The Gap Between Earning and Receiving
APRIL 01, 1967 by WILLIAM HENRY CHAMBERLAIN
Mr. Chamberlin is a skilled observer and reporter of economic and political conditions at home and abroad. In addition to writing a number of books, he has lectured widely and is a contributor to The Wall Street Journal and numerous magazines.
There was a time, within the memory of living men and women, when what an American earned was his to keep, subject to the payment of moderate Federal and local taxes. And, as a corollary, the American was supposed to pay his rent and medical expenses and make reasonable provision for his old age. This was economic capitalism — or individualism, to use a more accurate word; it was a simple and understandable system, and it was admirably calculated to promote hard work and individual responsibility. The state stayed off the back of the taxpayer and, in turn, expected him to look out for the present and future needs of himself and his family.
Now, scarcely a trace of this system remains. Because of enormously increased Federal, state, and local taxes and because of the growing burden, on the productive part of the population, of withholding levies for various welfare programs, the gap between what a man earns and what he receives, between his nominal wage or salary and his "take home" pay, has steadily widened. Take someone who earns $150 a week, an average rather than a high salary in this age of shrunken and shrinking dollars. After deductions for Federal and state taxes and for so-called social security levies, very heavily increased this year because of charges for Medicare, an earner in this bracket receives less than $115 a week, a bite of almost 25 per cent of what he is supposed to earn.
This is distinctly a growing trend. The amount deducted from wages and salaries is higher this year than ever before, even during the years of World War II. An ingenious mathematician with a computer, equipped with statistical information on the probable growing cost of the programs authorized by the late spendthrift Congress, might be able to calculate that the state’s lien on the earnings of the productive by some future year, say 1984, might swallow up such a proportion of these earnings as to tempt the recipient to apply for public relief in order to subsist.
It Happened Before and Can Happen Here
Do not think this is an exaggerated, alarmist picture. It has happened before in rich and prosperous states, and it can and most probably will happen here, unless the people find some effective means to check and reverse the two parallel trends that are making the phrase, "independent middle class," more and more of a mockery. These trends are the proliferation of bureaucracy at all levels and the ever enlarging encroachments of bureaucratic spending agencies on the earnings and reserves of producers. The state of affairs in the Byzantine Empire under the reign of Justinian, described in George Finlay’s Greece under the Romans, flashes a warning for us:
At last the whole wealth of the empire was drawn into the imperial treasury; fruit trees were cut down and free men were sold to pay taxes; vineyards were rooted out and houses were destroyed to escape taxation. The increase of the public burdens proceeded so far that every year brought with it a failure in the taxes of some province, and consequently the confiscation of the private property of the wealthiest citizens of the insolvent district, until at last all the rich proprietors were ruined and the law became nugatory.
The law to which reference was made had established collective responsibility for the payment of taxes. But, it is not necessary to look to the empire of Justinian to find houses being destroyed because of inability to meet tax burdens. In the Mt. Desert region of Maine, with which I am familiar, and no doubt in other districts, it is not uncommon to find inns and large private houses torn down because the owners have found the taxes too heavy to pay.
Pay as You Earn
There are several reasons for the substantial and rapid growth of the gap between what one earns and what one is allowed to retain. A big contributory cause, and a demoralizing development on several counts, was the institution, during World War II of PAYE, the abbreviation for Pay As You Earn. Previously, the taxpayer paid his tax at the end of the fiscal year and knew exactly what the Federal and state governments were costing him. But with PAYE the practice developed of deducting from the pay check Federal tax, state tax, and an assorted variety of social insurance payments. As a consequence, the typical taxpayer has scarcely any idea what he is obliged to pay on these various counts.
It would be a gain for financial realism and clarity if the taxpayer were given the full amount of his wage or salary and then required personally to pay all the levies which are now lumped under one process of deduction. There would then be less excuse for the persistent but mistaken idea that the government pays out of some nonexistent resources of its own for aid to Hottentots, for a large variety of schemes designed to combat poverty (no one of which remotely approaches in efficacy the decision of a poor person, if unemployed, to look for a job, or, if holding a low paid job, to train himself for something requiring more skill), for Medicare and other provisions of social welfare legislation. The money for all these numerous forms of government spending comes directly out of the pockets of the people. If this fact were more generally known, as it would be if the taxpayer had to pay out the claims of the various taxing agencies after he had the feel of a full salary check in his pocket, public appraisal of legislators who are prodigal and of those who are economical with public money would probably be radically different from what the polls have been showing.
The Growing Burden
Fifty years, or even thirty years ago the American citizen was regarded as having done his duty if he took care of himself and his family and made reasonable offerings to religious, charitable, and educational projects of his choice. No one expected him to play the Atlas role of assuming responsibility for curing poverty in Africa, Asia, Latin America, Appalachia, Harlem, Watts, and other slum areas.
The theory had not become popular that, unless the richer nations of the world, with America at their head, somehow subsidized the economically retarded peoples of the southern hemisphere, not through the normal methods of trade and investments, but through direct handouts of one kind or another, the peace of the world would somehow be endangered. This theory leaves out of consideration the fact that modern history records no case of a war started by poor, economically backward peoples against more affluent powers — and for a good and obvious reason. A people must be fairly affluent before its rulers can develop the expensive weapons of large-scale destruction that are dominant in modern warfare.
Now, the American taxpayer is required to shoulder burdens of which his grandfather never dreamed, which his father felt in much lighter degree. He is supposed to pay for defending democracy in countries where most of the people do not understand what the word means, for combating famines which recur with monotonous regularity as a result of climatic, social, and economic conditions over which he has no control, for keeping a stream of aid flowing to countries of which some, so far as their governments are concerned, are clearly hostile to this country, on occasion stirring up mobs to attack our embassies and other installations, in one case, in defiance of all the rules of civilized diplomacy, placing our ambassador under house arrest.
Our Strange Behavior Toward Friend and Foe
Indeed, our current policies in Africa seem to be in curious inversion of the normal responses to friendly and hostile behavior. We are meek as lambs when our citizens are arrested and expelled, our flag insulted, our embassies and reading-rooms invaded and sacked by riotous mobs. But we eagerly associate ourselves with sanctions and hostile declarations in regard to two countries which have always maintained friendly and correct relations with us and which maintain far better conditions, as regards standard of living, and peaceful and orderly living conditions, than a number of African lands which are torn with savage tribal feuds and which have suffered clear retrogression since independence was, perhaps overhastily, established. The two countries are, of course, South Africa and Rhodesia.
Our representatives in the UN, as they blithely vote for sanctions against Rhodesia and for a resolution setting this country on a collision course with South Africa about the mandate over Southwest Africa (an issue that is emphatically none of America’s business), seem oblivious of the lessons of the Congo and, more recently, of Nigeria. Suppose we could, by sanctions or threat of sanctions and military force, bring down the two most efficient and prosperous regimes on the African continent. Would the conditions that would follow necessarily be to our national advantage or liking? Here is a practical illustration of the disadvantages of our membership in the UN. Before that organization existed, Americans, as individuals, were free to hold any opinions they chose about the racial franchise in Rhodesia, or the desirability of South Africa’s administration of Southwest Africa, or the theory and practice of apartheid in South Africa. But the United States government would have taken no official stand, would not have involved itself in unnecessary quarrels and complications.
Now, the supposed necessity of conciliating the artificially swollen bloc of new African nations in the UN Assembly (a bloc of which the voting strength is in grotesque disproportion to the political, economic, and educational development of its members) leads the United States representatives in the UN to seek such quarrels and complications — out of which new financial burdens and responsibilities may grow.
There is just as little prudence, just as little promise of relief for the overburdened taxpayers in domestic policy as in foreign policy. The 89th Congress, which has now passed into history, earned the doubtful distinction of being the "spendingest" Congress in American history, at least in a time of nominal peace. And most of its spending was not connected with the hostilities in Vietnam, but with a host of schemes calculated to pillage the thrifty for the benefit of the thriftless. HEW, the Department of Health, Education, and Welfare, has grown from modest beginnings into an empire disbursing 30 billion dollars annually, and completely incapable of administering its numerous and complex functions efficiently. To quote James Reston of The New York Times on the record of the 89th Congress:
In its first 174 years the Congress of the United States voted $5.8 billion in Federal funds for education; in 1965-66 alone the 89th Congress voted $9.6 billion. The first 88 Congresses voted approximately $10 billion for health since the establishment of the Public Health Service in 1798; in the last two years the 89th Congress has voted $8.2 billion for health, including Medicare, almost as much as in the previous 166 years. And the record of most of the social and economic innovations of the 89th Congress follows the same pattern.
Now it would be absurd to suggest that the United States was seriously lacking for either education or health before the 89th Congress went on its spending spree. This country was a pioneer in providing education for all its children and has long led the world in the proportion of its young men and women enrolled in colleges. Nor have Americans suffered from neglected health.
Loss of Local Control
What has changed is that much power and emphasis has shifted from elected school boards, responsive to the feelings of their community, to a distant irresponsible bureaucracy in Washington; and the simple human patient-doctor relation of the past has been fuzzed up by the intrusion of an enormous official apparatus, smothering patients and doctors alike in an avalanche of questionnaires and red tape.
Most economists agree that the heavy increase in government spending during the last years is a cause of the inflation which has touched off boycotts of stores and other protests. And inflation is another cause of the gap between what a man is supposed to earn and what he receives in real values. He may be receiving the same number of dollars, even a larger number of dollars, in his pay envelope. But if those dollars buy less, the effect is much the same as that of the ever-growing bite at the pay check, represented by taxes and social security levies.
Finally, the American taxation system, especially on the Federal level, is heavily weighted against the individual who does not like to be dependent on state handouts and would rather provide his own and his family’s social security. Three points should be borne in mind in this connection.
First, the Federal income tax is levied on a steeply graduated basis. In most countries the weight of taxation is more or less evenly distributed between direct and indirect forms of levy. No form of tax is pleasant; but direct graduated taxation bears much more heavily on savers than do sales or excise taxes. The Federal income tax, therefore, has a strong leveling effect and sometimes makes the gap between what a man earns and what the state allows him to keep almost grotesque, as graduation advances rapidly in the upper brackets.
Second, there is a gross and palpable injustice in the practice of taxing the same source of income twice, once when it is earned by a corporation, again when it is received by the individual stockholder in the form of a dividend. For a time, a slight abatement on income tax was granted in recognition of this injustice; but even this has now been abolished. So, income that has already been taxed at the rate of almost 50 per cent as corporation income is taxed again at individual income rates when it is received by the stockholder. In the case of persons in high income tax brackets this means that the government, with two bites at the same revenue, may take 75, 80, or even 90 per cent of net income which it has assumed no risk in earning. If this is not socialism, it is something pretty close to it.
Third, there is the capital gains tax of 25 per cent on any profit earned from selling a stock or piece of tangible property at a higher price than the owner originally paid for it. This form of taxation implies both an injustice and an economically undesirable consequence. The injustice is that the "capital gain" often barely or insufficiently compensates for the loss which inflation has inflicted on the stock or property. The owner would only be even with the game if he sold a stock held for the last twenty-five years at two and a half times the price he paid for it. The undesirable effect of the capital gains tax is that it "locks" the investor into certain holdings and takes away from the market the desirable element of liquidity.
Taxing the Middle Class Out of Existence
A former Commissioner of Internal Revenue, Mr. T. Coleman Andrews, familiar from his office with the many inequities and the well-nigh hopeless complexity of the system, voiced this heartfelt appeal to members of Congress some ten years ago:
Whether you believe it or not, everybody is being overtaxed and the middle class is being taxed out of existence. Thereby the nation is being robbed of its surest guaranty of continued sound economic development and growth and its staunchest bulwark against the ascendancy of socialism. We, who somehow have managed to hold on, finally are beginning to see the shameful extent to which we have been made the special victims of rapacious tax enactments — and we don’t like it….
High rates of tax don’t mean anything when there isn’t anything to tax.
What with ever-growing withholding from wages and salaries, inflation, and outrageously high leveling rates of taxation by the Federal government and by many states, the prospect that the individual will be able to retain a reasonable share of what he earns is pretty dim. But so long as we possess basic freedoms of election and expression, all is not lost.
Experience is a good teacher, and as people become more accustomed to living in a mare’s nest of obstructive bureaucracy and seeing hard earned money vanish in the smoke of withholding, inflation, and oppressive taxes, a strong surge of revolt may build up. What is most necessary is to educate, educate, educate. Two lessons that should be driven home in season and out of season are:
That government bureaucracy will always deal with any social problem more slowly, wastefully, expensively, and incompetently than the private agencies which it seeks to supplant.
That, when government lightly proposes to spend tens of billions of dollars for some utopian scheme, it is not spending "its" money, but yours, and mine, and our next-door neighbor’s.
Several months ago, the Federal Government announced that it was going to conduct a sweeping investigation of the operation of American Telephone & Telegraph. The natural assumption of the public was that the Federal Government believes that profits, and rates perhaps, of this regulated utility are too high. The result of this investigation is that the price of A. T. & T. stock has dropped precipitately, and three million A. T. & T. stockholders are worried.
A. T. & T. does make a huge profit, but it needs these profits to plow back into expansion of plant and equipment. We have the best telephone service, at the lowest cost in the world, in the U.S.; but, this doesn’t restrain powerful bureaucrats from attacking A. T. & T., which is a model of efficiency under private ownership, while our publicly owned post office loses over 800 million dollars a year.
ROSS ROY, "Can Detroit Be a Leader in Freedom of Enterprise?"