The New Year's First Heist

Douglas French
Jan. 04, 2013

The high priests of the civic religion are very worried that people no longer seem to trust government. The law stands discredited. Once-hallowed institutions are under fire and losing status. People are openly loathing public officials. Movies, television, and best-selling books urge revolt. Most people don’t bother to vote.

And these priests wonder why.

Here’s an example of why. As the year opened, the House, Senate, and president all collaborated to enact the largest tax increase in human history — under the cover of night on the first day of the year, on the 100-year anniversary of the income tax. They did it in the name of saving us from some mythical beast called the “fiscal cliff.”

It’s going to take an extra $20-40 or more out of your paycheck per week. If your son or daughter or a thief did that without your permission, you would be mighty upset. But this is what our elected leaders are doing to us, and we have no choice about it.

The tax increase is sly in other ways. It occurred in an area of federal finance that had not even been part of the debate, an area of taxation that many people don’t even believe constitutes taxation: the payroll tax. The 2% add-on that everyone will pay hammers the middle class in a way that all politicians, left and right, have sworn they would never do.

But they did it anyway, even though it will seriously harm job creation, rob people blind every day for years, and do injury to that paltry economic growth that barely seems to exist. In short, from an economic point of view, it is the stupidest policy one could impose, given the fragile state of things.

Why would they do this? Because you have money and they want it. They have deemed their priorities to be more important than your need to save, go out to eat, go to the movies, rent movies, join the Laissez Faire Club, or whatever.

In all the stimulus efforts since 2008, only one measure truly made sense. In 2010, the administration and Congress cut the payroll tax. The idea was to leave more money in workers’ hands and lowering the cost of hiring. It was a rare moment of good sense. It wasn’t enough, but it was step in that direction.

The frenzied deal to avoid the “fiscal cliff” — a phony, D.C.-generated crisis designed to frighten and intimidate the public — included a repeal of this tax break. Incredible. All that talk about taxing the rich only, about broadening the base, etc., and this is what it comes down to: a massive fleecing of the entire workforce, combined with no spending cuts at all. And get this: The bill is called the “American Taxpayer Relief Act of 2012.”

Unspeakable.

You can be forgiven for not knowing about this. You have to read deep into The New York Times article on the tax deal to find it. I listened to an hour of Morning Edition on NPR and didn’t hear a word about it. Instead, all we hear about is what a glorious moment this is for the cause of political compromise and how the new tax will affect only incomes over $400,000. This is sheer nonsense.

As for 2%, that’s no small shakes. It was the whole of the tax as it existed from 1943-49, and then it was effective only up to $3,000 in income. Over time, it increased more and more. Today, two-thirds of taxpayers pay more in payroll tax than they do in income tax. For the vast majority of Americans, the payroll tax is the main means by which they are looted every day. It is hardly irrelevant.

Why is it that we hardly ever hear about this tax? Long ago, when FDR first put in place the Social Security program that the payroll tax funds, he fobbed it off as a form of insurance. Insurance is a market institution. You pay a premium to guard against risks you can’t control. It makes no sense to apply this term to a guaranteed payout that appears at a set date in the future, one funded not by premiums, but by direct transfer payments.

Still, the term stuck. All these years later, and despite the obvious insolvency of the “insurance” aspect of the Social Security program, people inside and outside government still treat the payroll tax as some kind of market-based program. This is rot. The payroll tax as currently constituted brings in enough revenue to fund the whole of the federal government as it existed in 1982. Yet the elites are still not calling it what it is.

The little scam to raising this tax in cloak-and-dagger conditions is an old one. This is precisely what Ronald Reagan did after 1983. He was able to use his reputation as a tax cutter to enact what was then the largest-ever tax increase in the guise of “saving” Social Security. Much to the delight of the entire political class, the trick worked. Taxes went up and up, and somehow, Reagan still maintained his reputation as a tax cutter.

So this recent racket is a redux of the 1980s. In retrospect, we all should have seen this coming. This is why Washington ginned up this phony hysteria about the “fiscal cliff.” Reporters never stopped talking about it. Every day, we were told about the coming disaster. This way, we were supposed to be grateful to our elected leaders for saving us from falling.

The news is also slowly leaking out that the tax deal doesn’t cut a dime of spending; on the contrary, it guarantees spending increases far into the future. Irresponsible? Absolutely. But think hard about this. What incentive does anyone have to cut spending so long as there is a money printing machine down the street — it’s called the Federal Reserve — that can cover the liabilities as quickly as Congress can rack them up?

The Fed was founded 100 years ago this year. It’s the best thing that ever happened to government. It took a few decades for the presidents and Congresses to warm up to the wonderful reality, but finally, after 1973, when the dollar became nothing but paper and all gold was removed as a limit, it became clear: No one in Washington would ever again have to curb their appetite for spending other people’s money.

Thenceforth, they would take what they could through every possible means, and print what they could not steal directly. This is the business of government

Most people are clueless about the specifics. But most everyone knows that something has really gone wrong in Washington. Most everyone gets the core truth: These people are living at our expense. All the pseudoscience in the world can’t cover up for that core fact.

This is why so few really trust the system anymore. It’s a system of robbery. It’s always why so many people have realized that if they intend to retain any of their liberty and property, they are going to have get extremely creative about doing so. After all, if government can use this amount of trickery to rob us, the rest of us are surely justified in using any clever means possible to put a lid on it.
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Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of two books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply, and Walk Away, a monograph assessing the philosophy and morality of strategic default. He is founder and editor of LibertyWatch magazine. Write him.