Tax Philosophy in America; a Brief History

The United States has been blessed with an abundance of natural resources unlike most any other nation in the world from the very beginning of our nation. Plentiful rich land for expansion, an abundance of coal, oil, natural gas, and a mostly congenial and mild climate combined to make this a haven for those willing to work hard and have an independent spirit for the better part of three centuries now. Combine this with rich soil, and almost limitless supplies of fresh water and wild game and you begin to get a feel for how uniquely rich this country has been since its inception. It is hard to overstate the fact that much of the rich character of our nation is directly attributable to the vast bounty in natural resources that our part of the continent of North America contained when the first settlers from Western Europe set foot here. We as Americans are fond of bragging about the individualism and entrepreneurial spirit that made us the greatest economic and military power in the world today without giving due credit to the vast richness the land held when we came here.

At the outset of the experiment that the United States government is we were almost overwhelmingly an agricultural nation. What made this country unique from so many of the nations of Western Europe where so many of the original immigrants came from was the heretofore unimaginable amount of land available for the taking. This is the only nation of the western world where for centuries there was more land available than people to work it. This led to low prices on land and high prices on labor; both uniquely and vastly different from what the rest of the western world knew as normal. It was this great abundance of land that financed much of our government expense for most of the first two centuries of our existence as a nation. Money from the public sale of these lands along with moderate tariffs on imports from overseas provided the great majority of revenues that our government needed to survive. While much of Western Europe struggled with high taxes and all manner of attempts to raise enough revenue to cover expenditures Americans were for the most part completely unconcerned with such problems.

Indeed the American Revolution by which we as a country gained our independence from Great Britain was largely fought over Americans refusal to pay taxes to the British government. Great Britain believed that since she had provided the military that fought two wars against foreign powers and Native American allies to these powers, the colonies should share in the high taxes these expenditures had levied on her citizens in Great Britain and other colonies of the crown. American colonial leaders disagreed. It is worth noting here that even at that time the preponderance of this tax burden fell upon the first wealthy class that had sprung up in this nation. These taxes that American colonial leaders found so objectionable were not levied on the average American small farmer they were taxes on the merchant and planter class; the wealthiest Americans.

As Adam Smith in his "Wealth of Nations" notes; it is the division of wealth that is in many ways the root cause of government expense to begin with. If all nations are equal in wealth there is little motive for one nation to attack another. If all citizens within a country are equal in wealth there is little reason for the expensive protections government provides in the form of justice systems, police, and standing armies. It is the division of wealth, furthermore the unequal division of wealth that makes stronger central governments necessary. Central governments from the very beginning of civilization have been necessary to support property rights. John Locke, the enlightened thinker from whom Jefferson borrowed the immortal "Life, Liberty, and the Pursuit of Happiness" in the opening of the Declaration of Independence, stated the function of all government more clearly as the protection of "Life, Liberty, and Property". While both Jefferson and Locke agree that all true governments receive their power from the consent of the governed Locke was much more honest about the three basic rights governments have the duty to protect. In other words, justice systems, courts, police, and to a great extent national armies are necessitated by the need to protect property rights. In largely agrarian societies with equal wealth smaller, less expensive governments have always sufficed. An axiom that Smith well recognized is that the larger the division of wealth within a nation, the more complex and expensive the government system that is needed to support it.

Smith spends a great deal of time in his book explaining this theory. It is the basis for his justification for taxing the populace in proportion to their wealth. After all, if they are the reason why a larger more expensive government is necessary, they should be willing to pay for it in proportion to their need. This is an important point and one that we seem to have lost sight of in this country in the recent past. Much of our governmental effort goes into protecting the business interests of our wealthiest citizens. Our nation's foreign policy since the beginning of the 20th century has been overwhelmingly slanted towards protection of the largest business interests in the country. When we were an isolationist nation with little business interests outside of our borders we had little need of a huge military or a large and expensive state department. As corporate giants began to dominate the market place both here and abroad our government grew to protect and support their interests.

When the bulk of this nation was agrarian we had little need of a large central government. For much of the first 120 years of our history as a nation this held true. However, with the growth of corporations, manufacturing interests and international trade interests at the end of the nineteenth century this began to change. This change was manifested in our growing involvement in international affairs on a national basis. We didn’t become intimately involved in international affairs through a national referendum; we became involved because of the growing influence of a wealthy class of Americans whose financial interest necessitated a strong military and diplomatic international presence to support their interests. Anyone who takes the time to read the writings of our founding fathers will find them almost unanimous in their disdain for a strong central government supported by large standing armies. This is because as an agrarian nation, we had no need of such exigencies, but as an economic leader in world financial centers this is no longer the case. I don’t think anyone would sensibly argue we don’t need a standing army today or an international diplomatic corp. Aside from those who believe we should revert to being an agrarian nation, everyone understands this is simply a necessity in today’s world.

It was our nation’s rise as an industrial nation that necessitated the growth of our government. In other words, the growth of wealth in this country led to our becoming a leader in the world and this wealth also has costs associated with it that we pay in the form of a larger, more expensive government. You simply cannot have one without the other. Therefore, since it is the wealthiest among us who profit the most from this system they should pay the largest share of the expense in maintaining it. This has been the basis for a fair system of taxation from the very beginnings of organized governments. To quote from Smith again;

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.

The growth of corporate power in this country is another reality that we seem to not understand very well as a voting public. Corporations have gained legal status that allows them to have many of the same rights as individuals without the requisite liability of an individual. Just for example, the Supreme Court recently ruled that corporations have the same right of free speech as individuals so they should not be limited as to how they contribute to campaigns of their favorite candidates. While this may seem plausible on its surface it covers up the fact that as an individual you and I are responsible for all of our actions to the very limits of our financial ability to cover them while corporate leaders are only liable as far as their corporate finances while their individual finances are beyond the ability of a court to reach. This is just one example of how the vast capabilities of large corporation’s wealth don’t match their culpability in our legal system. There are many others that favor corporations which is exactly why their success has been tied so closely with the growth of our nation’s power and the growing division between the wealthiest 1% of Americans and the rest of us. I don’t believe corporations are evil entities but they are favored entities under the legal system of this country which is exactly why they have so much wealth and requisite power in our government today.

It is in their best interests that many of the foreign policy decisions that the rest of us pay for are routinely made. Receiving the great abundance of favor that such decisions afford them, one would think that they would happily pay the heaviest share of the expenses put forth to gain them but that is not what is going on in this country today. Since the Reagan revolution we have seen a steady increase in corporate profits along with a steady decrease of the amount of revenue the government receives from them. It is true that the Corporate Tax Rates in this country are high compared to most other industrialized nations (close to 35%). However, what is also true is that tax loopholes that have progressively been extended throughout the last 30 years have reduced the actual tax liability of corporations to all time lows. In 1978 the percentage of total tax revenue raised in this country off of tax revenue on corporations was 15% as opposed to some 47% in individual income taxes at the same time that corporations took in some 40% of the total profits realized. In 2009 the percentage of revenue gathered from corporations was 6% as opposed to 46% in individual income taxes. In other words, corporations which took in some 70% of the total profits made in this country paid 6% of the taxes collected. Looked at another way if corporations earn 70% of the profits and pay 6% of the revenue they are paying a vastly smaller percentage of the cost of the government that makes their profit margin possible while at the same time capitalizing on the protection government affords them. Taking into account the recent rulings on campaign contributions by corporations it is easy to see how this vast increase in profit margins will allow them to continue to consolidate control over the election process in the near future.

Beyond the unlevel playing field of corporate America is another level of unequal taxation the Reagan revolution ushered in that is just as devastating to the deficit. The highest tax brackets in this country have historically paid some 70-90% in income taxes. Again, this is the group of Americans who profit the most from the business environment that our large government creates through subsidies, government research and development grants, and foreign policy decisions built around protecting the financial interests of this same group of people. This same group of people today typically pays some 15% on their income taxes by the time all the loopholes available to them through tax attorneys and favorable legislation are assessed while the average upper middle class citizen pays close to 30% on their income taxes in direct payroll deductions. This is exactly why the upper 1% of the wealthiest Americans now own 45% of the wealth of this country as opposed to the 18% they owned when Reagan came into office.

Without a doubt we as a country have some serious problems as far as our financial situation. We are continually spending more than we take in which is obviously unsustainable. The question is what do we do about it? Do we continue to slash government programs until we can subsist on the lower revenues our present tax codes provide or do we believe that it is both necessary and proper for the government to provide basic services and increase our revenues through higher taxation on corporate profit? The ugly truth we seem to be ignoring is that our government which has steadily grown more and more to be controlled by corporate interests in the financial interests of the wealthiest Americans has at the same time continuously reduced their responsibility for paying the bills. The good news is that we are approaching a point to where these questions will have to be answered. The bad news is that we don’t seem to realize why or how we got into this situation. Corporate interests of the wealthiest Americans continue to gain more control of our government while at the same time increasing their profit margins by cutting the amount of taxes they pay while pointing to the poorest among us as the financial drain on the economy. The choice is ours to make. We can either institute a taxation system based upon the timeless values of equal taxation espoused by Adam Smith above or we can continue our present system of unequal taxation and see the eventual financial collapse of our government as we now know it. What we cannot do is expect to continue on the path we are presently on without facing up to where it is leading us.