From within the belly of the beast at Milan FCI in 2011:

GETTING IT GOOD AND HARD

A brief look at 100 years of Fiscal Folly; and a nice confirmation of CtC scholarship using four-generation-old data from the IRS itself.

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

-H. L. Mencken

OVER THE COURSE of the last 100 years, Americans have foolishly indulged the dangerous conceit of imagining themselves able to discern angels from devils, and that angels are to be found amongst their own ranks. This has led to a laxness in our proper jealous regard for our liberties and the rule of law, and deeply-misplaced confidence in the good-faith and competence of public officials.

We should have known better, and at one time we did. "Let us hear no more of faith in the goodness of men in high office, but bind them down by the chains of the Constitution!" thundered Jefferson, and for a long, prosperous time, that's how we rolled.

Jefferson's attitude served us very well indeed for 125 years or so. But early in the last century we got so rich, and so full of ourselves, and so misled by pretentious official pomposities that we let slip the chains. As H. L. Mencken warned us at the time, we have since gotten the government we deserved for our foolishness, and we have gotten it good and hard.

Let's look at just one of the prices we have paid for being taken in by "good government" eyewash...

IN TOM WOODS Jr.'s recently-published 'Back on the Road to Serfdom' (ISI, 2010), PhD historian Brian Domitrovic contributes an essay titled 'Economic Policy and the Road to Serfdom: The Watershed of 1913'. In it, Domitrovic points out that except for a couple of years afflicted by abortive governmental interferences in the natural economy (involving the clearing of the accumulated ill-effect of "greenback" fiat currency circulated during Lincoln's War, and a flirtation with the monetization of silver in the 1890s), American economic growth during the 50 years prior to 1913 AVERAGED a muscular, extraordinarily prosperous 5% PER YEAR!

What's more, neither unemployment nor inflation existed during this period at all.

In 1913, everything changed. The engine of monetary debasement known as the Federal Reserve was successfully fastened upon the body politic that year. Injections of fiat currency and manipulated interest rates began poisoning the economy almost immediately.

That same year, the income tax was revived after a 40-year slumber (which had been interrupted only briefly by an aborted wake-up shake in 1894). Unlike the Fed, the income tax began its new run benignly, functioning as designed and capturing for public benefit a portion of the profits enjoyed by those using public resources to make their money.

Within just over a quarter-century however, subtleties of its design had allowed revenue-hungry governments to begin mis-applying the tax. By 1940, the siphoning of increasingly large volumes of wealth out of the hands of independent producers and its reallocation for political and private benefit by means of that mis-application had commenced.

The assault on the natural economy through both the Federal Reserve and the misapplication of the "income tax" have continued ever since, and here's the bill: Since 1913 the average annual growth of the economy has limped along at a relatively anemic 3.26%. Domitrovic calculates that the differential of 1.74% from the 5% growth rate produced by the unimpeded natural economy of the prior 50 years resulted in a loss to American well-being of a staggering 4/5ths of the wealth we ought to be enjoying right now.

That is, had we not drunk the Kool-Aid and allowed the gimmicking of the economy by the political class, we would be 500% better off than we now are. As much as we would like to imagine ourselves as affluent, we are living in the basement of the mansion we could have and should have built during the last 95 years.

BUT EVEN THAT 500% is just a hint of what we've lost by letting busybodies, cronyism and corruption pollute and distort our natural economy. That 500% is a static calculation-- pure math. Added to it would be some incalculable enhancements because the diminished output since 1913 was not just a suppression of the natural economy; it was a distortion of economic activity, manipulated by a corrupt political class for its own benefit and that of its cronies.

Had the economy been allowed to continue in its natural state without the afflictions of the Federal Reserve and the misapplied "income tax", economic activity would have remained pure and productive. We would have enjoyed massive compounded growth above and beyond the merely predictable.

The 20th Century saw a staggeringly-rapid and bountiful increase in technical knowledge. Productivity would have reached heights of which we cannot even dream had that knowledge been efficiently coupled with capital, innovative thinking and entrepreneurial spirit focused on market-satisfying purposes, rather than being skewed by self-interested manipulations of those in control of state violence.

Instead, we have had the steady bleeding of the productive economy by currency debasement. Worse, because its inflationary effect is not immediately felt, the first recipients of the debased currency enjoy a higher value from it than all currency soon will have. This gives those recipients an illusory appearance of economic virtue (as though they had served the market well and been rewarded accordingly), and an unfounded strength in resource acquisition.

The first of these illegitimate effects influences the assumptions and decision-making of other economic actors (with false information leading to bad decisions). The second allows the early recipients to absorb and sequester more capital resources than their actual productivity and attunement to the satisfaction of market interests merits. Since these early recipients are inevitably government-favored enterprises selected for purely political reasons, the dynamics of the process steadily erodes the economy from efficiency to inefficiency.

Then, in addition to the currency-debasement affliction, we have also been suffering the gimmicking of the tax structure to reward political allies of those in power, and to punish and hinder their competitors. This results in less productive economic actors dominating the market and subjects us all to higher prices and less growth and opportunity.

Further, the relative paucity of our wealth accumulation during the past century has not only failed to make us rich, but it has lagged far behind the outright destructive effects of the ongoing government meddling responsible for that poor performance. This has tragically resulted in America going from being the most prosperous society in human history when the government interference with the natural economy began to now being the biggest aggregate debtor in human history.

EASTER EGG: A NICE HIGHLIGHTING OF THE TRUTH ABOUT THE TAX BY IRS DATA

THOSE INCLINED TO READ Domitrovic's otherwise excellent treatise should note that while his conclusions about the "income tax" as a destructive force are sound enough as regards the last 70 years or so, he mistakenly extends that period all the way back to 1913. This is an error resulting from a basic and still all-too-common misunderstanding of the nature of the tax not yet corrected by Domitrovic discovering CtC scholarship.

Citing data from the Tax Foundation, and referring in particular to the period from 1913 to 1920, Domitrovic observes that "the new income tax system hit persons making as little as $1,000 a year ($11,000 in today's terms)." ('Back on the Road to Serfdom', p. 8.) Erroneously imagining that the "making as little as $1,000" referred to everyone earning that amount from any gainful activity rather than only those receiving that much from federally-connected activities, Domitrovic concludes that the tax was therefore widespread in its reach and impact.

Certainly, if Domitrovic's belief that "income" means "all that comes in" in the context of the tax was correct, his conclusion that a rate structure reaching everyone with $1,000 in "income" ($11,000 today) meant that a majority of the adult working population-- indeed, an overwhelming majority-- would have been subject to the tax. After all, even non-union factory workers earned half again as much during this period.

BUT DOMITROVIC'S CONCLUSION is a classic case of GIGO-- Garbage In, Garbage Out-- because his misunderstanding of the tax skews him into error. The fact is, not even a fifth of the gainfully-employed heads-of-household population of America was affected by the tax in any way until as late as 1940.

This is because Domitrovic's misunderstanding of the tax was not suffered by the American population in 1913, or for many years afterward. More than a quarter-century had to pass from that year's revival of the 1862 tax before fading memories of the purpose and character of the 16th Amendment and a sustained propaganda campaign encouraging worship of the state had produced enough American ignorance about the subject for Domitrovic's assumptions about its widespread impact to become sound.

Census and IRS data reveal that between 1913 and 1939, and even while as little as $1,000 of "income" was taxed, there wasn't a single year in which more than 17.3% of non-dependent, gainfully-employed, earnings-capturing Americans filed a tax return. The average percentage per year for that whole twenty-seven years-- which included the "Roaring Twenties", by the way-- was a mere 9.36%.

Starting around 1940 the "income tax" DID become a major contributor to the economic dysfunction plaguing the last 95 years, and grew as a destructive force like Topsy from that point forward. In that year, misunderstanding led to so many Americans coming to believe themselves subject to the tax that the percentage of earners filing returns jumped to 25.7. In 1941, the figure was 45%. By 1947, the figure was 91.7%, and it has stayed in that neighborhood ever since. (See the data table here.)

Prior to the 1940s, our grandparents and great-grandparents practiced a more educated and jealous regard for their liberties and the rule of law. But over the years those wanting to live by the "political means" rather than by the more-demanding "economic means" misled enough Americans into the same error about the nature of the tax that produces Domitrovic's mistake today.

Ultimately, the folks at whose privileged gains the tax is really directed succeeded in turning it into a scourge against all the rest of us, just by dumbing us down on this subject. The benign income tax became recast as the evil vampire that has preyed upon us all good and hard ever since.

But this change in appearances and perceptions is not because anything ever changed about the tax. It's just because we fell asleep at the wheel.

Happily, we're now waking up from our decades-long nap. The servants may have re-decorated to suit themselves during our slumber, but the house still belongs to us. We just have to come fully awake, shake out the cobwebs, and set things back to rights.

Aren't You Really, Really Glad YOU'VE Taken Control Of YOUR Money, Just As The Founders Intended?