Why Taxing Only the Rich Doesn’t Raise More Revenue

tax_richOne of the byproducts of free people making different choices with their time, talents, and treasure is the unequal distribution of economic outcomes.  I suspect that no western tradition generates more passion among Occidentals than the concept of inequality.  Whether we like it or not, or whether it is true or not, many Americans believe inequality is one of America’s greatest moral failures.  During the 2012 presidential debates between President Obama and Governor Romney, large segments of the discussion centered on the topic of taxing the rich more while preserving the relatively low tax rates for everyone else.  As we will see, the policy of taxing the wealthy significantly more is not new.  I want to demonstrate from history why a steeply progressive tax code, where the rich pay significantly more and the poor pay significantly less, doesn’t achieve its intended purpose of raising more revenue.

Our Founding Fathers weren’t big fans of the income tax.  In fact, it wasn’t until 1913 that the 16th Amendment was ratified allowing the federal government to directly tax the incomes of individual Americans.  The ensuing Revenue Act of 1913 called for a tax that ranged from a modest 1% on incomes exceeding $3,000 to 7% on incomes exceeding $500,000.  It wasn’t long before a policy of “taxing the rich” significantly more was implemented.  In order to pay for WWI, Congress passed a law in 1916 that raised the tax rates on incomes over $300,000 to 70%.

Ironically, from 1916 until 1918, the number of Americans earning more than $300,000 dropped in half!  This caused President Woodrow Wilson himself to urge Congress to reconsider whether very high tax rates were productive in collecting revenue.  Wilson said that, beyond some point, “high rates of income and profits taxes discourage energy, remove the incentive to new enterprise, encourage extravagant expenditures, and produce industrial stagnation with consequent unemployment and other attendant evils.”  In the midst of a deep depression and hundreds of thousands of Americans unemployed, those who successfully implemented the steeply progressive tax policy found themselves elected out of office.

In contrast to the poor economy experienced during the Wilson administration from 1916 to 1920, the Roaring 20’s was a time of unprecedented economic prosperity.  Americans both rich and poor were buying radios, washing machines and automobiles.  Unemployment was virtually non-existent, and it was the first and only time in American history when blacks had lower unemployment numbers than whites.  What was the cause of such a positive economic turnaround? Many believe it was the reduction of excessive progressive era tax rates.  The treasury secretary at the time, Andrew Mellon, convinced both President Warren G. Harding and his successor Calvin Coolidge, that the most effective way to raise tax revenues was to flatten the tax code.  From 1921 until 1929, marginal tax rates shrunk from a high of 77% to 24%.

The result?  Record collections of tax revenues that were so large the government almost paid off the national debt.  As for getting the wealthy to pay their fair share, In 1918, when marginal tax rates were over 70% only 20% of taxes collected came from incomes over $300,000.  However, by 1926, 65% came from top earners!  Mellon proved that the way to raise revenue was not to raise marginal tax rates, but to lower them enough to make work and investment meaningful to wealthy people.

At first glance, lowering tax rates on high incomes for the purpose of raising revenue seems counterintuitive.  However, Secretary Mellon knew that productive Americans would not produce if taxes were too high.  Mellon wrote in 1924, “The history of taxation shows that taxes which are inherently excessive are not paid.”

One of the ways that the wealthy produce less income is they invest in tax advantaged investments that are usually less attractive when tax rates are lower.  Growth stocks, insurance annuities, sophisticated and expensive retirement trusts, and tax-free municipal bonds, all become incrementally more attractive to wealthy people as their income tax rates increase.

A second way wealthy people avoid income taxes is they invest overseas in countries where their investment income is taxed less.  There are many countries where investment opportunities are unattractive when U.S. tax rates are low.  However, at some point even risky overseas investments become relatively more attractive as tax rates on U.S. investment income are increased.

Finally, when productive people get taxed more, they produce less.  If you think I am fibbing, try this experiment at home.  Tell your children that if they clean their rooms by noon on Saturday, you will take them all out for ice cream; however, whoever cleans their room first will be forced to clean the bedrooms of their less efficient siblings.  Productive people tend to have less debt, so they don’t need much income to flourish.  When income tax rates are high, wealthy people spend more time in leisure activities and less time in activities that require them to pay excessive taxes on their productivity.

lglafferArt Laffer, a distinguished economist and advisor to Ronald Reagan, developed the concept of the Laffer Curve.  Laffer postulated that no revenue would be collected when tax rates were 0% (for obvious reasons), but he also believed no revenue would be collected at rates of 100% because no one would have an incentive to produce income.  Somewhere between 0% and 100% lies a sweet spot where the greatest amount of revenue will be collected.  History has demonstrated that tax rates above 24% tend to result in reductions of revenue collected.  With our national debt at unprecedented levels, our economy in dangerous waters, and our own economic futures uncertain, it is critical that we take into the voting booth with us an understanding and historical appreciation for tax policies that actually work.

12 thoughts on “Why Taxing Only the Rich Doesn’t Raise More Revenue

  1. The distribution of the burden of federal income taxation is slanted very heavily toward higher income earners, with roughly half of the tax being paid by persons in the 90th percentile of earners, and all of the income tax being paid by the highest two quintiles. The lowest quintile actually receives a net benefit in the form of “refundable credits” such as child care credits and earned income credits, in excess of tax withholdings. But this distribution of tax burden reflects both the effect of progressive tax rates and the substantial inequality of incomes.

    Whether the current system is good public policy depends on answers to some basic governance questions. For example, should a majority of persons eligible to vote in federal elections be exempt from federal income tax? Should tax policy seek to alleviate income inequality by placing a disproportionate burden on high income earners?

    A second set of questions concerns characterization of income for tax purposes. For example, should capital gains and dividends be taxed? If they are taxed, should they be taxed at the same rate as ordinary income? Should net corporate earnings be taxed? What is the rationale for their taxation?

    A third set of questions concerns types of taxation. For example, should wealth transfers be taxed? What is the rationale? Should certain classes of transfers be exempted? Should certain amounts be exempted? Is a national sales tax a more rational, more efficient method of taxation? A value-added tax? Are there constitutional constraints on either a sales tax or a VA tax?

    A fourth set of questions concerns payroll taxes. For example, should income from employment be subject to higher tax rates than income from passive sources? Should payment of payroll taxes correlate directly with ownership of a guaranteed benefit?

    Finally, a fifth set of questions concerns the place of generational equity. Current federal outlays, including Social Security and Medicare spending, exceed revenue by roughly 30%, and accumulated debt, both debt held by the government and by the public, is now nearly 100% of annual GDP. Although interest rates are currently at near-historic lows, interest on the federal debt is currently 6 to 7 percent of annual federal outlays. A return to historic average interest rates would more than double that percentage. Since two thirds of federal outlays are legal obligations, that increase would put significant strain on such discretionary items as defense, highways, and education. How will future generations work through the problem of dealing with this inherited debt load? Inflationary monetary policy? Reduced federal outlays? Substantially higher marginal tax rates on lower income taxpayers?

    The present system of taxation is not fulfilling its most basic function, that is, paying for the government that voters apparently demand. My concern is that our political system appears to have accepted that spending in excess of revenues is a sustainable policy, and may not be able to respond to a future economic crisis in the interest of its citizens without defaulting on current obligations to its debt holders. Put another way, current taxation and spending policies contribute to a concentration of wealth in the holders of government debt. While most of those holders would view disruption of the American economy as a threat to their investment, it is also likely that debt holders would seek to influence public policy in ways that would be unpalatable, or even unacceptable to the American public, setting up long-term political instability.

  2. Jim,
    When I was studying the taxation portion of my CFP® materials years ago, I was shocked to learn that revenue collection was not the sole purpose of the U.S. tax code. The tax code has in fact additional purposes: stimulate growth, provide disincentives for particular behaviors, and income redistribution. Many of these purposes are at odds with one another, and the dysfunctional effect is similar to the patient who takes a stimulant in the morning to wake up and then must take a sleeping pill to offset the effects of the stimulant to fall asleep.

    Economics assumes rational agents are working in pursuit of self-interest; however behavioral economics tends to refute that assumption. Humans don’t consistently act in their own self interests, primarily because of their own cognitive limitations and/or their carnal cravings.

    There are only three ways a government can raise money: 1) collect taxes; 2) borrow it; or 3) print more of it. Only #1 affects citizens immediately, so it is treated with the greatest amount of suppression, unless someone else is doing the paying, in which case those doing the paying modify their behaviors to reduce their obligations (thus the subject of my blog post). Because humans desire good things in the present but prefer putting off bad things into the future, they tend to defer distasteful things (like paying back loans or contending with inflation) until tomorrow. Mature people play chess 5 or 6 moves in advance, but amateurs only see the move in front of them.

    Self government is only sustainable when a majority of voting citizens are well educated and moral. While I don’t know the future, I am optimistic that educated and moral people will always find each other and cooperate, regardless of what the majority does.

    Thanks for your thoughtful comments.
    Joe Coco

  3. Great read. Great break from the end of college madness. What would the opposing sides rebuttal be to your argument? They must have a good one, because you demonstrated quite well how history has seemed to support your thesis.

  4. Hey Jon,

    IMO, the opposing side’s strongest rebuttal tends to be normative rather than descriptive. The opposing argument would say that the economy is a zero sum game, and the only reason we have wealthy folks is because they stole what rightfully belongs to others. Regardless of the consistent historical evidence proving steep progressive tax codes collect less revenue than flatter tax codes; raising revenue is not often the passion behind progressive tax codes. When a majority of voters believe wealth is accumulated through theft, corruption and greed, raising revenue is not as much of a motivator for taxing the wealthy (in some historical cases up to 100% of income) as returning plundered wealth back to its rightful owners.

    Hopefully others with an opposing viewpoint to my blog post will weigh in with other comments if I am off-base.

    Thanks for commenting.
    Joe Coco

  5. I don’t know whether most members of Congress even have much say in the creation of tax policy, and I don’t know whether most members even do much thinking about the bigger picture. It does appear, however, that those members who do have some say and do some thinking have made four basic assumptions about taxes. I would summarize them as follows:

    1. Progressive tax rates are the only fair way to impose income taxes. The principle is that those with relatively higher income can more easily bear the cost of government. Carried to a further level, this principle sometimes results in tax policies specifically intended to reduce the after-tax income of high income persons, just for the purpose of reducing the extent of income inequality. American political thought has long favored equality, a principle that has often taken the form of equality of condition or outcome, not just equality of opportunity because there is still some truth to the idea

    2. Taxation is a viable tool for the implementation of social objectives. This principle appears in practice in a number of taxes on products like tobacco and alcohol, presumably to discourage their use, on firearms and ammunition to fund wildlife conservation programs, and on gasoline to fund the federal highway trust fund. It also appears in the form of estate and gift taxes designed explicitly to discourage the concentration of wealth. On the other side, Congress uses credits and deductions to encourage behavior like charitable giving, investment in income-producing property, and retirement savings.

    3. Taxation is a constitutional tool for the implementation of social objectives otherwise beyond Congress’ legislative authority. The constitutional rationale derives from the “tax and spend” power found in Article I, Section 8. I would prefer to read the taxation power as a power that Congress can use for the purpose of implementing its specific legislative powers enumerated in the following clauses, a reading that I think is amply borne out by Federalist 46. But the Sebelius decision that determined that the Affordable Care Act’s individual mandate for insurance (and specifically the tax penalty for failure to procure qualified insurance) was a constitutional exercise of that power, without regard to the question of whether its object was within any of the specific legislative powers. The Court had already determined that none of the ACA could be upheld as an exercise of the commerce power and didn’t identify any other specific legislative power that Congress had exercised by enacting the ACA. The Sebelius case goes as far as any decision I know of (compare for example the Kahriger decision and Stewart Machine decision) in which Congress’ power to tax and spend has been held constitutional. Kahriger and Stewart Machine reject the Federalist 46 explanation. Sebelius doesn’t even bother to acknowledge it.

    4. Taxation need not fulfill the government’s need for money. In fact, deficit spending is good for the economy because of its stimulating effects on the economy.

  6. finishing paragraph 1 above, “. . . some truth to the idea that the rich have more opportunities to expand their wealth than the poor.”

  7. Jim,
    The rich do have more opportunities to expand their wealth than the poor. Investors with $1000 to invest only have investment options that require $1000 or less. Wealthy investors certainly can invest in $1000 opportunities, but they also can invest in $10,000, $100,000, and $1,000,000 opportunities as well. Because of the economies of scale, wealthy people can pay less to invest because of quantity discounts; and finally, wealthy accredited investors can invest in unregulated investments much easier than un-accredited investors. Although the wealthy do possess relatively more opportunities to expand their wealth, there are still ample opportunities for the poor to expand their own, and I would argue that envy is a force that prevents too many from focusing their efforts on the wealth expansion opportunities they do possess.

  8. And in your example, a person with a million dollars to invest can realize fifty thousand in income per year at five percent, while the person with a thousand dollars to invest can realize fifty dollars. Both expend equal effort and both take equal risk, but the reward is proportionate to what was available to invest.

  9. I checked my reference to the Federalist. It was 41, not 46. The question is whether Congress can tax for the purpose of achieving policy objectives which are not within the enumerated legislative subjects contained in Article I, Sec. 8. In Fed. 41 Madison argued that the power of taxation is not as broad as the terms “common defense” and “general welfare,” but were limited by the specific enumeration of powers that followed. To reason otherwise, he concluded, was to “stoop” to a misconception for the purpose of making an unfair or uninformed attack on the proposed constitution by implying that there were no real limits on Congress’ taxation power and that the enumeration of powers that followed in Sec. 8 were a purposeless “absurdity.” Any doubt as to the meaning of general terms such as “common defense” and “general welfare,” he argued, should be resolved in favor of the more specific terms that followed them.

    “Some, who have not denied the necessity of the power of taxation, have grounded a very fierce attack against the Constitution, on the language in which it is defined. It has been urged and echoed, that the power “to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States,” amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction. Had no other enumeration or definition of the powers of the Congress been found in the Constitution, than the general expressions just cited, the authors of the objection might have had some color for it; though it would have been difficult to find a reason for so awkward a form of describing an authority to legislate in all possible cases. A power to destroy the freedom of the press, the trial by jury, or even to regulate the course of descents, or the forms of conveyances, must be very singularly expressed by the terms “to raise money for the general welfare. ”But what color can the objection have, when a specification of the objects alluded to by these general terms immediately follows, and is not even separated by a longer pause than a semicolon? If the different parts of the same instrument ought to be so expounded, as to give meaning to every part which will bear it, shall one part of the same sentence be excluded altogether from a share in the meaning; and shall the more doubtful and indefinite terms be retained in their full extent, and the clear and precise expressions be denied any signification whatsoever? For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural nor common than first to use a general phrase, and then to explain and qualify it by a recital of particulars. But the idea of an enumeration of particulars which neither explain nor qualify the general meaning, and can have no other effect than to confound and mislead, is an absurdity, which, as we are reduced to the dilemma of charging either on the authors of the objection or on the authors of the Constitution, we must take the liberty of supposing, had not its origin with the latter.”

    I would suppose an explanation such as this would be highly influential on Congress and maybe even authoritative in the courts. But consider this passage from United States v. Butler decided by the Supreme Court in 1936:

    “Since the foundation of the Nation sharp differences of opinion have persisted as to the true interpretation of the phrase. Madison asserted it amounted to no more than a reference to the other powers enumerated in the subsequent clauses of the same section; that, as the United States is a government of limited and enumerated powers, the grant of power to tax and spend for the general national welfare must be confined to the enumerated legislative fields committed to the Congress. In this view the phrase is mere tautology, for taxation and appropriation are or may be necessary incidents of the exercise of any of the enumerated legislative powers. Hamilton, on the other hand, maintained the clause confers a power separate and distinct from those later enumerated, is not restricted in meaning by the grant of them, and Congress consequently has a substantive power to tax and to appropriate, 66*66 limited only by the requirement that it shall be exercised to provide for the general welfare of the United States. Each contention has had the support of those whose views are entitled to weight. This court has noticed the question, but has never found it necessary to decide which is the true construction. Mr. Justice Story, in his Commentaries, espouses the Hamiltonian position.[12] We shall not review the writings of public men and commentators or discuss the legislative practice. Study of all these leads us to conclude that the reading advocated by Mr. Justice Story is the correct one. While, therefore, the power to tax is not unlimited, its confines are set in the clause which confers it, and not in those of § 8 which bestow and define the legislative powers of the Congress. It results that the power of Congress to authorize expenditure of public moneys for public purposes is not limited by the direct grants of legislative power found in the Constitution.

    “But the adoption of the broader construction leaves the power to spend subject to limitations.

    “As Story says:

    “The Constitution was, from its very origin, contemplated to be the frame of a national government, of special and enumerated powers, and not of general and unlimited powers.”[13]

    Again he says:

    “A power to lay taxes for the common defence and general welfare of the United States is not in common sense a general power. It is limited to those objects. It cannot constitutionally transcend them.”[14]

    “That the qualifying phrase must be given effect all advocates of broad construction admit. Hamilton, in his 67*67 well known Report on Manufactures, states that the purpose must be “general, and not local.”[15] Monroe, an advocate of Hamilton’s doctrine, wrote: “Have Congress a right to raise and appropriate the money to any and to every purpose according to their will and pleasure? They certainly have not.”[16] Story says that if the tax be not proposed for the common defence or general welfare, but for other objects wholly extraneous, it would be wholly indefensible upon constitutional principles.[17] And he makes it clear that the powers of taxation and appropriation extend only to matters of national, as distinguished from local welfare.

    “As elsewhere throughout the Constitution the section in question lays down principles which control the use of the power, and does not attempt meticulous or detailed directions. Every presumption is to be indulged in favor of faithful compliance by Congress with the mandates of the fundamental law. Courts are reluctant to adjudge any statute in contravention of them. But, under our frame of government, no other place is provided where the citizen may be heard to urge that the law fails to conform to the limits set upon the use of a granted power. When such a contention comes here we naturally require a showing that by no reasonable possibility can the challenged legislation fall within the wide range of discretion permitted to the Congress. How great is the extent of that range, when the subject is the promotion of the general welfare of the United States, we hardly need remark. But, despite the breadth of the legislative discretion, our duty to hear and to render judgment remains. If the statute plainly violates the stated principle of the Constitution we must so declare.”

    Hamilton’s explanation of Congress’ power to tax came after ratification in his 1791 “Report on Manufactures” in which he advocated a number of tariffs designed to promote the expansion of an American manufacturing industry. I admit that his meaning is somewhat difficult to follow in light of Madison’s explanation:

    A question has been made concerning the constitutional right
    of the Government of the United States to apply this species of
    encouragement; but there is certainty no good foundation for
    such a question. The National Legislature has express authority
    “to lay and collect taxes, duties, imposts, and excises, to pay the
    debts, and provide for the common defence (1012) and general
    welfare,” with no other qualifications than that “all duties,
    imposts and excises, shall be uniform throughout the United
    States; and that no capitation or other direct tax shall be laid,
    unless in proportion to numbers, ascertained by a census or
    enumeration, {250} taken on the principles prescribed in the
    constitution,” and that “no tax or duty shall be laid on articles
    exported from any State.”
    These three qualifications excepted, the power to raise money
    is plenary and indefinite, and the objects to which it may be
    appropriated, are no less comprehensive than the payment of the
    public debts, and the providing for the common defence and
    general welfare. The terms “general welfare” were doubtless
    intended to signify more than was expressed or imported in those
    which preceded; otherwise, numerous exigencies incident to the
    affairs of a nation would have been left without a provision. The
    phrase is as comprehensive as any that could have been used;
    because it was not fit that the constitutional authority of the
    Union to appropriate its revenues should have been restricted
    within narrower limits than the “general welfare;” and because
    this necessarily embraces a vast variety of particulars, which are
    susceptible neither of specification nor of definition.
    It is, therefore, of necessity, left to the discretion of the
    National Legislature to pronounce upon the objects which
    concern the general welfare, and for which, under that
    description, an appropriation of money is requisite and proper.
    And there seems to be no room for a doubt, that whatever
    concerns the general interests of learning, of agriculture, of
    manufactures, and of commerce, are within the sphere of the
    national councils, as far as regards an application of money.
    The only qualification of the generality of the phrase in
    question, which seems to be admissible, is this: That the object,
    to which an appropriation of money is to be made, be general,
    and not local; its operation extending, in fact, or by possibility,
    throughout the Union, and not being confined to a particular
    spot.
    No objection ought to arise to this construction, from a
    supposition that it would imply a power to do whatever else
    should appear to Congress conducive to the general welfare. A
    power to appropriate money with this latitude, which is granted,
    too, in express terms, would not carry a power to do any other
    thing {251} not authorized in the constitution, either expressly
    or by fair implication.

    Even though the Butler decision held the Agricultural Adjustment Act invalid on 10th amendment grounds, its explanation of the breadth of Congress’ power to achieve ends not enumerated in Art. I, Sec. 8 left the Court considerable room to uphold “regulatory” taxes in a broad variety of contexts. I’m unable to locate in Sebelius a principle upon which the taxation power is limited except specific prohibitions contained in the constitution such as ex post facto or Bill of Rights prohibitions. Madison’s description of what the taxation power was not supposed to accomplish is precisely what it has accomplished. Joseph Story’s explanation quoted in Butler that the power to tax is limited only by the qualifiers “common defense” and “general welfare,” rather than by the enumerated powers that follow in Sec. 8 completely undercuts Madison’s argument in support of ratification, and appears to me to exceed even Hamilton’s explanation which, notwithstanding some very broad statements, remains qualified by his final paragraph, conceding that the power to tax “would not carry a power to do any other thing not authorized in the constitution,” though how he squares that concession with his previous description of a “plenary and indefinite” power is really not clear.

    In my mind, then, the conflict over limitations on subjects within Congress’ legislative competence has shifted from the power to regulate commerce among the states to the taxation and spending powers, and few limits to the taxation power are discernible. Here’s what the Sebelius opinion says about Congress’ power to “influence” behavior through taxation:

    “Whether the mandate can be upheld under the Commerce Clause is a question about the scope of federal authority. Its answer depends on whether Congress can exercise what all acknowledge to be the novel course of directing individuals to purchase insurance. Congress’s use of the Taxing Clause to encourage buying something is, by contrast, not new. Tax incentives already promote,for example, purchasing homes and professional educations. See 26 U. S. C. §§163(h), 25A. Sustaining the mandate as a tax depends only on whether Congress has properly exercised its taxing power to encourage purchasing health insurance, not whether it can. Upholding the individual mandate under the Taxing Clause thus does not recognize any new federal power. It determines that Congress has used an existing one.

    “Second, Congress’s ability to use its taxing power to influence conduct is not without limits. A few of our cases policed these limits aggressively, invalidating punitive exactions obviously designed to regulate behavior otherwise regarded at the time as beyond federal authority.See, e.g., United States v. Butler, 297 U. S. 1 (1936); Drexel Furniture, 259 U. S. 20. More often and more recently we have declined to closely examine the regulatory motive or effect of revenue-raising measures. See Kahriger, 345 U. S., at 27–31 (collecting cases). We have nonetheless maintained that “‘there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.’” Kurth Ranch, 511 U. S., at 779 (quoting Drexel Furniture, supra, at 38).

    “We have already explained that the shared responsibility payment’s practical characteristics pass muster as a tax under our narrowest interpretations of the taxing power. Supra, at 35–36. Because the tax at hand is within even those strict limits, we need not here decide the precise point at which an exaction becomes so punitive that the taxing power does not authorize it. It remains true, however, that the “‘power to tax is not the power to destroy while this Court sits.’” Oklahoma Tax Comm’n v. Texas Co., 336 U. S. 342, 364 (1949) (quoting Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U. S. 218, 223 (1928) (Holmes, J., dissenting)).

    “Third, although the breadth of Congress’s power to tax is greater than its power to regulate commerce, the taxing power does not give Congress the same degree of control over individual behavior. Once we recognize that Congress may regulate a particular decision under the Commerce Clause, the Federal Government can bring its full weight to bear. Congress may simply command individuals to do as it directs. An individual who disobeys may be subjected to criminal sanctions. Those sanctions can include not only fines and imprisonment, but all the attendant consequences of being branded a criminal: deprivation of otherwise protected civil rights, such as the right to bear arms or vote in elections; loss of employment opportunities; social stigma; and severe disabilities in other controversies, such as custody or immigration disputes.

    “By contrast, Congress’s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more. If a tax is properly paid, the Government has no power to compel or punish individuals subject to it. We do not make light of the severe burden that taxation—especially taxation motivated by a regulatory purpose—can impose. But imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.11”

    Apparently the point is that taxation isn’t the same as coercion, so it is within Congress’ power to levy taxes for the purpose of influencing behavior. Never mind that the behavior has nothing to do with commercial activity or anything else Congress has the explicit or implied power to control by legislation. Nothing in the constitution says Congress can’t tax for this or that purpose, so it can tax, even when the purpose for the tax would not be within Congress’ power to regulate directly. That rationale turns the concept of federal government as one of limited, enumerated powers completely upside down.

  10. The opinion of courts and the the nature of the universe aren’t necessarily the same thing. Properly vetted, an ambitious president with the consent of the Senate can find 5 justices to opine just about anything. IMO, the role of the courts is rule on the constitutionality of laws, but it is the role of the legislature to pass laws (and since the 17 Amendment) exclusively for serving the people they represent. When Congress serves its constituency by passing popular laws that will do harm in the aggregate, natural law is always in the shadows ready to right all wrong popular decisions.
    Raising taxes on the wealthy, or using the tax rudder to steer the economy may be legal under man’s law, but it violates natural law; as a result, those who advocate such legislation will tend to hurt the very people they tend to represent.

  11. I agree. It’s challenging (and probably hazardous) to speculate on how people might be hurt, but at least one trend that has developed well enough to create some concern is the concentration of wealth that results from debt financing, particularly when the holders of debt are large institutional investors and foreign central banks. An interesting study a few years ago (by the Congressional Budget Office as I recall) responded to the question of who holds federal debt overseas and how those debt holders whose geopolitical interests may differ from our own or those of our allies may use their position as creditors to influence U.S. policy. Certainly there will always be market-based constraints against black-mailing the U.S. government, but under present trends our government’s creditors are already experiencing some anxiety about U.S. monetary policy.

    In 2012, famously, the governor of the People’s Bank of China made a speech outlining the Triffin Dilemma, referring to an analysis by a Yale professor some years ago of the international trade system. Under that analysis, a government whose currency was the standard of value for international trade would be tempted to pursue inflationary policies if it became a net debtor in international trade relationships. Obligations payable in dollars, in other words, would be of less value to the creditors over time. The same is true of U.S. government debt instruments (including dollars) held by central banks in other countries. When a manufacturer in Shanghai deposits its dollars into the Chinese banking system for the sake of converting dollars from WalMart into yuan, those dollars eventually end up on the People’s Bank’s balance sheet. If the People’s Bank uses those dollars to buy U.S. Treasury certificates (and it has about $1.3 trillion last I heard) it stands to lose on its investment unless the interest rate exceeds the rate of inflation on the dollar. So the governor of the central bank suggested that the dollar be replaced with a new measure of value, something along the line of “trade credits” administered by an international exchange fund.

    That’s a mild example, but would involve a significant rebuff to U.S. economic power and policy. Other forms of efforts to influence U.S. monetary or fiscal policy could be more blunt, like refusing to invest in U.S treasuries if, for instance the U.S. authorized sales of military hardware to Israel, Japan, or Taiwan. Or a large, multinational corporation or a trade cartel such as OPEC could put pressure on our policy-making system to change tariff or export policies, adjust treaty commitments, or decrease its money supply, either by changes to the Federal Reserve’s interest rate or limiting debt financing of federal operations. Maybe it could involve pressure to reduce our military spending, our research and development budget, or our nuclear deterrence capacity. In any case, U.S. policy makers in the future will increasingly have to show a heightened level of sensitivity to persons, governments, or corporations that are not responsive to our electoral system simply because we have allowed them to accumulate so much of our debt.

  12. The rich ruleth over the poor, and the borrower is slave to the lender.

    More nations have been conquered by debt than by invading armies. The problem with debt financing is it gives the illusion of working in the beginning. Living beyond one’s means always feels good until the line of credit runs out.

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