Governments have traditionally generated revenue either via some form of direct taxation or through tariffs. In 1913, one of the progressive darling Woodrow Wilson’s priorities was to replace a large portion of the Federal government’s revenue with income tax.
The 1913 Revenue act lowered the average tariff rate from 40% to 26% and implemented a 1% tax on income over $3,000 annually, which affected only a relatively small proportion of the population at the time. In addition to this, came a 1% corporate profit tax as well. This new legislation marked a historic shift in US government financial policy making where revenues would now increasingly come in the form of income taxes rather than tariffs.
These days income and payroll taxes account for a significant portion of US government revenue. The political genius of Wilson’s move was not to be understated. He, rightfully, recognized that tariffs were an unfair racket on the American consumer’s access to global trade, while Republican counter-parties argued that tariffs were a necessary protectionist policy to shield American industry from foreign competition.
The truth is, that both sides of the political isle were working with a distorted version of reality to protect their political interests. On one hand, the Democrats were correct in so much as how tariffs unfairly affected the consumer, and on the other hand Republicans were correct in so much as how tariffs shielded American industry from foreign competition.
However, swapping tariffs for income taxes shifted economic policy from one which punishes the consumers of goods to one which punishes the producers. Certainly, in many circumstances these people can be one in the same but the economic incentives of this policy shift should not be ignored.
As America moved into decades of labor reform, her newfound distaste for protectionist trade policy would carry with it hefty consequences. While progressive labor reform offered seemingly much improved quality of life for the average American worker (things like the 40 hour work week, pension plans, employer health care coverage, etc) the American labor pool became increasingly noncompetitive in the global market.
It is no doubt that the seeds for the exodus of American manufacturing had been planted long before the foreign relations policy making of men like Henry Kissinger in the 1970s. The economic reality in a rational world governed by market action, is that progressive labor reform affects the bottom line of productivity.
While freer and fairer trade policies, in aggregate, make everyone more well off as access to goods and services increase and for a cheaper price, economic policy micromanagement is a series of steps that lead to self-cannibalism.
The driving force behind this policy making is always two fold. Populist political favor bought in the form of labor reformations and increasing government revenues. Both of which, are ultimately a net negative for the economic flourishing of a nation’s ability to be competitive in a global marketplace.
The bottom line is this, government intervention in business and government intervention in economic planning (be it monetary or otherwise) can offer immediate benefits but carries with it destructive second order effects. These days the question should be asked, why do we even bother paying taxes when the government can simply print however much money it needs?
Book of the Month:
The Price of Tomorrow: Why Deflation is the Key to an Abundant Future
-“The world order, largely intact since the end of the World War II, seems to be breaking down. Capitalism, and its relentless march towards progress, allowed many to win. Although no system is perfect, the rules by which capitalism operated were well regarded and understood. You could expect that if you made a big bet and were wrong, you would be wiped out—but if you were right, your hard work, ingenuity, or risk taking would be rewarded. In game theory, we could call this a dominant cooperative strategy, and it dominated for the better part of the twentieth century. The rise of fiat currencies that could be manipulated domestically and the bailout in 2008 changed that strategy to one where the players whose bad bets caused the crisis, instead of being wiped out, were rewarded handsomely. Capitalism’s long-dominant cooperative strategy was replaced by a non-dominant strategy, crony capitalism, where the cheaters won.”
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