The Income Tax: Still a Tool of Plunder

Murray Sabrin

The New Jersey state income tax will be 30 years old in 2006, and the hosannas are starting to appear in the press. In yesterday’s Star-Ledger, Jon Shure, president of New Jersey Policy Perspective, a “progressive” think tank, sings the praises of former Governor Brendan Byrne’s gift to Garden State, the income tax.

When the New Jersey income tax was introduced there were two rates, 2 percent and 2.5 percent on incomes above $20,000. Currently, the top rate is 8.97 percent on income above $500,000---Jim McGreevey’s “millionaire tax,” which was relentlessly advocated by Shure and others a couple of years ago to fill the state coffer to close the state budget deficit.

So the “modest” state income tax of 2.5 percent on incomes above $20,000 has now climbed almost four fold to nearly 9 percent. In short, once the government gets its clutches on the people’s money, rates invariably climb for virtually all taxpayers.

That’s the lesson of public finance. Once a tax is introduced it almost always increases. The federal income tax, for example, exempted 98 percent of the population when it was instituted in 1914, and the highest marginal tax rate was 7 percent. By the end of 1917, the highest marginal rate climbed to more than 70 percent and most income earners were paying a federal income tax.

In other words, the federal income tax initially funded America’s entry into World War I, and then was used to help create the welfare state in the 1930s. The income tax has been an indispensable tool to plunder Americans to finance the welfare-warfare state for more than 90 years. Without the ability to tax the American people directly, the federal government could not have grown as rapidly as it did for nearly 100 years.

But I digress; back to New Jersey. Jon Shure’s defense of the income tax fails miserably, and his call for it to be hiked ignores major economic, financial and philosophical objections to the progressive income tax.

Although Shure is not an economist by training, he should have taken the time to do so homework about the economics of taxation. He then would have learned that raising taxes does have negative effects on employment, output and eventually brings in less government revenue than the proponents of high tax rates hope for. All taxes create disincentives. The evidence is abundant. As tax rates increase, people tend to work less, produce less and avoid taxes (which is legal) or evade taxes (which is illegal), to protest what they perceive to be government confiscation.

People react differently to government policies. The most tax sensitive individuals will do all they can to reduce their tax liability, while the folks who are happy to pay higher taxes will not complain, because they think the government is doing God’s work on earth in addressing the needs of the “poor” and middle income families.

The evidence is compelling. Higher tax rates reduce tax receipts. (Not that we want to see tax revenue increase.) This was known as far back as ancient Egypt, when the tax collectors realized that high tax rates reduced the amount of revenue flowing into the treasury. Yet for thousands of years, big government types have wanted to raise rates in country after country in the mistaken belief that would cause the treasury to bulge with tax dollars.

In another vein, Shure makes the egregious statement that the income tax is “fair” because it is based on the ability to pay. Who says so? Why should individuals be taxed on the “ability to pay?” Shure offers no defense of his assertion. Goods and services in the economic marketplace are based on the law of one price. All goods tend to have one price for all consumers, no matter what their income is. Could you imagine going to the supermarket or the mall and the goods your purchase would be based on your annual income? You would be outraged. Yet, the income tax, one of Karl Marx’s ten planks that he believed would eventually create a communist society, is supported by politicians across the political spectrum.

In short, ideas matter. And bad ideas matter a lot.

As far as government services are concerned, privatization and nonprofitization would provide better and lower priced services to the public than government. In other words, a limited government society would be more prosperous and freer than the status quo of high taxes, profligate spending and burdensome regulations.

Lastly, proponents of the income tax fail to address the most powerful critique of the income tax and of taxation in general. As Frank Chodorov, author of The Income Tax: Root of All Evil, wrote: “There cannot be a good tax nor a just one; every tax rests its case on compulsion.”

That’s the debate that Jon Shure and other advocates of taxation do not want to engage in. Why should government be allowed to engage in plunder? Private citizens cannot use compulsion, coercion or violence against their fellow citizens. A just government must adhere to these same principles.

Let the debate again: Liberty and freedom versus coercion and compulsion.


Murray Sabrin, Ph.D., is professor of finance in the School of Business, Ramapo College of New Jersey, where he is also executive director of the Center for Business and Public Policy, www.ramapo.edu/cbpp.