Statement of John
William Kurowski
Founder of The
American Constitutional Research Service
Before the
Committee on Ways And Means
United States House of Representatives
June 1995
Mr. Chairman and Member of this Committee:
The subject of tax reform was extensively
debated by the Founders of our country. I do not know if other
participants in these Hearings have taken the time to research the
accounts of these historical debates when formulating the
suggestions they will present to this Committee, but, having
research the Founders' original tax reform package. I am
inclined to believe its fundamental principals are as valid today
as when they were put into practice over two hundred years ago.
Our nation's first revenue Act was
"...in a certain sense a second Declaration of Independence;
and by a coincidence which could not have been more striking or
more significant, it was approved by President Washington on the
fourth day of July, 1789." [See, Twenty Years of Congress,
James G. Blaine, 1884, Vol. 1, page 185]
James Madison, in discussing this Act before
Congress identified a fundamental principal concerning the power
delegated to Congress to lay and collect taxes:
"...a national revenue must be obtained;
but the system must be such a one, that, while it secures the
object of revenue it shall not be oppressive to our
constituents."
The Act went on to imposed taxes, not on
Congress' constituents, but on specific "goods, wares, and
merchandise, imported into the United States", and not one
dime was raised under the Act by internal taxation! Internal taxes
were frowned upon by the Founders, especially when a national
revenue could be had by requiring foreigners to pay for the
privilege of doing business on American soil!
Jefferson, in his Second Annual Message
(December 15, 1802) states:
"In the department of finance it is with
pleasure inform you that the receipts of external duties for the
last twelve months have exceeded those of any former year, and that
the ratio of increase has been also greater than usual. This has
enabled us to answer all the regular exigencies of government, to
pay from the treasury in one year upward of eight millions of
dollars, principal and interest, of the public debt, exclusive of
upward of one million paid by the sale of bank stock, and making in
the whole a reduction of nearly five millions and a half of
principal; and to have now in the treasury four millions and a half
of dollars, which are in a course of application to a further
discharge of debt and current demands." [emphasis added]
Imagine....all this in consequence of "external
duties"!
In Jefferson's Second Inaugural Address
(March 4, 1805), he points out:
"At home, fellow citizens, you best know
whether we have done well or ill. The suppression of unnecessary
offices, of useless establishments and expenses, ENABLED US TO
DISCONTINUE OUR INTERNAL TAXES. These covering our land with
officers, and opening our doors to their intrusions, had already
begun that process of domiciliary vexations which, once entered, is
scarcely to be retrained from reaching successively every article
of produce and property...
"The remaining revenue ON THE CONSUMPTION
OF FOREIGN ARTICLES, IS PAID CHEERFULLY BY THOSE WHO CAN AFFORD TO
ADD FOREIGN LUXURIES TO DOMESTIC COMFORTS, being collected on our
seaboards and frontiers only, and incorporated with the
transactions of our mercantile citizens, it may be the pleasure and
pride of an American to ask, what farmer, what mechanic, what
laborer, ever sees a tax-gather of the United States?"
[emphasis added]
Although the national sales tax proposals
appear to be somewhat fairer than existing taxations, each would do
ill to out nation as they are all based on INTERNAL TAXATION, which
would ultimately increases the cost of goods manufactured on
American soil; burden the American Citizen in its collection; and,
are to be paid by the "farmer, mechanic, laborer", etc.,
who will continue to see the intrusion of the "tax-gatherer of
the United States" if such a system is adopted!
In view of the undesirable effects of an
internal national sales tax, perhaps it is wise to further study
the Founder's plan and learn how imposts and duties (external
taxation) were successfully used to fill the national treasury,
encourage domestic manufacturing and assist in building a strong
industrial base.
In addition to imposing a specific amount of
tax on specific articles of consumption imported, the first revenue
Act also imposed an across-the-board tax on imports which was
higher for imports shipped in foreign owned foreign built vessels,
and discounted the tax for imports arriving in American owned
American built ships:
"...a discount of ten percent on all
duties imposed by the Act shall be allowed on such goods, wards,
and merchandise as shall be imported in vessels built in the United
States, and wholly the property of a citizen or citizens
thereof."
This patriotic and skillful use of EXTERNAL
TAXATION not only filled our national treasury, but gave American
ship builders a hometown advantage and predictably resulted in
America's merchant marine becoming the most powerful on the
face of the planet. Unfortunately, today when I visit the docks in
New York's Hell's Kitchen area, I am saddened that I can no
longer read the names on the docked ships as they all seem to now
be foreign owned foreign built vessels....an irrefutable sign of
America's decline traceable to the acceptance of thirty pieces
of silver.
Yes, there was a day when our national
treasury was gladly filled by foreigners paying for the opportunity
to do business on American soil. But this was when members of
Congress, and those running for Office, put American interests
first and would have considered the NAFTA, GATT, and the WTO as
acts of sedition, and would have tarred and feathered those
participating in the surrender of America's sovereignty.
A national sales tax plan which omits external
taxation as a principal source to fill our national treasury, is in
fact a surrender of national sovereignty to the advantages of
foreign interests!
A SECOND SOURCE TO FILL
THE TREASURY
An across the board national sales tax would
unquestionably increase the cost of production on American soil, as
previously pointed out. To avoid this, and other unwanted effects
of an across the board national sales tax, common sense dictates we
must exclude from the list of taxable items, tools of production,
supplies necessary to conduct business, services needed to sustain
business, and the necessities of life (food, shelter, clothing,
medical expenses) i.e. all those items which makes labor possible
must also be excluded.
In simple language, a consumption tax plan
ought to be limited to articles of luxury, and each article must be
individually selected by Congress and the appropriate amount of tax
must be determined for each specific item chosen, just as was done
in the first revenue raising Act of our country!
By limiting the tax to articles of luxury, and
requiring each article to be specifically chosen and the
appropriate amount of tax determined by Congress, a self regulating
check and balance is imposed upon Congress. If Congress does its
job properly and the nation as a whole is productive and
prosperous, the purchase of articles of luxury will undoubtedly
increase, and with it, the flow of revenue into the common
treasury! But, if Congress' policies become burdensome and its
regulatory requirements upon business, industry and our
nation's labor force inhibit a hearty economy, or any
particular article is excessively taxed, the first sign would be a
decline in the flow of revenue into the national treasury!
Thus, the free market place determines the
limit of taxation under the Founder's internal consumption tax
plan, and it establishes a self regulating gauge beyond the reach
of Congress' manipulation!
As Hamilton said, in regard to taxes on
consumption, they:
"....may be compared to a fluid, which
will in time find its level with the means of paying them. The
amount to be contributed by each citizen will in a degree be by his
own option, and can be regulated by an attention to his own
resources. The rich may be extravagant, the poor can be frugal;
AND PRIVATE OPPRESSION MAY ALWAYS BE AVOIDED BY A JUDICIOUS
SELECTION OF OBJECTS PROPER FOR SUCH IMPOSITIONS...It is a signal
advantage of taxes on articles of consumption that they contain in
their own nature a security against excess. THEY PRESCRIBE THEIR
OWN LIMIT, WHICH CAN NOT BE EXCEEDED WITHOUT DEFEATING THE END
PROPOSED.... THAT IS, AN EXTENSION OF REVENUE." [No. 21 of the
Federalist, emphasis added]
BALANCING THE BUDGET
Still one more question remains to be
answered: what is to be done if insufficient revenue is raised
from external and internal taxes on consumption?
Once again the Founder's plan shines
bright above all contemporary suggestions. Careful research into
out Nation's early legislative history reveals the Framers did
in fact provide Congress with an emergency power to be used if
deficits should arise. And the wisdom of the Framer's method,
unlike the proposed balanced budget amendment (S.J. RES.1),
contains a brilliant mechanism which would abruptly end
Congress' current profligate spending habits!
Under the Framer's plan, whenever the
monies arising form Congress' normal taxing powers (imposts,
duties and excises) are found insufficient to fund federal
expenditures during a fiscal year, and a deficit is produced by
Congress borrowing to finance expenditures, Congress must then use
its direct taxing power at the beginning of the next fiscal year to
raise an amount sufficient to retire this deficit.
Congress is required to follow the rules of
apportionment when imposing this tax, and bills each state for a
share of the deficit. Each State must contribute a share of the
total deficit in proportion to its allotted number of
Representatives a set forth in Article 1, Section 2, clause 3, of
the United States Constitution. The more votes a State exercises
in the House, the larger is its share toward extinguishing a
deficit.......REPRESENTATION WITH PROPORTIONAL OBLIGATION!
The chart below is based on a total House
membership of 435:
STATE NUMBER
OF REPRESENTATIVES SHARE OF DEFICIT
----------------------------------------------------------------------
New York 31
31/435's
Maryland 8
8/435's
California 52
52/435's
Idaho 2
2/435's
Florida 23
23/435's
etc...................................................................
----------------------------------------------------------------------
The states are left free to raise their share
of the tax in their own way, within a time period set by Congress.
But if any state shall neglect to pay its share, then Congress must
send forth its officers to assess and levy that state's
apportioned share, together with interest thereon.
LEGISLATIVE HISTORY
This method of extinguishing deficits appears
in seven of the ratification documents which gave life to the
United States Constitution. The first emergency DIRECT tax was
imposed in 1798, to extinguish part of the Revolutionary War debt.
It was later used during the War of 1812, and also to extinguish
deficits during the Civil War.
The Sixteenth Amendment to the United States
Constitution did not repeal or alter Congress' power, or
OBLIGATION, to impose the emergency direct tax should a deficit
arise. The power of Congress to impose a direct tax still exists,
and direct taxes are still required to be apportioned among the
states, as pointed out by the United States Supreme Court [see
Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Eisner v.
Macomber, 252 U.S. 189 (1920); and, Bromely v. McCaughn, 280 U.S.
124 (1929). Also see Congressional Research Service Report No.
84-168 A 784/275, which was updated September 26, 1984].
BIG ADVANTAGES
There is no smoke and mirrors with the
'FAIR-SHARE' method of balancing the budget. The emergency
direct tax is required to be imposed whenever Congress closes a
fiscal year with a deficit. The structural mechanism which would
immediately bring fiscal sanity to Congress is the requirement of
having Congress send a bill to the governor of each state,
notifying him to remit his state's APPORTIONED SHARE toward
extinguishing the deficit created during the year by Congress; the
governors and state legislators being left with the burden of
having to raise this money, and to send it off to Washington,
D.C.
Picture, for a moment, the expression of the
faces of the Governor of New York and the New York State
Legislature, if New York should receive a bill for its apportioned
share (31/435) of the 1995 federal deficit. This threat would
create a compelling incentive for the Governor of each state, and
the various state legislatures, to keep a jealous eye on the
spending habits of their Congressional Delegation.... it would
require the fiscal accountability which the state governments once
DEMANDED from their Senate and House Members!
In addition, because each state's share of
the tax burden is determined by a fixed rule, similar to that which
determines the House membership size of each state, a barrier is
erected preventing the kind of mischief which Congress now
practices, i.e., discriminatory tax legislation; pork-barrel
favoritism; special interest lobbying, etc.
BOTTOM LINE
The Framers of our Constitution provided
specific method to extinguish anticipated deficits through an
emergency direct tax. Hamilton, in No. 36 of the Federalist Papers,
reminds us:
"let us be recollected that the
proportion of these taxes IS NOT TO BE LEFT TO THE DISCRETION OF
THE NATIONAL LEGISLATURE, BUT IS TO BE DETERMINED BY THE NUMBERS OF
EACH STATE, AS DESCRIBED IN THE SECOND SECTION OF THE FIRST ARTICLE
(United States Constitution). An actual census or enumeration of
the people must furnish the rule, a circumstance which effectually
shuts the door to partiality or oppression. The abuse of this
power of taxation seems to have been provided against with guarded
circumspection." (emphasis added)
The rule of apportionment was written into our
constitution to remedy a major defect associated with
"democracies", which Madison points out in No. 10 of The
Federalist Papers:
"...have ever been spectacles of
turbulence and contention; have ever been found incompatible with
personal security or the rights or property; and have in general
been as short in their lives as they have been violent in their
deaths."
And so, the Founding Fathers formed a
Constitutional Republic to avoid the predictable disastrous
consequences of democracy.
The intended use of the emergency direct
taxing power to extinguish deficits is not only for superior to any
of the proposed balanced budget amendments being offered....it is
already part of our Constitution. The method in text form is as
follows:
THE FAIR SHARE BALANCED
BUDGET METHOD
"SECTION 1. Congress ought not raise
money by borrowing, but when the money arising form imposts duties
and excise taxes are insufficient to meet the public exigencies,
and Congress has raised money by borrowing during the course of a
fiscal year, Congress shall then lay a direct tax at the beginning
of the next fiscal year for an amount sufficient to extinguish the
preceding fiscal year's deficit, and apply the revenue so
raised to extinguishing said deficit.
"SECTION 2. When Congress is required to
lay a direct tax in accordance with Section 1 of this Article,
Congress shall immediately calculate each State's apportioned
share of the tax based upon its number of Representatives as
allotted by the Constitution, and then notify the Executive of each
State of its apportioned share of the total tax being collected and
a final date by which said tax shall be paid into the United States
Treasury.
"SECTION 3. Each State shall be free to
assume and pay its quota of the direct tax into the United States
Treasury by the final date set by Congress, but if any State shall
refuse or neglect to pay its quota, then Congress shall send forth
its officers to assess and levy such State's proportion against
the real property within the State with interest thereon at the
rate of _____ per cent per annum, and against the individual owners
of such property. Provision shall be made for a 15 percent
discount for those States paying their share by ____ of the fiscal
year in which the tax is laid, and a 10 percent discount for States
paying by the final date set by Congress, such discount being a
defray the States' cost of collection.
CONCLUSION
There are participants at this Hearing, and
many political pundits appearing on talk shows across our country,
who are far more articulate than I in identifying the flaring
defects and dishonest nature of income taxation, whether flat or
progressive. Likewise, there is also an abundant supply of those
presenting well rehearsed arguments against an across the board
national sales tax, and have displayed their rhetorical skills
quite admirable. But who, I ask, has made a substantial argument
against the Founding Father's original tax reform package?
Perhaps our only problem in regard to tax
reform is that we, as a nation, have lost touch with the original
intent and wisdom of those who framed and ratified our
Constitution....such negligence culminating in our current
dilemma.
