The Power to Tax Destroys Freedom, Prosperity and Market Efficiency

By: Fred_Buzzeo

The landmark Supreme Court decision McCullough v. Maryland (1819) has had wide impact on the powers of the federal government. In fact, this decision, more than any other, is responsible for the incredible growth of federal authority throughout the years. Today, Washington has a tight grip on every aspect of our lives, and much of this federal intrusion is due to the "implied powers" doctrine that emanated from this court decision.

In the case, the clerk of the Bank of the United States, James McCullough, brought action against the state of Maryland. In opposition to the national bank, Maryland had imposed a tax on the Bank of the Unites States — hoping to tax it out of existence. McCullough took the position that such a tax was an unconstitutional interference with the activities of the federal government by a state — in this case Maryland. Therefore, McCullough brought action to stop Maryland from taxing the national bank out of existence.

Pleading the case on behalf of McCullough, the eminent jurist Daniel Webster argued that Maryland had no authority to tax the bank. The essence of his argument was quite simple: "An unlimited power to tax involves, necessarily, a power to destroy."

The court agreed. Speaking for a unanimous court, Chief Justice John Marshall echoed Webster's words. He wrote, "The power to tax implies the power to destroy. If the States may tax one instrument, may they not tax every other instrument…? This was not intended by the American people."

Consequently, with the help of these two highly esteemed jurists, we have conclusively settled a point of contention among many scholars — that the unlimited power to tax is the power to destroy, clear and simple. And without question, the government has an unlimited power in this respect.

Let us now examine some of the many ways in which the power to tax destroys.

The Power to Tax Destroys Freedom

In order to have an effect, laws must be enforced. The enforcement mechanism is the bureaucracy. Without a bureaucratic system of enforcers, laws would be just a collection of restrictive words on fancy parchment. This is why President Jackson said of another case during the Marshall court, "John Marshall has made his decision. Now let him enforce it." This was a reference to the obvious fact that the chief justice did not have an army of bureaucratic enforcers to put his words into action.

For the sake of clarity, I do not advocate the abolition of all laws. However, we must define legitimate laws as those that prohibit an act that is in itself bad. An example of this type of law is one that prohibits the infliction of bodily injury on another. Those laws that make an otherwise innocent activity unlawful are simply political in nature. They are what the philosopher Thrasymachus, best known as a character in Plato's Republic, labeled "the advantage of the stronger."

In order to enforce the "advantage of the stronger," an increasingly larger bureaucracy is needed. And in order to fund this bureaucratic watchdog, money is needed. Without money, there would be no bureaucracy and there would be no army of legislative staff members writing truckloads of laws aimed at limiting your "inalienable rights."

The money to feed this bureaucratic Goliath comes from your taxes! Since the inception of the income tax, government intrusion into our lives has grown by leaps and bounds. According to the Tax Policy Center, 57 percent of federal tax revenue comes from individual and corporate income taxes. An additional 36 percent is appropriated through the payroll tax. Since 1950, the individual income tax has been the largest growth area of federal-government tax revenue.

According to the US Census Bureau, there are 2.8 million civilian employees working for the federal government and paid for with your taxes. The state governments employ an additional 5.3 million civilians. These employees are dispersed throughout countless agencies, bureaus, and divisions.

I was once briefly associated with a local politician who constantly reminded his constituents that he had authored over 120 pieces of legislation. He thought that this was a big accomplishment on his part and a reason he should be elected to higher office. However, I was confused as to whether he was running for an elective office in New York or for a seat on the Soviet Politburo!

In any event, without the confiscatory tax system, all of these laws and regulations that limit your freedom would not be possible. We would see a return to the days when the American government was small, the free-enterprise system was strong, and the visions of the Founding Fathers were still present in the body politic.

The Power to Tax Destroys Prosperity

Quite simply, if one is taxed, he has less money either to invest or to spend. The higher the tax rate, the more money is taken from those individuals who can invest and create economic opportunity for themselves and for others.

An accumulation of capital is essential to increase the productive capacity of a nation. Therefore, it is important to understand the true meaning of savings. When money is deposited in a bank, it is usually lent out to someone else. The money is then used either to invest in business expansion or to purchase the products produced by business — cars, televisions, boats, etc. An accumulation of wealth is essential for a prosperous economy.

Cuba does not allow an accumulation of wealth. It was recently reported in the press that the Cuban leadership will now allow limited monetary payment to employees. However, the Communist administration will still not allow anyone (except themselves, of course) to accumulate wealth. Is there any doubt as to why there is no capital formation and viable industry on that island?

In the United States, a supposedly capitalist nation, wealth is taxed at all levels. For example, if you sell a piece of real estate for more money than you bought it for, the gain from the transaction is taxed. This is so even though the gain was due to your foresight and entrepreneurship. The taxman is a silent partner with a participation in your profits, even though those profits were the result of your business sense. The same scenario exists if your gains were the result of profits made in stocks, bonds, or commodities.

If you are a wealthy person, beware. The estate tax will destroy what you have created through your hard work and diligence. Unless you have spent a small fortune on financial planners, accountants, and tax attorneys, the fruits of your labor may be enjoyed by the government instead of by your heirs. Even when family members are active participants in making a business successful, there is no guarantee that they will not be supplanted by the government through a confiscatory system of taxation.

One of the main reasons that many small business establishments have difficulties is because of the regulations and tax burdens imposed upon them. A small business is subject, not only to income taxes, but also to a host of others taxes and requirements. These include the payroll tax, workmen's compensation insurance, and a list of fines aimed at fattening the government coffers. If small business fails, the economy will stumble because small business is a major engine of employment growth.

Parenthetically, we should not fall prey to the class warfare that is so often employed by the taxman. Discussing politics, an electrician who once worked for me stated, "I have no problems with rich people. I need to make a living. I never benefited by being hired by a guy who didn't have the money to pay me." This is an important point that should be kept in mind by all those looking for a job.

The Power to Tax Destroys Market Efficiency

Beginning with Joseph Stalin, Soviet leaders engaged in centralized, nationwide efforts toward rapid economic growth. At first, these so called five-year plans emphasized heavy industry. By 1970, the focus had shifted to the production of consumer goods.

In fact, Paul Samuelson was so impressed with Soviet industrial production that he believed it would surpass that of the United States, even in light of undeniable facts to the contrary published in his own textbooks. He referred to unregulated capitalism as "a fragile flower bound to commit self-suicide." Though I must admit that I am perplexed as to how a flower commits suicide, I am even more perplexed as to how deregulation causes "capitalist suicide."

Nevertheless, the Soviet Union collapsed under the weight of its centralized economy. The reason for this is that planned economies are inefficient. Central planners cannot properly gauge the sentiments of consumers.

The tax system in the United States produces the same inefficiencies as did the planned economy of the former Soviet Union. When a tax is imposed, money is taken away from individuals and spent by government. And, as the Soviet example has proven, government is an inefficient producer of goods. The reason for this is simple: central planners do not have the mechanism to determine what consumers want.

When government planners produce, they do so based upon political directives. Obamacare is a perfect example of this. Although highly unpopular with the American public, healthcare reform has been pushed through Congress simply to achieve the administration's political goal. Unless repealed, it will result in the misallocation of resources and higher healthcare costs for all.

Central planning does not work because the central force behind economic decision-making is the individual. Rothbard explains, "Only individuals have ends and can act to attain them. There are no such things as ends of or actions by 'groups,' 'collectives' or 'states,' which do not take place as actions by various specific individuals."

Therefore only an individual can determine what products should be produced. The actions of producers must focus on the needs and desires of the individual expressing his utility in the marketplace. The producer needs to get it right because his capital is at risk.

Money given to a bureaucrat to spend is inefficient because there is no at-risk capital. If a mistake is made, the project is simply terminated or more money is thrown at it until it achieves a politically favorable outcome. However, as in the Soviet case, no economy can sustain this structure for very long.

Free-market capitalism has given the consumer more goods and services than any other economic system ever employed. It is the only system in which the consumer is king. If an entrepreneur does not gauge the desires of consumers correctly, he will not be in business for long. This is not the case with the central planner. From this stems the inefficiency of taxation.

Conclusion

There are many other ways in which the power to tax destroys. Nevertheless, the point has been made. Taxes are an unproductive waste of resources.

The current administration is wrestling with a trillion-dollar-plus budget deficit. This deficit was created by a massive government intervention into the economy — one supposedly aimed at creating jobs.

But what has this intervention accomplished? Not much. Unemployment is still high, commodity prices are skyrocketing, and credit is still tight. Obviously, the Keynesian-induced tinkering with fiscal and monetary policy has once again fallen short of success.

Does the administration acknowledge this undisputable fact? Obviously not, since it is attempting to push through Congress another massive tax hike! Ironically, the president is trying to justify his tax increase by stating that the deficit is a "major job killer." He seems to have gotten the connection between budget deficits and slow job growth. Is it possible that he picked up a copy of Economics in One Lesson and actually read it?

Fred Buzzeo is a real-estate developer and as a consultant to small property owners in the New York City area. He resides with his wife and two sons in the Town of Oyster Bay, (Long Island), NY. During the 1990s, he held executive positions in city municipal government. It is during this employment that he saw firsthand the pitfalls of government intervention and regulation. Send him mail. See his article archives. Comment on the blog.

© Copyright Fred Buzzeo 2011

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