Income Tax in the United States - Research Paper Example

The American Founding Fathers did not include an income tax system as part of their vision of government, and this represents a fundamental limitation of the growth of government that has been lost in modern society. By legalizing the Federal Income Tax through the 16th and additionally by permitting money to buy influence in Congress through special interest groups, we have created a dangerous system where the public finances can be looted by private interest in collusion with the political parties who create the national budget, hand out contracts in a non-transparent manner, and distribute wealth to their supporters in different ways. This essay will consider means to decrease dependence on foreign investments and balance the budget through political reforms that change the way government is financed. As initial steps, it is proposed that finance regulations be increased to control the influence of special interest groups in Washington. Secondly, programs and policies that encourage American domestic savings through banks and Treasury Bonds at a high enough rate of interest to strengthen the dollar and provide return on investments for pensioners be promoted and enacted. Finally, new legislation should be introduced that prohibits foreign governments from buying or investing in U.S. debt. By limiting the government’s ability to issue debt, and reforming the processes which encourage corruption in Washington, the size of the government can be limited and it can be stopped from indebting future generations to years of taxation to pay for debt and policies that funnel public wealth to private parties such as special interest groups, solving problems like our current $1.345 trillion dollar deficit. (Leonhard & Marsh, 2010) “The nation had few taxes in its early history. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. The high cost of the War of 1812 brought about the nation's first sales taxes on gold, silverware, jewelry, and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods to provide sufficient funds for running the government. In 1862, in order to support the Civil War effort, Congress enacted the nation's first income tax law.” (Tax Foundation, 2007) Generally public debt was related traditionally to what the government needed to raise in emergency situations, namely in wartime, when large budgets might need to be raised to build armies or navies to defend the country from attack. Otherwise, the government was expected to keep a small and balanced budget, and representative served out of a call to altruism and service to society as a whole, rather than as limited agents of special interest groups representing minority populations. The Founding Fathers never intended and warned against the idea of “continual war” and “standing armies” – these too were not part of the original plan for America, and they were seen as a threat, for through these methods a tyrannical government that stole its population’s wealth through coercive taxes could be formed – which is exactly what we see in America today. “Assuming that current policies are continued — for instance, that all the Bush tax cuts become permanent — the deficit in 2015 will be about $400 billion larger than the level that economists consider sustainable.” (Leonhardt, 2010) Thus, the system of checks and balances designed to protect the people from government assumption of liberty and property was lost through standing armies, income tax, and continual war. In the original message of the Founding Fathers, American resistance to taxes and tax increases is formed – indeed, these were the very reasons America sought to be free of the Kingdom of England and Great Britain’s Parliament – to create a free system of living, “no taxation without representation.” Therefore, in our current situation, we need to develop reforms that will limit government’s ability to tax and spend in a non-transparent manner, benefitting special interest groups such as the banking industry, military-industrial complex, and organized labor with policies that are not helpful to greater society or burden them with their costs. As Paul Krugman writes, “Assuming that current policies are continued — for instance, that all the Bush tax cuts become permanent — the deficit in 2015 will be about $400 billion larger than the level that economists consider sustainable.“ (Krugman, 2008) The political process needs to be reformed fundamentally to end the way these special interest groups can buy legislation and regulation that favor their industry to the detriment of the people. The obvious example is the debate between Main St. and Wall St. when the bailout, TARP, and other programs were passed that gave trillions of dollars in public money collected from tax revenues to private corporations, primarily bankers, stock traders, and real estate agents. A transparent political system which gave a wider voice to all of the members of society may have decided on very different budgetary and policy responses to this problem. Thus, we should end government support for business in the manner of TBTF banks and simultaneously reform the political process so that these types of company’s (oil, banking, defense, etc.) cannot buy legislation in Congress or policy in the White House. Furthermore, policies should be encouraged that not only limit government’s ability to collect tax, such as the repeal of the 16th Amendment, but also new laws that limit the government’s ability to raise debt from foreign nations. For example, Zero Hedge reports, “In May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation.” (Durden, 2010) We need a new law that would 1) Prohibit the U.S. Government from selling any U.S. Treasury debt to other sovereign nations or their agents, and 2) Prohibit the U.S. Government from issuing U.S. Treasury Debt that is bought by the Federal Reserve. In the first example, the sovereignty of the American people is at risk, because if foreign countries own nearly $4 trillion in U.S. debt that is $4 trillion that those countries have given Congress for their own pet projects, special interest groups, and over-spending. With financing comes a subtle control, thus if we worry about the TBTF banks’ influence in policy and legislation through money we have to also worry about the effect of U.S. Treasury debt held by other nations on impartial foreign policy decisions. That this is a factor of global trade imbalances and concentrations of wealth and power in developing countries is evident. “Recently we crossed an important watershed: we now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.” (Krugman, 2007) When there is not only a massive trade imbalance but the result of that trade imbalance is that foreign governments are issuing debt to the U.S. Congress, there is a need for a wider change of policy. When the Federal Reserve buys U.S. Treasury debt from the President and Congress, it is akin to printing money. This is the nature of Quantitative Easing, the Fed is priming the pump by financing more debt in Congress to stimulate the economy, but because of lack of transparency in government, few really know where the money is going and those who do are profiting heavily from its flow. Thus, to prevent this type of looting of the tax collected from hard working people, there needs to be multiple types of legislation introduced to reform these processes. While calling for the Fed to be replaced with a new system is not the intention of the essay, the author believes that increasing the strength of the dollar by raising interest rates will be the best policy to pursue in relation to national currency over the long term. The weak U.S. dollar, while supposedly lowering the cost of U.S. exports also weakens the buying power of the people and the value of their savings. Furthermore, a 0 to 0.5% interest rate as maintained by the Federal Reserve on large deposits and thus determining the banking rate in the country also should be raised to a minimum of 6%. The Fed maintains low rates as another means to artificially stimulate the economy but should not contribute to what is essentially a card trick by debasing the dollar and printing more money. In maintaining a low interest rate, the Fed seeks to create an environment where investors are forced to put their money into stocks and other risk investments rather than traditional savings, and through this re-inflate the economy. This has an effect in raising the price of commodities like oil, food, and metals through “speculation — that (is) investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices.” (Krugman, 2008) The effect on this for normal consumers and workers not receiving stimulus money from the Fed is harder felt. However, a strong interest rate from the banks would not only strengthen the dollar and buying power of the consumer, but allow for retired people to earn a reasonable return on their money by keeping money in the bank and not gambling with it through speculation in commodities. Thus, reforming the way special interest groups can buy influence in politics through money, limiting the government’s ability to raise debt by selling to foreign governments and the Fed who then simply prints it, and increasing the basic interest rate to a level where the dollar is strengthened and savings is encouraged, are all presented as possible solutions to our current situation that does not require the raising of taxes, new taxes, or more public debt. Sources: Durden, Tyler. (2010). Chinese Treasury Dump Brings Its Total Holdings To One Year Low, As "UK" Continues Exponential Accumulation Of US Bonds. Zero Hedge. Date accessed Dec. 12th, 2010: FRBNY. (2010). The Founding of the Fed. The Federal Reserve Bank of New York. Date accessed Dec. 12th, 2010: < http://www.ny.frb.org/aboutthefed/history_article.html> Krugman, Paul (2008). Running Out of Planet to Exploit. The New York Times (April 21, 2008). Date accessed Dec. 12th, 2010: Krugman, Paul (2007). Trouble With Trade. The New York Times (December 28, 2007). Date accessed Dec. 12th, 2010: Leonhardt, David (2010). O.K., You Fix the Budget. The New York Times (November 13, 2010). Date accessed Dec. 12th, 2010: Leonhardt, David & Marsh, Bill (2010). Get a Pencil. You're Tackling the Deficit. The New York Times.Date accessed Dec. 12th, 2010: < http://graphics8.nytimes.com/packages/pdf/weekinreview/20101114-deficit-graphic.pdf> Tax Foundation. (2007). History of the Income Tax in the United States. Pearson Education Group, Ltd. Date accessed Dec. 12th, 2010: Find Law. (2010). U.S. Constitution: Sixteenth Amendment. Thomas Reuters. Date accessed Dec. 12th, 2010: < http://caselaw.lp.findlaw.com/data/constitution/amendment16/> Read More