Re: [Fwd: Still More on the Fed]

["ÁÎ×Ó¹â Henry C.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Rich Harper wrote:

> Henry:  I realize that the necessity of reserves and of income tax are tangential comments on your part.  Each issue, however, could be a productive discussion.  Do you have a
> good tax model which functions without an income tax?  Rich

A "good" tax model depends on one's social and political perspective, since no tax structure is neutral or evenhanded that affects the population or the economy across the board
evenly. All taxes penalize some and reward others. That is why it is ultimately a political issue.

There are many tax regimes without income tax components that manage to achieve healthy public finance.  Hong Kong, which Freidman loves, is a clear example, and HK's economic
policy is not even populist.  Many states in the US operate quite well without income taxes.  There are on-going discussions in the US on the wisdom of replacing the income tax
with a sales tax.  A case can be made that the resistance to abloishing the income tax comes mostly from those interests that now benefit from the income tax deduction regime, not
from tax payers. Charity recipients and foundations for example.

The first income tax in US histroy was imposed to finance the $3 billion cost of the Civil War.  All tax revenue, including income tax, excise tax and tarriffs, collected only
$600 million for that purpose.  This tax regime was abolished  in 1872, except for tariiffs, even though revenue from it was no longer needed.  It was a pure protectionist
measure.

The Wilson-Gorman Tarriff of 1894 included provision for an income tax, but was declared unconstitutional by the Supreme Court in a 4 to 5 decision on the ground that the
Constitution stipulates direct taxes to be apportioned among States in prorption to population and also that the income tax was a violation to the right of property.

John P. Altgeld, a German immigrant populist who became Democratic governor of Illinois in 1890, attacked big corporations and promoted the interest of farmers and workers, gave
the state an able, courageous and progressive administration.

The question of currency was central to the US populist movement.  Farmers knew from firsthand experience that the fall in farm prices was caused by the policy of deflation
adopted by the Federal government after the Civil War and only ineffectively checked by the Bland-Allison and Sherman Silver Purchase Acts.  The Treasury's redemption of silver
with gold increased the value of money and deflated prices.  Despite the rapid growth of business, the government engineered a sharp fall in the per capita quantity of money in
circulation.  The National Bank Act of 1863 also limited banks notes to the amount of government bonds held by banks.  The Treasury paid down 60% of the national debt and reduced
considerably the monetary base, not unlike the bond buyback program of the current Treasury.  To farmers, it was unfair to have borrowed when wheat sold for $1.00 per bushel and
to have to repay the same debt amount with wheat selling for 63 cents a bushel, when the fall in price was engineered by the lenders.  To them, the gold standard was a global
conspiracy, with willing participation by the US Eastern Bankers - the money trusts.

Grover Cleveland, despite winning the 1892 election with populist support within the Democratic Party, gave no support to populist programs.  Cleveland saw his main
responsibilities as maintaining the solvency of the Federal government and protecting the gold standard.  Declining business confidence caused gold to drain from the Treasury at
an alarming rate.  The Treasury then bought gold at high prices from the Morgand and Belmont bannking houses at great profit to them.  Populists saw this effort to save the gold
standard as a direct transfer of wealth from the people to the bankers and as the government's capitulation to internation finace capital. Cleveland even sent Federal troops to
Illinois to break the railroad strike of 1894, over the vigorous protest of Governor Altgeld.

The election of 1896 was about the gold standard.  Cleveland lost control of the Democratic Party which nominated 36-year-old William Jenning Bryan who declared in one of the most
famous speeches in American history (though mostly shunned these days):
"You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."  The banking and industrial interests raised $16
million for McKinney to defeat Bryan who suffered a defeat worse than Carter's.  The Hamiltonian ideal was firmly ordained.  It was not disimilar to the Reagan victory in 1980.

The 16th Amendment calling for a "small" income tax was enacted to compensate for the anticipated loss of revenue from the lowering of tarriffs from 37 to 27% as authorized by the
Underwood Tarriff of 1913, the same year the Federal Reserve System was established.

"Small"  now translates into an average of 50% with Federal and State income taxes combined.

Henry C.K. Liu