The Federal Reserve and Income Tax: Working in Tandem or Seperate Institutions?
Initiated within the same year, do these two federal institutions exist independent of each other or work together? by Gene DeNardo
(libertarian)
Thursday, April 22, 2010
The federal income tax was made possible with the ratification of the Sixthteenth Amendment on February 3, 1913. Ten months later on December 3rd, the Federal Reserve Act was passed, establishing the Federal Reserve banking system. Though most historians view this proximity of dates as a coincidence, it is extremely interesting how these two institutions work together to benefit the growth of the state and the transfer of power and wealth from individuals to government and large corporate interests.
The fundamental product of the Federal Reserve over nearly one hundred years has been money production and the resulting monetary inflation. This monetary inflation, the forced addition of dollars distributed to selected traders by the mechanisms of the Federal Reserve, has caused the value of the dollar to drop to three cents in comparison to the year the Fed was created, 1913. Prior to that year, deflation was as common, if not more common, than inflation.
The purpose of the income tax was to raise money to maintain and expand the central government. The income tax offered an extremely ingenious way of accomplishing this objective. Income, which is earned within the individual states, would be collected and sent directly to the federal government.
This has brought about the absurdity of the states having to beg the federal government to return to them money that was initially generated within the states. With the power thus inversed, federal agents can meter and reward those activities within the states they wish to and also favor those states which have drawn influence and power within the federal system. Added to this, the ease at which federal projects can be funded without the consent of either the states or the taxpayers who are funding the projects.
The reverse of this would be a much healthier situation. If the federal government had instead to "ask" for money from the states, the states could make demands and requests and be sure they received "services" in exchange for the money they sent to the fed to sustain its operation. In this way, the size and scope of the federal government would be controlled. There is no way to control a government that has direct access into the pockets of every working US citizen, with little return accountability.
The states would also be accountable to the taxpayer under a reverse collection income tax system. They would need to compete with each other in providing the most for each tax dollar. If they failed, citizens could simply load up the truck and move to a better functioning state.
The role of the Federal Reserve in this income tax scheme is often overlooked. Its primary function is that of carrying out the "inflation tax". By creating a constant state of inflation, any new currency printed draws its value from existing currency. While we create value at work, the value we receive, our wage or salary, is constantly being devalued by the creation of new money with zero backing.
In this manner, the federal government is able to create and spend money that would have no value if not for the value instilled by the value that its citizens have already created and are at this moment creating when they work. It is another silent income tax that transfers away the wealth and value that we produce. It is also another advantage the federal government can wield over the states, as it is illegal for the states to create their own money, again forcing them to be reliant on the federal system.
Inflation also has the effect of "diminishing" the value of debt. As the value of money diminishes, the value of "old" debt also loses relative value. The new, devalued money is more plentiful and old debt is paid off easier. This allows government debt to grow smaller in theory as it ages, allowing greater future federal indebtedness. Having the power to print currency at will and at the same time lower the standing of past debt is very addictive, as you may have noticed.
Federal money creation also forces workers to demand and receive a higher wage in order to cope with a rising cost of living. Because of wage increases necessary to cope with inflation, the income tax takes a larger bite out of workers who are pushed into higher tax brackets with corresponding higher tax rates. This is accomplished without a tax increase as workers earn more, while at the same time continually losing purchasing power, some of it surely due to the greater tax bite.
Taxpayers on the higher end of the scale actually lower their tax rate through inflation. Since, their incomes started at a higher level and almost always increase at the same rate or a greater rate than the lower sectors, the disparity between income levels grows geometrically with inflation. If the highest tax rate does not increase or decreases, the upper tiers can actually gain greater purchasing power despite increasing prices. More of the economy becomes geared towards "luxury" purchases, since the middle sector has lost purchasing power, increasing competition in that area which causes prices for high end items to decrease relative to the inflation rate. Through the passage of time, inflation is able to turn a progressive income tax into a regressive tax.
Add to that tax breaks for "capital" investment and "interest" income and it becomes easy to see how the fed works for the elite class of citizen at the expense of the rest of us. However, the biggest effect of both the tax system and the Federal Reserve on economic stratification is the inflationary effect on assets. .
The natural economic reason for ownership of assets is one of utility. What can a particular asset do for the owner or what is the productive capability of the asset. In a free economy, the value of the asset is based solely on its value as a productive or utility unit. Deflation, which would occur with increased aggregate production and a stable currency, only reinforces this concept. The asset must prove its worth as it is entirely possible that it may lose value during its ownership. In fact, this is where we came upon the use of "depreciation" as a method to cost assets. The asset loses value through time or depreciates.
The Federal Reserve enforcement of constant inflation has set this relationship on its head, in the process severly distorting the economic field. New currency is drawn to assets like iron to a magnet. Asset values rise for no apparent reason. Income tax laws encouraging capitalization and indebtedness only intensify this process.
Reward, which naturally seeks out production in a free economy, instead goes directly to owners. The quickest way to wealth is certainly not work, but neither is it through the production process. Wealth is attained and great chasms are created between the wealthy and the remainder of the society simply due to ownership of assets. While the average worker or manager watches the value of his product shrink and diminish due to inflation, the owners of assets, for the most part corporations, witness immense profits simply due to asset title. The economy shifts away from production and to entitlement.
That this value reliant on ownership is not taxed but rather protected from taxation is certainly not a crime. What lacks any justice, if any income tax has the possibility of being just, is the incredibly high tax rate on work and production, through both income and sales tax, relative to the lack of taxation on capital assets and their growth in value.
While it is the overall "rate" of taxation that determines the level of control over the entire economy, it is "relative" taxation that determines the distribution of wealth within the economy. Who is taxed and how much in relation to everyone else determines who is allowed to keep the value they produce. Where the collected tax is distributed determines who gets to keep everyone else's produced value. Undoubtably, income taxation goes hand in hand with privilege.
Historians will continue to debate whether the formation of the Federal Reserve and the institution of the income tax within months of each other was a random and coincindental act or a collusive effort. Whatever the outcome, there is no doubt that the two together are much stronger than either would be by itself. They work together in marvelous fashion to control the economy and direct capital away from the producers and into the laps of selected beneficiaries. Whatever there original purpose, whether altruistic or devious, close to one hundred years of ever increasing power has allowed these two institutions to help create a world that could never have been envisioned.
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The purpose of income taxes is not to raise revenue under a fiat monetary regime, it is to undergird that regime by forcing people to pay their tax using fiat money.Â
Breadsley Ruml, a former Federal Reserve head, said that there were basically three reasons for income, estate and gift taxes, none of which had to do with federal revenues. The first was to enforce the fiat monetary regime, the second was to redistribute and control wealth and the third was to maintain a particular social order.
