Original Intent and the Income Tax; R. Keating

servation, and decide what is really needed to make a civilized society in the twenty-first century. D Original Intentand the IncomeTax by Raymond J. Keating E ntrepreneurs drive the economy. By creating and investing in new busi nesses, ideas, and innovations, the entre preneur ensures economic renewal and growth. Unfortunately, the federal govern ment has an economically unhealthy habit of throwing obstacles in the path of entrepre neurs, such as burdensome regulations and inflationary monetary policies. Perhaps the most formidable government barrier, though, is the income tax. Today's federal income tax system is punitive, complicated, inefficient, intrusive, and impedes entrepreneurship, investment, economic growth, and job creation. Inter estingly, however, when initially imposed, the income tax, despite its progressive rates, appeared rather straightforward and not all that burdensome-almost benign. Of course, appearances can be deceiving.

Mr. Keating is chief economist with the Wash ington, D.C.-based Small Business Survival Foundation. There were, of course, warnings about the dangers of a progressive tax structure. But people supported the income tax because it was originally meant to impose only very low tax rates on only the highest incomes. Proponents argued that the 16thamendment to the U.S. Constitution would force the so-called "robber barons" to pay taxes. It was not supposed to provide a mechanism for Washington to reach into most Ameri cans' pockets. Figures 1and 2illustrate this point. Figure 1 shows the personal income tax structure as initially imposed in 1913, while figure 2 indicates what this tax system would look like in 1994 dollars. Original Tax Rates The originalincome tax was obviously not meant to be paid by most citizens, nor were rates high enough to significantlyundermine the spirit of enterprise. For example, under this system single taxpayers today would ORIGINAL INTENT AND THE INCOME TAX 71 Figure 1: 1913 Personal Income Tax System Figure 2: 1913 Personal Income Tax System in 1994 Dollars ,Tax Rate Income Level Tax Rate Income Level 1% up to $20,000 1% up to $298,507 20/0 $20,000-$50,000 2% $298,507-$746,269 3% $50,000-$75,000 3% $746,269-$1,119,403 4% $75,000-$100,000 4% $1 ,119,403-$1,492,537 5% $100,000-$250,000 5% $1,492,537-$3,731,343 6% $250,000-$500,000 6% $3,731,343-$7,462,687 7°~ over $500,000 7°~ over $7,462,687 (A $3,000 exemption for single filers and $4,000 for a married couple.) pay no tax on any earnings up to almost $45,000and married couples on earnings up to almost $60,000. A one percent tax rate would be in effect on incomes up to about $300,000. The top rate of 7 percent would not take hold until earnings hit almost $7.5 million.

As for the corporate income tax, it was imposed in 1909at a rate of one percent and included a $5,000 exemption. Again, trans lated into 1994 dollars, companies would face the one percent rate with an exemption of $81,967. Alas, people attracted to the income tax through appeals to envy soon discovered that envy knows no boundaries and never makes for good economic policy. Govern ment rather quickly transformed the income tax from a light tax on high incomes to a heavy tax on almost all incomes. This very different income tax than orig inally intended then acted as high-octane fuel for the growth of government spending. Between 1913 and 1994, inflation-adjusted federal government expenditures increased by 13,592 percent! Over this same period, personal and corporate income taxes grew from 7 percent of total federal revenues and 0.1 percent of the economy, to more than 54 (A $44,776 exemption for single filers and $59,701 for a married couple.) percent of total federal revenues and over 10 percent of U.S. GDP.

The income tax also proved to be an economically dangerous levy, raising the costs of working, saving, investing, and risk-taking, thereby restraining economic growth. From 1870 to 1913-between the Civil War income tax and the post-16th Amendment income tax-the U.S. econ omy expanded by over 435 percent in real terms, or by an average rate of more than 10 percent per year-with no inflation. Alas, as we now look toward the twenty-first century, America's economic vitality in an increasingly competitive world economy is suspect. The implications are clear: surely we must downsize government, deregulate our econ omy, and ensure sound money. Perhaps most important, though, we should replace our current tax system with a low, flat income tax. Or better yet, we should put an end to what has turned out to be one of the biggest impediments to entrepreneur ship and growth in America this century the income tax. The resulting entrepreneur ial boom might surprise even the most wild-eyed optimists and launch the U.s.

economy into the twenty-first century. 0 THEFREEMAN IDEASON UBERtY Taking Taxes: The Case for Invalidating the Welfare State by Donald J. Kochan A s attempts to downsize the welfare state continue, reformers are relying primar ily on practical arguments-that transfer programs waste taxpayers' funds and hurt the poor, for instance. They do, but there is a more fundamental issue: social programs have no constitutional warrant. Even if such outlays fell under an enumerated power, they would still run afoul of the Takings Clause of the Fifth Amendment. "Nor shall private property be taken for public use without just compensation" runs this critical protection in the Bill of Rights.1 Properly interpreted, this clause prohibits taxing citizens to fund programs for the benefit of others, for doing so violates the requirements that any taking of "private property" be for "public use" and that the property owner receive "just compensa tion."