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ARTICLE

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.

Domestic Welfarism

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.

Inequitable Taxation

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.

 

***

Two Ways

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?"

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April 1967

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