The standard leftist position on helping the poor is: Increase income taxes on the rich and give the money to the poor in the form of welfare. The idea is that it’s just not fair that someone has more money when someone has less money. By equalizing people’s financial conditions, through the force of a progressive income tax and a welfare state, the financial plight of the poor will be improved.
The left, however, is wrong. As our American ancestors, who lived without income taxation for more than a century, learned, the best way to help the poor would be by abolishing the income tax (and the IRS).
For one thing, no one is ever going to get rich on welfare. One reason is that government officials place a strict limit on the amount of income a person is permitted to receive in order to continue receiving his dole. If the person exceeds that income limit, his dole is eliminated. It’s difficult to get rich that way.
Moreover, welfare produces a mindset of hopeless dependency within the recipient. Once he begins receiving the dole, he becomes convinced that he could never survive without it. We see this insidious effect particularly with recipients of Social Security, Medicare, Medicaid, public housing, and food stamps, most of whom are absolutely convinced that they would die without their dole. The fact is that welfare is worse than heroin.
So far, we’ve talked about the poor who are on the dole. What about the working poor? Income taxation hurts them in two ways: by limiting their ability to get rich and by impeding their productivity as workers.
Suppose there is no income taxation at all. People are free to keep everything they earn. Obviously, with that situation, it’s much easier to improve one’s standard of living. A worker receiving $40,000 in tax-free income is financially better off than if he is receiving $30,000. The extra $10,000 that he otherwise would be paying in income taxes can go into savings. In 10 years, he has $100,000 in savings plus whatever interest he has earned on the money. The more he earns, the more he is able to put away and the wealthier he becomes.
Here’s a thought experiment. Let’s assume that you have been paying $20,000 a year in income taxes for the past 27 years that The Future of Freedom Foundation has been in existence and calling for the abolition of the income tax. If there had been no income tax, you would have $540,000 in savings. That’s a considerable sum of money to pay medical bills, educational expenses, and the like.
Obviously, the more money that the government takes from a worker through income taxes, the harder it is for him to become wealthy.
Leftists feel good about the fact that they are reducing the level of wealth of the rich through income taxation. Even if the money isn’t paid out in the form of a welfare dole and, say, is frittered away on overseas military antics by the warfare-state part of the government, leftists like the fact that they have prevented the rich from becoming richer.
Actually though, the income tax protects the relative financial position of the rich in society. Let’s say that there is a 50 percent income tax levied on everyone. While it’s true that the tax is going to inhibit the rich from getting richer, it’s also going to inhibit the poor from accumulating the necessary capital, through savings, to compete against the rich in the provision of goods and services to consumers.
Let’s say that a rich person has a long-established retail business. With no income tax, a person can quickly save a lot of money (or borrow savings from others) that he can then use to open a new business to compete against the long-established business. Through innovation, originality, new products, and better service, the new business can attract customers and expand market share, even to the point of threatening the existence of the long-established business.
Not so with the income tax. By impeding the ability to save larger quantities of money, the income tax makes it more difficult for would-be entrepreneurs to start new businesses as quickly as they would in an income-tax-free society. The income tax protects the relate position of the rich in the business world.
Finally, the income tax makes workers less productive, which impedes the ability to raise their standard of living. When people are free to keep everything they earn, saving money becomes easier. All that savings, from the poor, middle class, and rich alike, goes into banks, which then lend it out to businessmen who wish to improve their operations.
All that capital manifests itself in the form of better tools and equipment, which make workers more productive. More productivity means higher revenue for their company. As firms do better, they begin competing for workers with their increase revenues. That means higher wages.
One of the founding principles of America was no income taxation for anyone. Our American ancestors opposed a tax system that was based on covetousness, envy, political stealing, and welfare largess. Thus, for the first century of our nation’s existence, Americans had no income tax, welfare state, or warfare state.
For the first time in history, the poor had a chance to survive and prosper. Many of them even became rich. The overall standard of living of everyone in society was constantly on the rise. Given that our American ancestors also rejected immigration controls, poor people from all over the world chose to flee the lands of income taxation, welfare, and warfare to come to the land that was free of income taxation, welfare, and warfare.
The best thing that could ever happen to the poor is if Americans today restored their nation’s founding principles of economic liberty.
Also see FFF’s book “Your Money or Your Life: Why We Must Abolish the Income Tax” by Sheldon Richman.
The Future of Freedom Foundation.
This article was published by The Future of Freedom Foundation.