The Mises Institute monthly, free with membership
April 2000
Volume 18, Number 4
Hidden Taxes
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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