By - June 22, 2011

Involuntary Servitude and Taxes

Indentured Servitude and Taxes

Involuntary Servitude and Taxes

The following applies to slavery, but also gives us something to talk about as far as taxes are concerned.

The Thirteenth Amendment to the United States Constitution provided an end to slavery in America, stating:

“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”

The question I would put before all Americans, concerning taxes, is whether we are now willing to embrace this right and live up to the obligations of a free people.

All rights come with great responsibilities.   Few would dispute the common understanding all citizens bear an obligation to support the legitimate expenses of their government.

But, as Supreme Court Chief Justice John Marshall, in the Supreme Court case McCulloch v. Maryland, noted “An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.”

Recently, America hit its current authorized debt ceiling of $14.294 trillion, although through some accounting gimmicks the Treasury Secretary will be able to keep borrowing until approximately August 2nd.  No compromise, on the budget or taxes, has yet been reached.

A trillion is a thousand billions.  A billion is a thousand millions.  In contrast, the population of the entire United States is just over 300 million.

Shortly after tax day, on April 17, 2011, press articles noted the bottom 45 percent of all Americans will pay no income taxes to the federal government in 2010.  In contrast, the top 5 percent of earners – households earning more than $160,000 per year – accounted for about 59 percent of all federal income taxes paid.  The next 45 percent – taxpayers earning between $33,000 and $160,000 – accounted for about 39 percent of all personal income taxes paid.

Thus, the bottom 50 percent of wage earners accounted for the remaining sliver of tax revenue, with 45 percent paying no federal income taxes whatsoever.

On one end, we have half of the people of the United States paying no income tax and on the other side, we have 5 percent of the highest incomes paying 45 percent of all income taxes.  That is not to say the poorest workers will continue to pay 15 percent of their wages (including their employer’s match) in FICA taxes, which the Treasury borrows and spends for the “general welfare.”

Unfortunately, the taxes collected from all sides are not sufficient to keep pace with federal expenditures.  The bipartisan budget agreement also reached in April provided for the largest budget deficit in history of $1.6 trillion dollars, requiring the government to borrow $188 million per hour.  This is not to be confused with our $14 trillion debt or $60-$100 trillion in unfunded mandates for entitlement programs such as Social Security, Medicaid, and Medicare.

President Obama has pushed to raise the tax rate on families earning more than $250,000 after 2012; however, nonpartisan Public Notice documented, if Washington wanted to hoist tax rates to actually cover spending, the top tier rate for income taxes would go from 35 to 88 percent; the middle tier from 25 to 63 percent and the lowest tier for income taxes from 10 to 25 percent.  What would this do to our recovery from recession?

A marginal tax rate of 88 percent – confiscating 88 cents of every dollar  – seems like involuntary servitude to me.  For that matter, is a tax rate of 33 percent, or a third of every dollar earned less of an involuntary servitude?  Payers would be working a third of the year without compensation.

Would Americans agree to pay 20 percent of our income and agree to be excluded from all future government transfer payments and tax deductions and credits to be left at 20 percent?   To be left alone?

Many would be quick to point out no one really pays the top marginal rate because there are so many holes in the tax code for credits and deductions, a celebration of the complexity of filing our taxes.  As Will Rogers wry noted, “The income tax has made more liars out of the American people than golf has.”

In a market economy, consumers get to vote with their dollars, selecting products and services based on their own wants and desires.  Their own preferences.  It incentives personal choice and personal responsibility.  When government spends on our behalf, this freedom is lost to us.

The problem with sending money to Washington, DC (or a state capital) to be spent on projects for the public good – even for things we need – is that a certain percentage of it is going to be wasted as a transaction costs, to pay for this government oversight and management.

More lamentably, we also know another percentage of the money, again…taxes, is going to be wasted on items we don’t need as Appropriations Committee members trade favors for their districts.  Congressmen and Senators pick winners and losers based on parochial special interests.

Finally, we know that anytime Person A spends Person B’s money for the benefit of Person C, he is never going to be as careful as he would spending his own money.

We are at a precipice.  We must raise taxes or we must constrain spending.  If we raise our debt ceiling and continue to spend, we must raise taxes.  When does our level of taxation (taxes) reach a level of involuntary servitude?

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