"The Power to Tax Is the Power to Destroy "

These are the words of Chief Justice John Marshall

The Founders of this great nation were very deliberate in enunciating the powers of the Federal and State governments, and gave neither of them the power to tax the income of the people . The reason, as the Congress and State Governments have proven over the last 95 years, was they knew they couldn't be trusted with this much power.

The United States had no income tax until the 16th Amendment to the Constitution was ratified on February 3rd 1913. That meant that each dollar you earned was truly yours, and you got to keep that whole dollar. You weren't forced to surrender any part of it to whom ever the State thought you should. Since its enactment into law, politicians have used the enormous power of the tax code to wreak havoc on it's citizens and the economy, in the name of doing good deeds.

The top marginal rate of the 1913 tax code was 7% on income above $500,000 (equivalent today to approximately $10,000,000 in income). Compare that with today's lowest tax rate, which is 10% on income between $0 and $8,025. We now ask the poorest among us to pay a tax rate greater than what we expected from the wealthiest, and is in a word, disgraceful. Before we move on, it's important to also remember we currently pay 7.65% on every penny of income we earn (up to $106,800 in 2009) in Social Security and Medicare taxes (your employer also pays 7.65% for a combined total of 15.3%) . This combined tax is more than three times what the top marginal rate was when the income tax was introduced. Does anyone really believe that the cumulative effect of this enormous confiscation of wealth from the private sector has been negligible?

Congress, in it's infinite wisdom, decided early on that tax rates needed to go up. Within three years of implementing the nations first income tax, they more than doubled the lowest and highest marginal rates. Not satisfied with the additional revenue, the top rate was pushed up to an astonishing 67% on income in excess of $2,000,000 in 1917. In 1916 there were 206 people with incomes of $1,000,000 or more, and as a result of the increase this number fell to 141 in 1917.The very next year,1918, the top tax rate was raised again to 77%, and the amount of income at which the tax was applied was reduced to $1,000,000. The number of people with incomes in excess of $1,000,000 plunged to 67. By 1921, the number of people with incomes over $1,000,000 had fallen to 21.With the number of people reporting $1,000,000 or more in income rapidly disappearing, the congress did what it always does when trying to soak the rich: they lowered the income threshold where the tax began to $200,000 (the top marginal rate was lowered to 56%). The tax increases had eliminated nearly 90% of the top earners of the era. Was that really the outcome that Congress had in mind? What Congress never learned is that if you attempt to soak the rich through tax increases the rich go away, and then you have to tax those who aren't rich.

There are many examples where the government tax increase are promoted as being a restoration of fairness, but instead produces outcomes that are injurious to the very people they seek to help. The AMT tax was another example of how Congress was once again going to restore fairness to the tax code by making the rich pay their fair share. This tax law, which was passed in 1969, targeted 150 millionaires who paid no tax due to exemptions and deductions that Congress had put into the tax code. Imagine that Congress was upset that people were taking advantage of the deductions and exemptions that congress had put in the tax code. I guess incentives really do matter. What started out as a tax on the rich has now, nearly 40 years later, turned into a tax trap for the middle class. Apparently the best that Congress can do is to offer a temporary one year fix, year after year.

The Capital Gains Tax, pure and simple, is a Tax on Capitalism. Jack Kemp has been rightly saying for years that you can't have capitalism without capital. When you raise the rate on capital gains you choke off the access to capital for America's entrepreneurs (the folks who produce the bulk of the jobs in this country) and you reduce the amount of revenue the government receives in the form of capital gains taxes. Investors aren't stupid. They won't invest their money if they can't get a return. Nixon proved this again in 1969 when he raised the Capital Gains tax rate to 45%. The number of initial public offerings plummeted throughout the decade of the 70's. In 1969, 1298 companies completed initial public offerings. By 1978, that number had dropped to 18. No wonder the 70's didn't produce any new "go go" companies. They didn't produce any new companies. The Dow Jone Average, which started the decade at 744, ended the decade at 806. How much revenue do you think the capital gains tax generated?

Once again, we are hearing that tax rates on the rich need to be raised so that we can spread the wealth around. There is that fairness thing again. Get a firm grip on your wallet because it won't be any different this time! When the the top income earners are once again punished by the tax code, they and their tax revenue will disappear, just like last time and the time before that. The government will once again move further down the income ladder in search of the revenue they desire. The only difference is that this time it will happen faster, because now the rich are not folks who earn $10,000,000. They are folks who earn $250,000 or $200,000 or $150,000or $120,000. They are you and me!