Last month I gave a teaser that we would dive into the vile world of federal Estate Taxes. I thought perhaps this would be a good opportunity to back up a little further into history and run through a synopsis of tax evolution in America, particularly considering the political winds blowing at present. Why? What does this have to do with Business 101? Simple. If a business owner doesn’t understand how taxes started and why, they can’t effectively defend against them to protect the legacy they’ve built with hard work.
In 1787 Alexander Hamilton (the $10 bill guy) along with James Madison (4th US President), and John Jay (not the hair stylist) were polishing up what would 2 years later be ratified by the 13 colonies as the United States Constitution in September of 1789. It was during this two year period that these three men toured the colonies to argue in favor of ratification, thereby creating a very small and very limited federal government to perform a very few and quite clearly defined list of duties (primarily set forth in Article I, Section 8) – the duties/powers of Congress.
To aid their efforts these men wrote a series of about ninety articles to circulate among the colonies, titled “The Federalist” – later known as “The Federalist Papers”. Not to drag into terrible detail, but needless to say that if anyone had misgivings about what powers and duties the federal government was granted and wasn’t clear on what the Constitution does, the founding fathers left a highly detailed roadmap within the Federalist Papers to use as a guide.
In Article I, Section 8, the phrase “…to provide the general welfare and common defense…” appears for the second time (the first of which is in the preamble and what everyone quotes). It is this second appearance that quite explicitly defines what this means. It’s a mystery to me how this one line from the most brilliant document ever written has been so perverted over the centuries by politicians and those wishing to (as Franklin and Jefferson put it) “…vote themselves gifts from the treasury…” But I digress.
In this section the federal government is granted the authority to lay taxes to support its limited operations…but not per capita taxes. In other words, not income taxes, or any such taxes based on wealth, earnings, or the mere fact that you’re alive. In fact, it explicitly excludes such taxes.
Taxes in this country’s early years were derived from things like small embedded sales taxes and import tariffs. Had the federal government the authority under the Constitution to reach into our pockets and take at will (as it does today), you can rest assured it would have never been ratified by even a single colony.
During some great political upheaval among the parties from 1909 -1912 President Taft dropped two massive Constitutional measures into the state houses. Both of which were quite horrifically and unfortunately ratified in 1913 just after Woodrow Wilson took office.
The first of which (Amendment XVI) directly refuted the founding fathers’ original intent by negating the language in Article I, Section 8 and making the Federal Income Tax a new and (in this author’s humble opinion) evil reality. Taking nearly 4 years to be ratified provides a history too long to delve into here, but needless to say this is quite possibly the greatest travesty against liberty this nation has ever suffered since 1776. It wasn’t many years after this amendment that Congress refined its power by mandating the ultimate insult to American families – the payroll deduction system. “Don’t worry about that pesky income tax bill. We’ll just go ahead and take it from you before you even see it.”
Amendment XVII was ratified just two months later in April of 1913. It was proposed only about seven months earlier and managed to sweep through the ratification process very quickly, as it probably seemed far more innocuous and billed as a fostering of further democracy. It, in fact, seems to have since then provided the exact opposite.
When created, the bicameral legislature of Congress (the House and Senate) were specifically designed to balance each other in several ways. The first of which was to afford more populated states greater representation in the federal government (the House) while the other (the Senate) gave smaller states even footing as all states were granted only 2 senators. There was, however, another crucial distinction – how they were chosen.
As we all know, members of the House are elected directly by the people via popular vote. What is less known is that Senators were constitutionally appointed through the states themselves by vote in the state legislature. The 17th Amendment snuffed this and made Senate seats subject to popular vote in the same manner as the House.
So what’s the problem with this? Well there’s the little phrase at the tail end of Article I, Section 8 where we read the famous words “...rights reserved to the people and states respectively…” The bicameral Congress was built to protect that and created an intentional road block for all potential legislation that may come through. The founders intended it to be difficult to pass Congressional law, making it hard for the federal government to pass new intrusions on the American populous. Members of the House represented the people directly and those in the Senate represented and protected the all-important rights of the states. Once the 17th Amendment passed muster, Senators no longer had to answer to the states, only their direct electorate, which now found it much easier to “vote themselves gifts from the treasury”.
With this little history lesson out of the way, we have now set the stage for a multi-generational, federal bureaucratic performance of economic class warfare and political positioning for decades to come. Yes, Sir. Enter Death and Taxes. The High Cost of Living. More next month…just in time for tax season.