Saturday, December 19, 2009

The Law and the Profits: Part 2

The Law and the Profits, by C. Northcote Parkinson (of Parkinson's Law fame). Chapter 1, continued.

Chapter 1 delves into the reasons for increasing taxation before attempting to persuade concerning the evils of excessive taxation. In short, he attributes the trend increase to "temporary" wartime increases that are never fully decreased once the war is over. This long paragraph, excerpted from the beginning of Chapter 1 is too well-written to attempt a paraphrase:

Governmental as opposed to individual income is historically linked with the incidence of war. In all systems of revenue there has always been the provision for the temporary expenses of conflict. During a time of emergency, with our interests, our beliefs, our pride, or even our existence at stake, we agree to pay almost anything as the price of victory. In theory the revenue should fall to something like its previous level. In practice it seldom does. While the governmental income remains almost at its wartime level, peacetime expenditure rises to meet it. In times past the action of this law was slightly restrained, to be sure, by two considerations which no longer apply. In the first place, it was usually felt that taxes had to be reduced somewhat in time of peace in order to allow for their being raised again in time of war. During a century, however, when each successive war is judged to be the last, this theory finds no further support. In the second place, there are types of extravagance which yield only a diminishing return. To the provision of banquets and the enjoyment of dancing girls there is (eventually) a physical limit. The same is not true, unfortunately, of departmental and technical luxuriance. Economic and cultural advisers can multiply beyond the point at which concubines might be thought a bore; beyond the point even at which they might be thought unbearable. Financially, as well as aesthetically, the situation has become infinitely worse.
One can look into the history of the United States to understand when taxation has been introduced. Article 1 of the U.S. Constitution provides for "Taxes, Duties, Imposts and Excises," of which primarily duties, imposts and excises were chiefly in force in the colonial period. The first instance of the income tax is in 1861 during the Civil War (at a mere 3% single top rate). Though struck down as unconstitutional, it was introduced again in 1894 during peacetime (at a mere 2% single top rate), but was struck down again as unconstitutional. It was revived permanently (thus far) in 1913 following ratification of the Sixteenth Amendment. The highest rates were increased from 7% to 77% between 1916 and 1918 during World War 1. Following the war, the rates were reduced (generously, we might think) to (only) 24%, though it took until 1929 to reach this nadir. Rates went up again (to 81% by 1941) to combat the Great Depression, increased further to 94% (by 1942) during World War 2. Rates came down (only) to 82% (by 1949), then increased again to 92% in 1952-1953 (the onset of stalemate in the Korean War). Since then, rates have trended downward to the present highest rate of 35%. (See this Wikipedia article for the details.)

Payroll taxes were introduced to combat the Great Depression (Social Security) and the War on Poverty (Medicare), and have been expanded several times over several decades to increase revenue and expand public services.

It is clear simply from U.S. history that Parkinson observed correctly. Taxation does not seem to return to pre-war levels, giving rise to the statement of the second law, that expenditure must inevitably rise to meet the increased level of taxation.

In the next article, we shall take up the details of taxation somewhat from the civil service and political viewpoint.

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