The Ultimate Tax Cut
by Jacob G. Hornberger

Since it is presidential campaign season, we will inevitably be treated to the usual discourse about tax cuts. Some candidates will call for tax cuts, undoubtedly as a way to bribe voters into voting for them. Others will resist the call, undoubtedly in fear that their favorite government program might not receive desired funding. In actuality, all the tax-cut talk will be rather meaningless, especially for advocates of liberty.

From the founding of the United States through the early part of the 20th century, with a few exceptions (e.g., the Civil War), Americans lived without income taxation, the federal government being funded primarily by tariffs and excise taxes. Americans were free to keep everything they earned and decide what to do with their money. There was no IRS and no one had to file income-tax returns.

When the idea of an income-tax-free society is posed to a modern-day American, oftentimes the reaction to such a radical idea is shock. “Why, that would be anarchy!” the American sometimes responds. But that notion would have come as a surprise to our American ancestors, who lived in a society with a fully functioning federal government and no income taxation for more than 100 years.

Why did our American ancestors oppose income taxation? Because they had discovered an important point: People cannot be free in a society in which the government has the power to levy taxes on income. To put it another way, people are free only when they have the ability to keep everything they earn and decide for themselves what to do with their own money.

With the advent of income taxation in America, the relationship between citizen and government was inverted. Prior to the income tax, the citizen was sovereign by virtue of the fact that he was free to earn unlimited amounts of money and there was nothing the government could do about it. Like it or not, it was his money, to do with as he pleased.

With the adoption of income taxation, all that changed. In effect, the income tax nationalized income. While many people would undoubtedly prefer not to think about it in this way, under the federal income tax everyone’s income belongs to the government or, if you prefer, to “society.” The power to set the tax rate is essentially the power to decide how much of their income people are going to be permitted to keep.

Thus, the income tax has converted the relationship between government and citizen into one akin to parent and child. The portion of their income that the citizenry are permitted to retain has effectively become an allowance. Sometimes the government is good to the citizenry and lets them keep more of their income. Sometimes the government is not so nice and lets the citizenry keep less of their income. But what’s important here, in terms of freedom, is not the percentage that is being levied but rather the fact that it is the government making the determination. That’s obviously a far cry from a society in which there is no income taxation at all.

Taxes and spending

There is another factor to consider here, a practical one. Those candidates who call for tax cuts are doing more than throwing a bone to beleaguered taxpayers. They are also perpetrating a fraud, because they know that since government expenditures today far exceed government revenues, people are going to have to pay for the deficit somehow.

Permit me to digress a bit here. One of my biggest personal revelations when I discovered libertarianism many years ago was that the federal government acquired its resources differently than people in the private sector. I had envisioned the government as just being part of a huge collection of enterprises, producing its own wealth and deciding what to do with it. That was one reason I could not understand why anyone would object to the government’s helping the poor with welfare. I thought, Why shouldn’t the government be as “free” as everyone else to decide how to spend its money, and why shouldn’t it spend its money on helping the poor?

And then I discovered that the federal government acquired its money differently than everyone else. Its money comes from taxes, which are forcible exactions imposed on people. That is obviously very different from how people in the private sector get their money. Microsoft, for example, depends on offering products that induce people to voluntarily trade their money for a particular piece of software. If people decide to hold on to their money instead of buying the software, there is nothing that Microsoft can do about it. That is, Microsoft cannot force anyone to hand over his money.

It’s different with the government. Its revenues do depend on force. If someone doesn’t like a particular service that the government is providing (e.g., waging the drug war, providing people with welfare, torturing detainees, or killing people in Iraq), he can’t do what he does with Microsoft. He must pay his income taxes anyway, on pain of fine and imprisonment or even death upon steadfast refusal to do so.

Now, back to the tax-cut bone that presidential candidates love to offer voters during campaign season. As Milton Friedman pointed out, the true level of taxation is not what is being collected in taxes but rather the level of government expenses. Why is this so? Because if the government is spending more than it is receiving in tax revenues, it is doing it in one of two ways — borrowing or printing the money.

If it’s borrowing the money to finance its expenditures, those debts must ultimately be paid back. That’s why a tax-cut bone that presidential candidates offer voters is a fraud. They know that one way or another, ultimately the government is going to have to repay those debts. And the only way it can get the money to repay those debts is to tax the citizenry.