Mr. Clark is President of The Pioneer Bank, Chattanooga, Tennessee.
“The Forgotten Man,” first described by Professor William Graham Sumner in the 1880′s, was the hard-working taxpayer. A half century later, “the forgotten man” of the New Deal meant a person of low income —the “underprivileged” and “neglected.”
The New Deal sprang from the premise that a free economic system favors some and forgets others, and that it is the duty of the government to right this alleged wrong. Reasoning that one of the best ways to help the poor is to take from the rich, New Deal theorists concluded that this could be done most effectively through a steeply progressive income tax.
Now that this idea has been implemented on a large scale in America for nearly a quarter of a century, it is time to ask what its repercussions have been. Has it really benefited — remembered —the so-called forgotten man?
The superficial answer has to be “Yes.” The “national income” is at an all-time high, even after due allowance for inflated dollars. Most people today, including the New Deal’s “forgotten man,” are somewhat better off in a material sense—they have more actual purchasing power than before. Tangible evidence includes cars, homes, washing machines, refrigerators — and better food inside the refrigerators.
Acknowledging such economic progress for the once “forgotten man,” one nevertheless may ask: Is this because of the change we have made — because of the trend toward paternalistic government with huge subsidies and steeply progressive taxation — or in spite of it? And the answer seems clear to me that if we had pursued an opposite course, toward less government intervention and lower taxes, all of us — including the so-called common man — would be more prosperous than we are now.
The Push Is Gone
I’m convinced that our prosperity of the past generation is largely the momentum generated by years of economic freedom. Though our heavy taxation and growing inflation discourage it, saving is still a deep-rooted American habit; and savings and capital investment have been enough to keep our economy running reasonably well so far. The point is that our progress could have been far greater had government been more limited, taxes lowered, inflation prevented, and capital investment encouraged.
That is why I contend that the whole idea of paternalistic government with its steeply progressive income tax has boomeranged. It has come to hurt the very people it was designed to help. We have become so engrossed with generalities about the merits of the Welfare State that we fail to see its burdensome impact on even those who were supposed to be its greatest beneficiaries. In short, the typical American is being “forgotten” all over again under a continuation of the New Deal designed to memorialize him.
The program initiated to take from the “rich” for the benefit of the “poor” has held saving and investment beneath its potential, thus making our economy less productive than it might have been.
Meanwhile, the welfare program has grown beyond the capacity of the “rich” to sustain it. Increasingly, government has had to levy progressive income taxes against lower income groups. The simple fact is that half of the entire federal income tax is borne by people with incomes below $7,000. And unfortunately, under the concept of a welfare government, such a situation is inevitable.
A Regressive Income Tax
The progressive federal income tax is only one aspect of our present tax structure. Great numbers of our people — and especially millions of those in the lower income brackets — are subject to another kind of federal tax on incomes, the Social Security tax.
“Oh, no,” some will argue. “Social Security payments are not a tax; they’re premiums on an insurance policy.”
According to the law, however, collections for Social Security are listed as a tax. It is known technically and legally as the “Social Security Tax.” This, I understand, was done to give the Social Security program the appearance of constitutionality. The Constitution gives the government no authority to enter the insurance business and to force the citizens to pay premiums, but it does give authority to tax.
Many persons believe that Social Security is a kind of compulsory insurance and that it operates by means of an adequate payment into an ample trust fund, productively invested. Neither of these suppositions is correct. A recent booklet of the Social Security Administration, designated as OASI 36-M, frankly admits that the trust fund amounting to $23 billion as of June 30, 1957, isn’t adequate to cover the fund’s accrued liabilities:
The assets of the old-age and survivors insurance and the disability insurance trust funds are not intended to be equal in amount to the accrued obligations of the programs at any one time.
A private insurance company needs reserves equal to its accrued obligations because it must face the possibility that it may not be able to continue to collect premiums in the future.
The Federal programs, on the other hand, since they are compulsory under Federal law, can count on continuing participations in the programs and the continuing payment of contributions.
Mr. W. Rulon Williamson, a former actuary of the Social Security Administration, believes that his successor’s estimate of “from $300 billion to $325 billion as plausible accrued liability” may be too low. Whatever the precise figure, which no one can determine with certainty, there can be
no doubt that the present so-called trust fund of $23 billion fails by $277 billion or more to cover the accrued liability under the program.
Some Must Lose
It should be apparent that Social Security is not insurance in the true sense of the word since insurance contemplates that each age cohort jointly provides the funds for its own benefits. Actually, the use of the word “insurance” in connection with the program is fraudulently misleading.
Should private businessmen perpetrate such a cruel hoax on the people as politicians have done and are doing in the present Social Security program, they would promptly find themselves sojourning in Leavenworth or Atlanta.
It is easy enough to see why payments into the fund are inadequate to cover accrued obligations. Some persons have paid maximum Social Security taxes since their inception in 1937. In that case, the taxpayer would have paid a total of $837.00. His employer would have been compelled to pay the same amount — which could otherwise have been paid as wages to the employee — bringing the combined total to $1,674.
If that person had retired on January 1, 1957, having reached the age of 65, and if his wife had passed her 65th birthday, they would be eligible for retirement benefits of $162.80 a month. Thus, within a period of slightly more than ten months, that man and his wife would receive more in retirement benefits than they had paid in Social Security taxes over the twenty years since the program was initiated. But the life expectancy at the age of 65 is more than ten months — in fact, more than 141/2 years for the husband and 181/2 years for the wife. To fund an annuity producing the above payments through the expected life of each would require $16,807 for the husband and $9,667.00 for the wife. It is obvious to anyone that tax payments accumulating to a total of $1,674 cannot have earned in the past twenty years, and cannot in the future earn, sufficient interest to fund benefits amounting to $26,474. If this couple actually collects some $25,000 for which they have not paid, the implications are clear enough: other taxpayers will have been compelled to pay about $25,000, for which they are to get nothing.
Will Posterity Pay?
If there is a $300 billion accrued and largely unfunded liability in our Social Security system, where is the money coming from to pay the forgotten man’s Social Security benefits? From one source only — from future taxpayers; in effect, from the workingman’s children. What is this Seventh Heaven of dependence for us oldsters going to do to the younger taxpayers upon whom will fall the burden of supporting a prior generation?
Personally, I doubt that posterity should or will bear the major portion of the Social Security costs of prior generations — not in dollars of today’s purchasing power. The cruel part is that individuals of the present generation, lulled by political promises of security, will make little if any attempt to provide for themselves through their own savings and effort. The heavy tax burden that is a necessary part of the Social Security program not only cuts into the “forgotten man’s” spendable income, but also limits his ability to invest in industry or to start his own business and greatly discourages self-improvement and self-advancement.
And the repercussions of this discouragement, while difficult to pin down, are nevertheless real and far-reaching. We are impeding, limiting, and thwarting the hopes, aims, ambitions, and efforts of millions of Americans, and in the process, tremendously restricting the possible growth in our standard of living.
Inflation Is Also a Tax
But, of course, open taxation is not the only means being used to support our immensely overextended government. Direct taxation might be called “the out-in-the-open” or “front door” method of revenue collection. But our government also has a more or less “secret” or “back door” method which takes the form of a highly questionable monetary policy.
Arbitrary increase in the money supply results in, or in itself might be termed, inflation. It simply means that more and more dollars are in circulation, but that each dollar is worth less. The result, apparent in our everyday experience, is a shrinking dollar bill. If we say the 1939 dollar was worth 100 cents, then the 1945 dollar was worth only 77 cents. By 1953 its buying power was a mere 52 cents, and today it is only about 50 cents.
Inflation is a complicated subject, and it has various causes; but in my view, one of the most important is overexpanded government — a political mechanism with such heavy operating expenses that direct taxation alone can’t cover them; and so it turns to a fiscal policy which, in effect, involves printing money to pay its own bills.
Inflation deals its most lethal blow at the person with fixed or static income. This includes the handicapped or the aging worker, who, in the competitive labor market, is incapable of raising his dollar wages. It also includes the constantly enlarging group of older people no longer earning wages but living off fixed income from such sources as cash savings, annuities, or government bonds. Their income remains static, but under our present inflationary economy, its actual value in purchasing power tends to decline continually.
The Cure Lies in Freedom
The Welfare State, set up primarily to benefit “the forgotten man,” has — almost inevitably —injured that man through the combined results of heavy taxation and mounting inflation. And it has hurt him not only in terms of loss of income but in loss of initiative and incentive — loss of the driving desire to push ahead and fulfill his potentials.
The condition obviously is bad. It needs a remedy. What is it?
Many will propose various “gadgets,” temporary devices or maneuvers; but I contend there is only one real cure, only one way to eliminate the oppressive taxation and frightening inflation which now weigh so heavily on the average man’s shoulders —and that is to bring the government back into bounds, to restrict it to its proper function of protecting life and property, and to give up the disastrous attempt to use government to benefit any particular economic group.
This will so reduce governmental expenditures that taxes can be lowered and made more equitable; and at the same time, it will eliminate a chief cause of inflation.
Our present overexpanded government with its progressive income tax and inflation, is hurting every segment of our society, and especially the so-called “forgotten man.” The best way we can truly “remember” him, as well as every other citizen, is to work toward a minimum government guaranteeing to everyone a maximum of economic freedom.
Ideas On Liberty:
A Question of Means
“Would you let them starve?” “Do you think people ought to live in slums?” “Would you let them die for want of medical care?” “Aren’t all children entitled to an education?” “Shouldn’t old people be comfortable after retirement?”
Those who believe that the State should do more for the people never tire of hurling the above questions at those who believe the powers and functions of government should be reduced and the area expanded in which free initiative and self-reliance may be exercised.
Let it be understood that it is precisely because the libertarian wants less hunger, better housing, better education, improved medical care, more comfort in retirement and a higher scale of living all the way round, that he advocates less government, sound money, self-reliance, observance of the moral law, and freedom in the market places.
Less suffering, abolition of poverty, better living, and improved opportunity for cultural and spiritual development is as much the goal of the libertarian as it is of the advocate of the Welfare State. How to reach the desired objective is the question that divides these two groups.
Howard E. Kershner, L.H.D. From a release of the Christian Freedom Foundation, October 28, 1957.
