The Income Tax Really Is Evil

Mises Daily by J. Bracken Lee

This was, to be sure, "the home of the free and the land of the brave." Americans were free simply because the government was too weak to intervene in the private affairs of the people — it did not have the money to do so — and they were brave because a free people is always venturesome. The obligation of freedom is a willingness to stand on your own feet.

The early American wanted it that way. He was wary of government, especially one that was out of his reach. He had just rid himself of a faraway and self-sufficient political establishment and he was not going to tolerate anything like it in his newly founded country. He recognized the need of some sort of government, to keep order, to protect him in the exercise of his rights, and to look after his interests in foreign lands. But he wanted it understood that the powers of that government would be clearly defined and be limited; it could not go beyond specified limits. It was in recognition of this fear of centralized power that the Founding Fathers put into the Constitution — it never would have been ratified without them — very specific restraints on the federal government.

In other matters, the early American was willing to put his faith in home government, in a government of neighbors, in a government that one could keep one's eyes on and, if necessary, lay one's hands on. For that reason, the United States was founded as a Union of separate and autonomous commonwealths. The states could go in for any political experiments the folks might want to try out — even socialism, for that matter — but the federal government had no such leeway. After all, there were other states nearby, and if a citizen did not like the way one state government was managing its affairs, he could move across the border; that threat of competition would keep each state from going too far in making changes or in intervening in the lives of the citizens.

The Constitution, then, kept the federal government off balance and weak. And a weak government is the corollary of a strong people.

The Sixteenth Amendment changed all that. In the first place, by enabling the federal government to put its hands into the pockets and pay envelopes of the people, it drew their allegiance away from their local governments. It made them citizens of the United States rather than of their respective states. Theft loyalty followed theft money, which was now taken from them not by their local representatives, over whom they had some control, but by the representatives of the other forty-seven states. They became subject to the will of the central government, and their state of subjection was emphasized by every increase in the income tax levies.

The state governments likewise lost more and more of their autonomy. Not only was their source of revenue being dried up by federal preemption, so that they had less and less for the social services a government should provide, but they were compelled in their extremity to apply to the central authorities for help. In so doing they necessarily gave up some of their independence. They found it difficult to stand up to the institution from which they had to beg grants-in-aid. Furthermore, the federal government was in position to demand subservience from the state governments as a condition for subventions. It has now become politically wise for governors, legislators, and congressmen to "play ball" with the central government; they have been reduced to being procurement officers for the citizens who elect them. The economic power which the federal government secured by the Sixteenth Amendment enabled it to bribe the state governments, as well as the citizens, into submission to its will.

In that way, the whole spirit of the Union and of its Constitution has been liquidated. Income taxation has made of the United States as completely centralized a nation as any that went before it; the very kind of establishment the Founding Fathers abhorred was set up by this simple change in the tax laws. This is no longer the "home of the free," and what bravery remains is traceable to a tradition that is fast losing ground.

For those of us who still believe that freedom is best, the way is clear: we must concentrate on the correction of the mistake of 1913. The Sixteenth Amendment must be repealed. Nothing less will do. For it is only because it has this enormous revenue that the federal government is able to institute procedures that violate the individual's right to himself and his property; enforcement agencies must be paid. With the repeal of the amendment, the socialistic measures visited upon us these past thirty years will vanish.

The purchase of elections with federal money will no longer be possible. And the power and dignity of the home governments will be restored.

This measure should be supported by the governors and legislators of all the states. Every state in the Union now contributes in income taxes to the federal government more than it gets back in grants-in-aid; this is inevitable, because the cost of maintaining the huge federal machinery must come out of the taxes before the citizen can get anything. With the abolition of income taxation the states will be better able to serve its citizens, and because the state governments are closer and more responsive to the will of the people, there is greater chance that the citizens will get their full dollar's worth in services.

However, the principal argument for the repeal of the Sixteenth Amendment is that only in that way can freedom from an interventionist government be restored to the American people.

State income tax isn't why those millionaires are fleeing

Jay Hancock

The millionaires are fleeing Maryland, all right. But not because of the measly tax surcharge on income over $1 million.

They're bugging out because of Maryland's estate tax, which applies to a bigger portion of a dead person's hoard than the federal estate tax or those in other states.

Strange to tell, rich refugees didn't want to speak with me. But their lawyers did. They suggest the high inheritance tax costs the state a lot more than it brings in because absconding aristocrats don't pay any Maryland tax, let alone the one when they die.

"For years and years, I have had clients who complained about Maryland taxes and never took any action," says Lowell G. Herman.

But recently, nearly a dozen customers with big stashes set up residence elsewhere, largely because of Maryland's failure to match other states in reducing or eliminating its estate tax, he says. "But that's just sort of the beginning. There are many others who are thinking about it."

Wailing rose from Annapolis last week after this newspaper reported that income tax returns from those making more than $1 million plunged by a third.

Suspicion focused on the millionaire tax, which takes 6.25 percent of every dollar pocketed over that amount. According to one theory, that slightly higher (and temporary) rate, which became effective last year, pushed plutocrats across the border.

The much more likely explanation is that the worst financial crisis in decades culled the ranks of million-dollar filers. But that doesn't mean numerous wealthy Marylanders aren't becoming wealthy Floridians or Virginians.

They are. But their problem is the estate tax, which involves much bigger dollars.

"Nobody's going to leave the state because income tax rates go up a point over a million dollars - or whatever it is. It's just not going to happen," says Stuart Levine, a Baltimore tax lawyer and adjunct professor at the University of Baltimore law school. "But they do have to leave to some degree because of the estate tax."

Maryland has a complicated relationship with rich people. As one of the wealthiest states in the country, it cultivates more than its share. But they don't like to stick around once they've amassed a pile. At least they don't want to be taxed here.

Along with a cameo appearance in baseball records for his 50-home run, 1996 season, former Baltimore Oriole Brady Anderson shows up in Maryland's tax annals.

The state tried to declare him a resident and claimed thousands in back taxes, even though he owned a house in Nevada. A comptroller's hearing officer rejected the claim.

Maybe the most famous Maryland "domicile" case involved a former Internal Revenue Service manager and tax consultant for the state. The guy bought a condo in Miami Beach, kept his house in Pikesville and claimed residency in low-tax Florida.

Maryland tax authorities, his former colleagues, came after him with guns blazing. They investigated his voting records, car registration and phone book listings, declared him a Marylander and billed him $2,246 in back taxes.

"Former tax collectors do not like to pay income taxes any more than other taxpayers," wrote the judge who ruled on his appeal.

They probably like to pay estate taxes even less. Virginia eliminated its estate tax in 2007; Florida, in 2005. Many other states have done the same.

The federal estate tax doesn't kick in on accumulations smaller than $3.5 million. But Maryland taxes as much as 16 percent of estates exceeding $1 million, which when you think about it is not huge for a lifetime of earning and saving. The value of a home alone in Maryland could get you halfway there. It got worse in 2005 after Congress no longer allowed a federal credit for state-paid estate taxes.

For somebody worth $3 million, leaving Maryland would save his or her heirs $182,000. That's well worth the effort and often easy to do. People worried about the estate tax are mainly retirees. Many already own second homes in low-tax states, and it's hardly a sacrifice spending a few extra months a year in Sarasota to avoid filing in Maryland.

OK, you don't feel sorry for the retiree with $3 million. It doesn't matter. She can choose where to live, and driving her from Maryland means she's not buying in local stores, attending the symphony, or paying sales and income tax.

"I've never said this about any other law," said Herman, who agrees it's the estate tax, not the income tax, that's compelling the wealthy to leave. "This is one of the dumbest laws I've ever seen. It's very shortsighted from an economic and sociological standpoint for the state of Maryland."

One problem with that view is that last year, Maryland's estate-tax haul hit a record $195 million. But that could have been an aberration, swelled by the deaths of a few very rich folks, says David Roose, director of the comptroller's Bureau of Revenue Estimates.

We'll know much more in a year or two, after the comptroller's office replaces its neolithic computers. It'll be able to track how many people in which tax brackets are moving in, moving out, living and dying.

If Maryland hasn't cut the estate tax by then, don't be surprised if it shows the millionaire exodus has increased.

The percentage of estates worth more than $1 million taxed by Maryland and the amount saved for someone worth $3 million by leaving Maryland were misstated in an ealier version of this article. The Baltimore Sun regrets the errors.