As a startup entrepreneur, let me be clear, I don’t mind paying taxes. That’s the price of being in America and running our government. It’s no different than paying maintenance fees on my car to keep it running smoothly. Our government is necessary for a civil society, but it is based on sound business principles in order for it to work properly for the people of America.
As Andrew Mellon wrote in his book Taxation: The People’s Business soon after the end of World War I in 1924,
“Adam Smith, in his great work, Wealth of Nation (published March 9th, 1776) laid down as the first maxim of taxation that ‘The subjects of every state ought to contribute toward the support of the Government, as nearly as possible, in proportion to their respective abilities,’ and in his fourth and last maxim, that ‘Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state,’ citing as one of the ways by which this last maxim is violated a tax which ‘may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes … While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds, which might enable them more easily to do so.’ “
If you want to know why Adam Smith wrote what he did, just take a look at our own history to see how the Pilgrims failure at Communal (Communistic) living (based on their erroneous version of religious doctrines and business “principles”) resulted in many people dying. The necessary governmental and “political” changes thus ensured that everyone was given an equal chance to live. Notice that some died to prove that the designed governmental “system” was an absolute failure.
So what did Adam Smith learn from the Pilgrims and others examples was that based on past failures we came up with a better and new form of government, based on the rule of law. See this short video, The American form of Government, to learn the differences.
As Mellon also wrote soon after his above statement and cannot be stressed too little,
“The Government is just a business, and can and should be run on business principles.”
So how does this work out?
Same with sales of a product by a business. If the price is too high, sales will be low. If the price is too low, there may not be enough profit to make it worthwhile to stay in business as there is no money to be made. You can apply the same principle to taxes.
In the movie from Mark Twain’s Prince and the Pauper there is dialog that shows some of the thinking that goes into a statist’s view of taxation:
- Tom Canty: Please, sir, how much longer must I do this?
- Earl of Hertford: This is the last, sire.
- Tom Canty: [starts to read the document] “Authorizes an increased tax on windows…” Do you mean to say we have a tax on windows?
- Earl of Hertford: May I suggest that your majesty cease troubling himself about…
- Tom Canty: But I’m head of the government. It’s my job to be troubled about these things. And I think a tax on windows is cruel… unjust.
- Earl of Hertford: The royal treasury is empty, sire. Every means of replenishing it must be taken.
- Tom Canty: Yes…but windows. Don’t you see when poor people are sick, windows are the only outside they have? Why they wouldn’t have anything nice to look at if it weren’t for windows. And, besides… that’s taxing sunshine and light, which don’t belong to us at all, but to God.
So it goes, if taxes are too high and the size of government is too big, governmental revenue will decrease because there is less and less capital for business to invest and spur income and job growth and, more importantly, less and less motivation to work harder. As we saw from our own history of the Pilgrims. If taxes are too low, the government will not run well, or not at all, and the potential for anarchy will be soon around the corner. Mellon again states the right mindset:
So long as a man uses his abilities within the bounds of the moral sense of the community, monetary success is not a crime, but on the contrary adds to the total wealth of the country and to an increase in the standard of living as a whole.
What were the tax rates before and during Mellon’s time (and go to the link to see what they were after Mellon)?
- Year, Top Rate, Income
- 1916, 15%, 2,000,000
- 1917, 67%, 2,000,000
- 1918, 77%, 1,000,000
- 1919, 73%, 1,000,000
- 1920, 73%, 1,000,000
- 1921, 73%, 1,000,000
- 1922, 58%, 200,000
- 1923, 43.5%, 200,000
- 1924, 46%, 500,000
- 1925, 25%, 100,000
- 1926, 25%, 100,000
- 1927, 25%, 100,000
- 1928, 25%, 100,000
What spurred an increase in jobs and income? Have you heard of the “Roaring Twenties” in your history books? Look at the tax rates during that time. What other times in our recent history have we had such economic growth? When businesses fight over you and your skills you earn more, mostly in a “hot” and booming economy do you earn more.
I leave you with Mellon’s final comment in his book:
… high surtaxes are becoming less and less productive of revenue to the Government and at the same time are injuring business initiative. All business involves risk. If business loses, the Government shares not at all in the loss; if business succeeds, the Government takes more than half the gain. What can long withstand these odds ? Capital does not care to take risks on these terms. The spirit of initiative may still be there, but the present high surtaxes are driving it into idleness. America will become a nation of followers, not leaders. There is no escape from the conclusion that a tax system having this inevitable result must be changed.