is likely in the near future. It will take three laws: (1) the abolition of central banking; (2) the temporal connection between tax day and voting day; (3) the abolition of withholding taxes. If and when we get all three, the government will shrink back below the definition of tyranny provided in the Bible governments that tax at 10% or higher (I Samuel 8:14, 17)
Alvin Rabushka, the pre-eminent student of taxation in colonial America, has pointed to the history of American taxation after the Federal Reserve but before the New Deal and withholding taxes. Most people are unaware of this.
Nevertheless, reflecting its colonial antecedents, the scope of the federal government remained small, consuming only 3 percent of the national income as recently as 1929. The states remained the principal source of taxing and spending, consuming 7 percent of national income in 1929. It took the legislative measures enacted during the Great Depression to change the compact between the American people and their government, raising the share of taxes levied at all levels of government from a tenth to a third of the national income in peacetime, higher during wartime. The colonial roots of American taxation were lost in the transformation that took place in the twentieth century.
I would settle for going back to 1912. Wouldn't you?
July 7, 2011
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2011 Gary North
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