All About Tax Day
Jude Wanniski
April 15, 2003


Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: Courtesy of Gary North

Gary North sends me his “Daily Reckoning” every weekday and I do check it out, as he frequently has some interesting numbers, stats, or bits of history. We’re not on the same page on macroeconomics, but are close enough to remain engaged in friendly discussions. Here is the offering he sent today, Tax Day, with all kinds of interesting stuff I did not know about. Especially the news that the 16th Amendment to the Constitution, which allows Congress to tax our incomes, was never officially ratified by the required number of states.

Issue 231 April 15, 2003


Today is tax day. All across America, people will be frantically filling out their 1040 forms, mailing them in by midnight. Others will be sending in their extension forms. The annual day of reckoning reminds us that there are no free lunches.

Before income tax withholding was dreamed up by Beardsley Ruml in 1942, and sold to Congress as a wartime measure in 1943, Americans did not pre-pay through the year. They paid on tax day. Most of them didn't pay in 1942. Ruml was at the time chairman of the Federal Reserve Bank of New York, the most powerful regional FED bank. He had been on one or another of the Rockefeller Foundations' payrolls since 1921. He was Treasurer of Macy's, the giant department store. He had noticed there that customers paid their bills more readily when required to spend a little each month. He applied the same principle to taxes, with payment in advance. It worked. Income tax withholding raised revenues from this source from $686 million in 1943 to $7.8 billion in 1944.

What very few Americans know is that the income tax amendment was never actually passed by the voters. There were major irregularities in the amendment's voting procedure. The government wanted that tax in 1913, so the irregularities were overlooked. The Attorney General announced that it had been passed by the voters. Not for another seven decades did anyone go to the original sources, state by state, to see if the amendment had been legally ratified. Bill Benson, a former tax collector for the state of Illinois, did the spade work, collected 17,000 documents, and co-authored a book that showed that the 16th Amendment had not been legally ratified. The book, THE LAW THAT NEVER WAS, came out in 1985. It immediately was dropped down the memory hole. Professional historians, who should have done the work two generations earlier, ignored the book. If you're curious, click through:

This historical fact does not mean that the tax laws are not going to be enforced, as always. It surely doesn't mean that a jury will uphold you if you stop paying taxes. No jury will believe Benson's story. No jury is going to let you off the hook when they know they are forced to pay. It's a matter of envy.

Any attempt to use legal technicalities to overcome the lifeblood of the modern welfare State will fail. The courts are not going to overturn the entire modern economic system, with its faith in salvation by legislation and taxation. Our taxes are the judges' bread and butter.

Bill Benson doesn't pay income taxes. But he spent time in prison, where he almost died, as part of his one-man protest. He also has what you and I don't have: officially certified records of each state's voting in 1912. Still, I would love to have a CD-ROM with the images of all of those documents. They could be scanned in. I'd pay Bill $50 for such a CD. I have recommended to him that he do this, but so far he hasn't.


You may have seen a copy of the original 1040 form. If not, click here.

It was four pages long. Taxpayers paid 1% on everything above $3,000. The top rate was 7% (6% plus 1%). That rate kicked in at $500,000.

You can compare the purchasing power of the dollar in 1913 vs. 2003 by going to the website of the Bureau of Labor Statistics. Use the "Inflation Calculator” (under “Inflation & Consumer Spending”). Use $100 for the 1913 figure. You will find that today, you would need $1,849 to match the purchasing power of $100 in 1913.

So, anyone who did not earn $3,000 -- the equivalent of $54,000 -- paid no income tax in 1913. Anyone who earned more than the equivalent of $360,000 paid an additional 1% surcharge on income over this. The top surcharge of 6% kicked in at $500,000, the equivalent of $9,245,000. That's annual income, not net wealth.

Within five years, the top rate was 77% on income of more than $1 million. At the bottom bracket, the tax was raised by a factor of 6 (i.e., 6% on income over $4,000).

Most people escaped most of the income tax burden. They escaped until 1942. But, generation by generation, the bottom bracket has dropped, price inflation has risen (pushing everyone into a higher bracket), and tax compliance has increased. So has the authority of the tax collectors at all levels to undermine our privacy.

The opponents of income taxation in 1912 said that we would see the day when taxes would extract 25% of people's income. Such Cassandras were ridiculed. Today, the Federal government collects about 22% of national income. State and local governments extract an additional 18%. Yet the United States is taxed at lower rates than most Western industrial nations.

Note: the level of taxation imposed by the British after the French-Indian (Seven Years) War ended in 1763 was in the range of 1% of national income outside of the South, and possibly as high as 2.5% in the South. To escape from that oppressive tax burden, the colonists revolted in1776.

Last Friday, it took a tie-breaking vote in the Senate by Vice President Cheney to get a $350 billion tax cut (spread over 10 years). With the war costs at $79 billion for this year, we can see where we are headed: deficits for as far as the eye can see. A $35 billion a year tax cut is not going to get us on the upward slope of Arthur Laffer's famous curve. To see the curve, click here:

There must be economic growth to pay for the ever- escalating Federal budget. But we remain in recession, according the that National Bureau of Economic Research (NBER), which is the official arbiter of when recessions begin and end. The U.S. economy is stagnant. European economies (excepting Ireland) are worse.

This has implications -- bad -- for the stock market.

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