Budgets, Taxes, and Schemes of Oppression

When the Treasury Department released the budget data for August this past Thursday, the numbers were ugly. Not only did the government post a $380 billion deficit for the month, but interest on the federal debt surpassed $1 trillion for the fiscal year for the first time. Interest payments now constitute the second-largest item in the federal budget, bested only by Social Security (at $1.4 trillion). Worse still, on their current course, interest payments will reach $1.6 trillion on an annualized basis before the end of the year, making them the largest item in the budget, and creating a very serious and unprecedented crisis.

Of all the ugly numbers in the Treasury release, one stands out, uglier than the rest, and especially telling. Income taxes now generate revenues that cover less than half of federal spending. To be more precise, individual and corporate income taxes combined now fund a meager 41% of federal outlays. As the folks at Zerohedge note, what that means is that “If Trump proposed to do away entirely with all income taxes, the US would need to raise ‘only’ another $ 2.4 trillion in additional debt to the $4 trillion it raises every year.”

As alarming as that may seem, in truth, it is not surprising at all. Indeed, it is the natural consequence of the uses and abuses of the American tax code by generations of politicians who care less about governing soundly and effectively and more about advancing their partisan and ideological political agendas.

The simple truth of the matter is that the American tax code is no longer utilized specifically to raise revenue. It does so, of course, but that’s not its primary purpose. Rather, the American tax code is now used principally to reward or punish specific constituencies and behaviors.

Earlier this year, for example, senator and Republican vice presidential nominee J.D. Vance was criticized roundly for wanting to make the tax code more “friendly” to families with children. “He can’t do that!” critics screeched, “that would effectively punish those Americans without children!” Well…yes. That’s the point, to punish childlessness or—from Vance’s perspective—to reward having children. This is a tried-and-true (although fairly ineffective) way to address a perceived fertility crisis or to encourage family formation. It is no different in principle from Vice President Kamala Harris’s proposal to raise taxes on capital gains. Her plan would raise minimal government revenues, would spark considerable efforts to shield and hide gains from the government, but would, ultimately, punish those who earn the greater part of their wealth from capital rather than from salary and wages. And that’s precisely what she and her fellow partisans want it to do.

And so has it been for years. All of the leftist tax proposals to “soak the rich” are designed to do just that, to punish the rich, even as the taxes generate paltry revenue increases. Conversely, conservative tax cuts since Reagan at least have been designed to reward the rich—on the assumption that when the rich are flush with cash, they reinvest it, use it to create jobs and expand businesses, and generally do great things for the economy overall. President Trump promised to eliminate taxes on tips, largely because he would like to be seen as supportive of the working class and would like the votes of service workers. Vice President Harris adopted the plan for exactly the same reasons.

Although the explicit severing of the connection between taxes and revenue is of recent vintage, the planting of seeds of this distortion of government’s function and powers dates to well over a century ago, to February 3, 1913. That was the day that Philander Knox, attorney general to President William Howard Taft, signed the 16th Amendment to the Constitution, which read in its entirety, “The Congress shall have power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Woodrow Wilson—America’s Progressive authoritarian—was inaugurated the next month and, within weeks, signed the nation’s first income tax law, which he had more or less demanded Congress pass. The new law contained a flat tax of 1% on all income over $3000 and a steeply graduated “additional tax” that kicked in at $20,000.

Now, normally. This would be the point in the essay when I would explain why the Founders had rejected an income tax and had specifically and vigorously rejected the idea of a graduated income tax. I can’t really do that, though, in this case. While the Founders did indeed debate and reject a tax on income, they never discussed the idea of a graduated income tax, largely because they didn’t think they needed to. They thought flaws of unequal taxation were so manifest that they didn’t even merit discussion, that no democratically elected leader could possibly be so stupid as to believe such a thing desirable.

Only once was the subject of an “unequal” tax even broached by the Founders—in Federalist #10, written by James Madison—and then only tangentially. As part of a broader discussion of the importance of preventing certain factions of society from acting in concert to “carry into effect schemes of oppression” against others, Madison wrote that “The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.”

In a column published not long after J.D. Vance was chosen to be Donald Trump’s running mate, Veronique de Rugy, a free-market advocate and senior research fellow at the Mercatus Center, criticized the senator and all those who would use the tax code to reward or punish behaviors. “Using the tax code to ‘reward’ parents and ‘punish’ nonparents is at odds with the idea of a neutral, efficient tax system,” she wrote, “People making the same income should be paying the same level of taxes no matter how they choose to live their lives.”

Veronique de Rugy is absolutely and inarguably correct—with one minor oversight. When she wrote that “People making the same income should be paying the same level of taxes” she implicitly endorsed the idea of a gradual or unequal tax, which, as Madison presciently noted is the greatest inducement legislators face “to trample on the rules of justice.” Here, Madison was right and de Rugy wrong.

One might be tempted to suggest otherwise, to insist that a graduated or unequal tax can, in fact, be implemented fairly. The problem is today’s elected officials. Politicians of earlier eras were not as feckless as their contemporary counterparts, making them capable of avoiding such “schemes of oppression.”

History suggests otherwise. Wilson being Wilson, the steep graduation in the very first income tax was anything but fair and was, almost inarguably intended to punish the rich, the sworn enemy of the Progressives. Even from the start, in other words, the tax code has been about sticking it to the “bad guys.”

More than a century later, the ultimate consequences of this scheme are only now becoming clear. The 16^th Amendment set in motion the fiscal and ethical disaster made clear by the August budget numbers. Taxes are just another vehicle to punish or reward favored political constituencies. Nothing more, nothing less.