Why Repeal the 16th Amendment?

Liberty lovers everywhere would love to be done with the modern income tax; we all know it, the one where they withhold the tax from our paycheck and then we file a return every year hoping we overpaid and are due a tax refund.  

Faulty Interpretation

The standard narrative, from its opponents, of how we got the income tax goes something like this:  For the first one hundred years of our history the federal government was financed mostly by tariffs, taxes on imports.  Then the progressives decided that taxing the incomes of the rich would be "fairer", so they began a drive to replace the tariff with a small income tax which was paid mostly by the wealthy.  However the progressives were tripped up by the heroic Supreme Court which ruled in the1894 Pollock case that income taxes were unconstitutional.  The progressives struck back with 16th Amendment in 1913 which permitted an unapportioned direct income tax.  At first the income tax was small and borne by the wealthy but has grown to the current ubiquitous nightmare.  

If the above is accurate, then one might draw the conclusion that repealing the 16th Amendment would bring us back to the halcyon days of Congressmen wrangling over how high the tariff should be with no intrusive income tax.  The problem is that the above is not accurate and repealing the 16th Amendment would likely have little effect on our current tax code, at least little effect which would be predictable.  The root of the problem with the standard narrative is a misunderstanding of the Pollock case.  

Getting It Right 

Rather than ruling the entire tax law of that year, which included an income tax, unconstitutional, the court ruled only one particular part of the tax bill unconstitutional; the entire bill was then thrown out on the idea that removing only the offending section would have fundamentally altered the intent of Congress in passing the bill.  The offending section was a tax on rental income from real estate.  The rationale to declare this tax unconstitutional was novel--an example of judicial activism--and it overthrew one hundred years of understanding of taxation under the Constitution going back to the 1796 Hylton case.  

Essentially the court said that a tax on rental income from real estate was in effect a tax on the real estate itself; this is a winning argument on purely economic grounds but is a loser under the Constitution.  Taxes on the value of property are, under the Constitution, direct taxes that must be apportioned (divided equally) among the states--only property taxes and head taxes (capitations) are direct taxes.  No historical instance of the federal government resorting to direct taxation comes to mind.  All other forms of taxation are, Constitutionally, indirect and must be uniform throughout the states, e.g. Charleston cannot charge a lower tariff than Boston.  The reasoning of the Pollock court took a tax on rental income which had always been understood to be an indirect tax and made it a direct tax on real property.  Its lack of apportionment made it unconstitutional.  Again, this was a novel argument.

The problem that the Pollock argument presented to Congress in creating future tax law was that virtually any tax, formerly thought of as indirect, could be turned into a direct tax by considering its source.  Hence a tax on income from any business activity could be thought of as a direct tax on the property used in the business.  This rationale may indeed have had the salutory effect of limiting the federal power of taxation, especially on business and rental income.  It did not seem to have the effect of limiting the power to tax wages.  In fact the Pollock court left standing wage taxes in 1894.  The court threw out the entire tax bill because Congress meant to tax mostly the rich but taxed primarily the poor after the tax on rental income was ruled unconstitutional.  

In a purely Constitutional sense, the 16th Amendment was a conservative amendment.  It did nothing more than prevent the use of the novel rationale of the Pollock case, i.e. a tax on income from property (the source of the income) was in effect a tax on the property itself.  It re-established the formerly clear line between direct and indirect taxes which Pollock had blurred.  As the Supreme Court said, and tax protestors have misinterpreted, the 16th Amendment conferred no new power of taxation--from the case Stanton v. Baltic Mining Co. (1916):

“..by the previous ruling [in Brushaber] it was settled that the provisions of the 16th Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of INDIRECT taxation to which it inherently belonged, and being placed in the category of direct taxation....”

Conclusion

The income tax was never meant to be what it is today.  "Income", one hundred years ago, was something a wealthy patrician earned passively while sipping brandy in one of his mansions.  It was investment earnings.  The drive to replace tariffs, which were thought to bear on the poor more heavily, with a "soak the rich" income tax was pure class warfare from the so-called Progressive Era. Today's system of withholding taxes from our wages did not come about until World War II, the brainchild of one Milton Friedman (this perhaps ironic depending on your view of him).  

So what does it all mean today? Income tax opponents need to come to terms with the fact that there was no glorious time of income tax (as we think of the term today) unconstitutionality before the 16th Amendment.  The current system of tax withholding would be unharmed by its repeal.  The question of how and how much we are taxed is political one.  Anyone who wants to influence tax policy must make economic arguments to influence the politically powerful, not arguments from faulty constitutional theories.  My hope is that those who want lower taxes will stop undermining their otherwise good arguments by referring to a glorious bygone era of Constitutional orthodoxy that never existed.  

Obamanomics: A Break With The Past? Hardly

To hear President Obama tell it, our current economic crisis was caused by the failed policies of the last eight years, which conveniently coincide with the Bush presidency. Does the Bush administration bear any blame? Of course. The Bush years were marked by reckless fiscal policy (monetary policy was no less reckless but that was the work of Fed chiefs Alan Greenspan and Ben S. Bernanke). Obama rejects any calls by congressional Republicans to exercise fiscal discipline regarding the current stimulus bill citing correctly that Republicans lost all credibility over the last eight years in the fiscal restraint department. However in calling out the hypocrisy of the opposition party, Obama's logic takes an odd turn; he says that the Republicans have run up a trillion dollar deficit and that he will not return to their "failed policies". Incredibly, Obama says this during an appearance designed explain his own addition of a trillion dollars to the current deficit.

For the purpose of creating political rhetoric, the President says that the policy that led to our current malaise is just in elementary school, a tender eight years of age. In fact this policy is well into its retirement years at almost eighty years old. It is great to see our seniors out in the work force refusing to retire, but this government employee should be forced into retirement. The government spending as economic savior policy has been around since Herbert Hoover, who like George W. Bush, believed that fiscal stimulus could rescue us from a depression. FDR's New Deal actually took what Hoover started and expanded it greatly. Obama plans to do to Bush's fiscal policy what FDR did with Hoover's--expand it beyond heretofor explored boundaries. So, far from breaking with the policy of the past, Obama plans to pursue old policy with ever-increasing recklessness.

Is there any justification for Obama's belief in fiscal stimulus? No, not one bit. The father of fiscal stimulus, John M. Keynes wrote:

“Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.” -- Keynes, Collected Works, vol. XXVII, p.122

For Keynes, fiscal policy was simply too slow. It probably would not target idle resources either. He advocated monetary policy in the form of a zero interest rate, perpetual free money, to stimulate the economy as a first solution. Our problem is that we have a near zero interest rate now, with no apparent success and whole new set of central bank problems.

Not only do we know that the New Deal's fiscal stimulus, then unprecedented, failed to get us out of the Great Depression, we have also have some interesting, though rare, periods of fiscal contraction to consider. We had a depression in 1921 on the heels of World War I inflation. It had passed by the time Commerce Secretary Herbert Hoover convinced President Harding to do anything about it. Under Harding and President Coolidge, fiscal policy was contractive--the national debt decreased.

In 1947 we had another year of wrenching fiscal contraction after the massive inflation of World War II. All of the respectable Keynesian economists said this would bring on a renewal of depression-level unemployment. They were wrong. The post-war economy maintained high employment during a great fiscal contraction.

I would guess that President Obama and his advisors actually believe in the necessity of their stimulus package even as they and congressional Democrats salivate at the opportunity to fund their "pet projects". So I do not believe that Obama, as he says, hates to have to spend this money; he is relishing his role as our savior. However his crude rhetoric about breaking with failed policy of the past to bring us into a new brighter future is only persuasive to those unarmed with a knowledge of economic theory and history.

Monopoly Money

Ask a typical person to list the great laws of American history and almost without fail the Sherman Anti-Trust Act will appear. As we all know, the Gilded Age was an era when "unfettered capitalism produced the robber barons who ruthlessly exploited workers, brutally put down unions, gouged consumers, and corrupted politics." The Sherman Anti-Trust Act was used by enlightened statesmen like President Teddy Roosevelt to breakup the huge, abusive trusts like Rockefeller's Standard Oil. This put an end to their predatory ways, i.e., charging low prices to run their competition out of business and then charging higher monopoly prices. This is probably a fair summary of what is taught in a typical American school. Its major problem is that it is complete nonsense. Not one case in the history of antitrust enforcement has featured this behavior; and, as Casey Stengel would say, "You could look it up".

Anyone who would put any anti-trust law on a list of great laws is unlikely to have made any more than a superficial inspection of the theory and practice of antitrust. Dominic Armentano has written the best books available on the subject: Antitrust and Monopoly: Anatomy of a Policy Failure and the shorter Antitrust: The Case for Repeal. Both are accessible to the intelligent layman as this even shorter summary, "The Politically Incorrect Guide to Antitrust Policy".

By thoroughly debunking the competition models of modern microeconomics upon which the rationale for antitrust enforcement lies, Armentano pulls the rug from under it. Antitrust is special interest legislation that has been used by less efficient companies to cripple more efficient ones. The classic examples of evil monopolists like John D. Rockefeller always expanded output and lowered prices. Armentano concludes:

"Antitrust theory and history are both a myth and a hoax. The laws were never intended to help consumers...and their long historical track record is that they have not helped consumers. They have, instead, punished innovative and efficient business organizations while protecting less efficient competitors and every state-sanctioned monopoly. They have tended to make consumers poorer and the overall economy less efficient and they deserve to be repealed, not reformed. That the antitrust paradigm still can find support among a majority of economists, lawyers, and the public is a testament to intellectual laziness, to the power of special interest, and to decades of successful myth making."

There are monopolies out there and every one is "state-sanctioned"; there is no workable definition of a monopoly without the force of government to support it. While legal and medical professions are cartelized by anti-competitive licensing laws, the biggest state-sanctioned monopolies never have been and probably never will be subject to antitrust enforcement. I speak of the United States Postal Service and the Federal Reserve system, which hold monopolies on mail delivery and money creation, respectively.

The postal monopoly loses money year after year while its shortfalls are paid for by taxpayers. This monopoly depends on postal statutes which make it illegal to compete with the post office. FedEx and UPS are allowed to compete only based on the urgency or size of their deliveries or both. The Constitution allows Congress to establish a system of "Post Offices and post Roads". However, the Constitution does not prohibit competition. The postal monopoly could be broken easily without antitrust laws by simply repealing the postal statutes that make it illegal to complete with it.

The same could be said for the fiat (paper) money of the Federal Reserve. Federal Reserve notes could still circulate as money but people would be free create and choose whatever kind of money they wanted to use. This would a be great check on the well-established propensity of all central banks to inflate a currency (indeed,inflation is the very raison d'etre of central banks).

As Ron Paul concludes:

"...allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess.With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies."

Freedom to make peaceful agreements is a fundamental part of a free society. Those who think antitrust laws are good idea should be consistent and apply them in the only way they can do any good--against the government itself. The flag of Cornelius Vanderbilt's famous New Jersey-based steamship that broke Robert Fulton's government-granted steamship monopoly in New York waters read "New Jersey must be free". We could all benefit from a renewal of that kind of entrepreneurial spirit: "America Must Be Free".

Politics As Usual on Steroids

"The question we ask today is not whether our government is too big or too small, but whether it works, whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.

Where the answer is yes, we intend to move forward. Where the answer is no, programs will end.

And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government."

~Barack Obama, Inaugural Address, Jan. 2009

The above statement, far from being an argument to expand the government, is an argument to turn Washington, D.C. into a ghost town.  If there is one thing we know after almost eighty years of government spending on well-meaning but paternal programs it is that, aside from being entirely unconstitutional, they do not bring about their stated ends.  Thus Obama should, by his own rhetoric,  once and for all put the alphabet soup of federal agencies to rest.  That would be change that every thinking person could believe in.  Instead we are on the cusp four of years of politics as usual--except now we face a president with tremendous political capital.  This will result in not just politics as usual, but politics as usual on steroids.

Nothing so far proposed or done by the new Obama administration is worthy of being called change.  The stimulus to be voted on today is a variety of the ripest political scam imaginable.  In the name of blindly "doing something", Congress is going to vote on a nearly one trillion dollar stimulus package.  The process has been far from transparent; there have been exactly zero committee hearings on the bill.  Its contents have been determined outside the deliberative process of Congress, just like the recent $800 billion TARP bailout under Bush.  Further, the bill has has been designed with little attempt to determine (if this is even possible) if the money is being spent wisely.  The stimulus bill contains money for the arts, Amtrak, and a host of other politically-favored rat holes.  

"I would love to not have to spend this money," Obama is reported to have said.  What a sad joke.  There is no sound economic or historical reason to spend this money.  The stimulus bill is a simple act of desperation--a "hail Mary" pass.  The Fed has done virtually all it can do to attempt to re-inflate the economy with monetary policy, to no avail.  Now politicians are vainly resurrecting fiscal stimulus.  It will not work; it cannot work.  

Unless we consider putting politics as usual on steriods to be change, we are in for four years of the same old same old.

Bow Tie Extra: Cardinals in the Super Bowl?

"The Arizona Cardinals are going to the Super Bowl." If anyone here in the Valley of the Sun had just awoken, ala Rip van Winkle, from a ten year nap, he would not believe this statement. In 1999, the Cardinals had been in Arizona for eleven years and one thing was obvious--the Cardinals would never be the kind of team that would go to the Super Bowl as long the Bidwill family was in control. Now a short history.

The Cardinals are the oldest continuously run professional football franchise dating back to 1898 in Chicago. The name "Cardinals" comes from the faded maroon of the jerseys bought used from the University of Chicago team. The Bidwill family gained control of the Cardinals in 1932 during the Depression. As the Chicago Cardinals the team was modestly successful, fielding an exciting championship team in 1947. The Bidwill family made some St. Louis connections by marriage and moved the Cardinals to St. Louis in 1960.

The only truly successful period for the franchise in St. Louis came in the mid-1970s. This team was loaded with talent--Jim Hart, Terry Metcalf, Mel Gray, Roger Wehrli, Dan Dierdorf, Jim Otis, etc. Since I was a young football fan at the time, I am among the relative few who did not grow up thinking of the Cardinals as a doormat. Monday Night Football halftime highlights might, this was before the days over ESPN-induced supersaturation, feature Howard Cosell saying something like, "But back come the Cardiac Cards. On third and twenty Jim Hart throws deep down the sideline to the speedster, Mel Gray, and he could go all the way. Touchdown Cardinals." These Don Coryell-coached teams underacheived in the playoffs, never reaching even the NFC title game.

By the late 1980s, Owner Bill Bidwill, a fellow bow tie wearing penny pincher, had decided that St. Louis would never build a new stadium for the Cardinals. Phoenix offered a new stadium if Bidwill would move the Cardinals to Arizona. The Phoenix Cardinals played their home games in Arizona State's Sun Devil Stadium, with its hot metal bench seating, while waiting for their new stadium to be built. However the team never had the support to make politicians fund a new stadium. Wrangles over where the stadium would actually be located further complicated matters.

In the meantime, the Cardinals languished as a losing team with poor attendance whose owner refused to spend the money to make a winner. Home games often featured more fans from the visiting team than Cardinal fans and were almost always blacked-out on local TV per NFL attendance policy. Being a Cardinal fan was a seen by many locals as, if not a symptom of some mental disorder, worthy of ridicule . Die hard fans did exist and they spent much of their time griping about how the Cards could not win as long as the Bidwills owned the team. Some critics claimed that Bill Bidwill was purposely not building a winning team until he had his new stadium; he survived on revenue sharing from the NFL, not on attendance revenue. Players considered the Cardinals a team with an insurmountable losing culture and a professional dead end. The legendary fourth quarter collapse against the Chicago Bears two seasons ago was another "here we go again" moment and a monument to the futility of the Cardinal franchise.

After years of controversy, the new stadium was finally built in Glendale, in the west valley far from Tempe and Sun Devil Stadium. Arizona voters had to approve a huge bond issue to fund the stadium. The way this was done was illegal, as I understand the law. The east valley voters were led to believe that the stadium might be built in the east valley while west valley voters were given the same hope for the west valley. By law the location of the stadium should have been settled before the vote. It was not settled so as to avoid the disapproval of the voters where the stadium would not be built. As it was, the bond issue still barely passed. The Cardinals now have a truly modern stadium that gives them what cynical valley residents never believed possible for the Cardinals, a true home field advantage.

While I have not been a fan of owners' blackmailing of municipalities to get new stadiums built on the public dime, the football fan, like the investor and entrepreneur, must take the world as it is, not as it should be. I adopted the Cardinals when I moved to Arizona in 1996, warts and all. One of their newest warts is their uniforms; except for the white helmet and black shoes, they are a sartorial nightmare.

I am excited about the Cardinals' appearance in the Super Bowl. The Cardinals have possibly the smallest fan base of any team in the NFL. They will face a team with one of the largest fan bases, the Pittsburgh Steelers. The Steelers became established in the 1970s, along with Dallas Cowboys, as one of the NFL's great bandwagon teams with a national, not just regional, following. Rooting for the Cardinals, on the other hand, has been a contrarian play even here in Arizona. It would be great if the Cardinals' improbable bull run could include running the mighty Steelers bandwagon into a ditch.

Why Fiscal Stimulus?

Obama's fiscal stimulus plan is the culmination of a return, by desperate politicians, to an idea that recently had been out of fashion. For the last twenty five years or so, manipulating the economy was strictly the dominion of central bankers using monetary policy. We would be treated to wonderful commentary on whether the economy was "overheated" and in need of higher interest rates to cool it off or "cooling" and in need of lower interest rates to heat it up. A balanced budget was the ideal; the Democrats never really achieved one, but they came close at the end of Bill Clinton's term. We then actually went through a period of projecting budget surpluses for the foreseeable future. So much for the idea of foreseeability.

Perhaps the renewed belief in the efficacy of fiscal policy to stimulate the economy is related to the new lack of confidence in the Fed's ability to fine tune the economy with monetary policy. Former Fed chief Alan Greenspan, once the "Maestro", is now discredited; the econometric modeling that failed him so profoundly has not yet, unfortunately, met the same fate. Ben Bernanke has not restored confidence in Fed competence. Also, interest rates are already at rock-bottom levels; they cannot get much more stimulating. Counter-cyclical fiscal policy, i.e. budgetary deficits to heat up the economy during economic slowdowns and budgetary surpluses to cool down the economy during a period of overheating actually fell out of favor for some very good reasons that have relevance to our current malaise.

Fiscal policy comes from the Congress, which makes it notoriously slow to be enacted. Add that to the fact that the economic statistics used to determine whether the economy to needs a heavier foot on the gas or a foot on the brakes lag behind actual events and it is easy to see why fiscal policy had fallen out of favor. Official statistics have finally told us we are a year into a recession. We are now being told that we will not see any stimulus bill pass Congress until February. The main rationale for the bill is our need for "investment" in infrastructure. Those big projects may not take off for almost a year. Lack of timeliness is a big problem with using fiscal policy to counter economic cycles.

Fiscal policy has other problems that will not here be detailed. Foremost, in my mind, is that even if fiscal stimulus could be brought to bear in a timely fashion, it would still fail. Remember when we rushed to get a $165 billion stimulus bill under Bush? Then recently we just had to authorize $800 billion willy-nilly or the sky would fall. The sky is falling anyways. We would be wise to have our doubts about the next round of stimulus.

The simple fact is that government is incapable creating real wealth. Huge government deficits only guarantee one thing--wealth destruction through distortion of the capital structure. Idle assets will not be put to productive use. True wealth production will, on the margins, be sidetracked in pursuit of short-term, unsustainable gains from government largess. So what is the proper policy, both fiscal and monetary? Spending by Congress should be cut to a minimum and the Fed should do nothing. We need a revival of good old fashioned unfettered capitalism.

The Unfettered Capitalist: Introduction

We live in world of scarcity and uncertainty about the future. Mankind's struggle with these undeniable facts has shaped our world. Despite his shabby treatment in the mainstream media, the unfettered capitalist is the hero of the modern economy. The unfettered capitalist takes risks to organize scarce land, labor, and capital to meet the needs of consumers in the face of an unseen future. If he succeeds in satisfying consumers he profits; if he fails he may go bankrupt.

What does he need to do his beneficial work? He needs a system of private ownership where agreements to exchange goods can be freely made. Is today's capitalist unfettered? Hardly. Rare is the opportunity today to operate in a truly free market. Yet the entrepreneur continues on, fettered as he is by taxation and regulation which hinders him and thus impoverishes us all. The capitalist, who today can only dream of being unfettered, remains the hero of the entrepreneurial drama.

In this series, The Unfettered Capitalist, I hope to highlight the careers of the great unfettered capitalists of the past, both the heralded and unknown, either lionized or villainized. Hopefully the reader will gain a greater appreciation for the contributions of the unfettered capitalist and an appreciation for what we are losing as the government continues to tax and regulate us into poverty.

Capitalism has recently taken a beating. While most concede what capitalism has done for our material prosperity, they also believe that capitalism, without strong government regulation, produces many social ills: the rich grow richer at the expense of the poor, huge monopolistic corporations dominate our political process, workers work under horrendous conditions, and boom and bust cycles of prosperity and depression plague us. Superficially satisfying as this critique may be, it is simply wrong, from beginning to end.

Why does this critique persist? The answer is fairly simple. Our education system is controlled by the purveyors of these myths. As a people, we are simply miseducated. My own education is fairly instructive. I remember vividly being taught by my eleventh grade history teacher all about Keynesian counter-cyclical fiscal policy, i.e. that the government should increase taxes and cut spending during an economic expansion and should do the opposite during a recession. This is pure nonsense driven by the idea that the free market is cannot correct its own errors and so needs fine tuning by a beneficent government. I discovered free market economics in the same way that many great things happen, by chance. I was indeed looking for answers about how the world worked and why no one seemed to have a satisfactory answer when I read an article by Lew Rockwell about the the breakdown of the monetary system established at Bretton Woods after World War II. I followed the article's recommendation to read What Has Government Done to Our Money? by Murray Rothbard; this was my conversion experience to laissez-faire capitalism.

The rest of our typical history class is like-wise permeated with anti-capitalist mythology. The Gilded Age was a time when unfettered capitalism produced the robber barons who ruthlessly exploited workers, brutally put down unions, gouged consumers, and corrupted politics. All this changed when government rode to the rescue using new antitrust laws to break up monopolies, passed new laws to protect workers and consumers, and tamed big business excesses with income taxes and regulatory boards like the Interstate Commerce Commission.

Capitalism had its biggest crisis in the Great Depression. Franklin Roosevelt's New Deal established the government regulatory structure in labor, banking, taxation, and consumer protection that we are still under. Changes and additions to government regulation have followed but the anti-capitalist premises of the New Deal have remained.