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The Free Market
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April 2000
Volume 18, Number 4

Hidden Taxes

by Llewellyn H. Rockwell, Jr.

The US government is now awash in revenue, owing to the economic boom that has dramatically enlarged the pie on which the state can gorge itself. And yet the Clinton administration not only refuses to curb the rates, even a smidgeon, but it wants to trade some higher taxes for a few more targeted loopholes. Meanwhile, the GOP is promising-yet again-to cut taxes. But like Lucy with the football, no one believes it any more.

And yet all this focus on the income tax obscures an important point: America's hidden taxes are more costly to many Americans than the income tax. Between the payroll tax, regulations like the Americans With Disabilities Act and the Civil Rights Act, trade tariffs and quotas, incessant monetary depreciation, as well as direct taxes on goods and services, Americans are far more highly taxed than it would first appear. All this has conspired to turn the tax revolt, which has lasted from the early 1970s to the present, into a general exasperation with government in all its forms.

Washington has tried for decades to exclude the Social Security tax from its general calculations of the tax burden. In the early 1980s when Reagan reduced and even cut income taxes, one year later the same administration struck a deal with Congress that increased the Social Security tax (a deal orchestrated, by the way, by Alan Greenspan). But Reagan was not criticized in the same way George Bush would be a decade later when he broke an anti-tax pledge.

Why? Because Washington would rather treat Social Security as an "insurance" program, which it is not. It is a tax paid by working Americans whom the government attempts to placate by promising subsidies later in life. The connection between the "contributions" and the payment schedule is purely a formal apparatus, with insurance language tacked on to a redistribution scheme to give it the appearance of legitimacy. There's no use in pretending that the largest single budget item (23 cents on the dollar) consists in paying out insurance settlements.

Neither is it an accident that business pays half the individual's tax ("premium" is Washington's preferred term). As Murray Rothbard has shown, big business supported Social Security as a way of increasing the costs of doing business for their lesser competitors. In the language of the times, it was to be a subsidy for "progressive businesses" that offered pensions already, and a punishment on nonprogressive small business that did not. Hence, the only lobbying forces seriously opposing FDR's Social Security scheme were the small businesses who would bear the brunt of the taxes.

For those paying into the program today, it is more obviously a tax than ever before. That's because many young payers don't believe they will ever see a dime of it. From a strategic point of view, this is a good development. Young workers are preparing for retirement as if their benefits will never arrive, and this behavior in turn reduces the sense of dependency people have on the central state.

For enthusiasts of the flat tax, the Social Security tax should serve as a warning. It is not adjusted for income; it applies across the board, while the exemptions are few and far between. In short, it operates just like the flat tax promoted by Republican reformers who don't understand that the burden of taxes stems from the amount paid, not the schedule of payment.

The inflation tax-collected in the form of a continually depreciating currency-has been especially egregious in the postwar period. What you could buy for $1 in 1946 you have to pay $8.77 for today. Another way to put it is that $1 then is worth 11 cents today. What happened to the 89 cents? It has been taxed away by the Federal Reserve's continuing expansion of the money supply. The Clinton inflation tax alone (1992 to the present) has sliced off 18 cents from the value of the dollar.

Destroyed by this hidden tax are the purchasing-power benefits that should come with increased productivity. Briefly, it is a truism that if money supply (and money demand) remain constant while productivity increases, each dollar should be able to purchase more goods and services. This "deflationary" effect works like a pay increase to every dollar holder, and in a free market, this would be the normal course the money's value would take.

Instead, the Fed has waged a war against the supposedly evil forces of deflation, and robbed us of this added benefit of living in productive times. The central bank likes to say that deflation (falling prices) hurts productivity, which is absurd. It's enough to point to the computer industry, which has become vastly more productive even as the prices of its products have fallen precipitously.

Finally, there are the hidden taxes called regulations, which do nothing but cut off avenues of entrepreneurship, rewarding established businesses at the expense of upstarts. Even if no money is collected and no monetary depreciation occurs, regulations are no less a confiscation of property and therefore prosperity. If you understand this, you begin to understand the nature of the state itself: all of its activities amount to taking what does not belong to it in the first place.

Llewellyn H. Rockwell, Jr., is president of the Mises Institute.

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