Free To Choose: a personal Statement

Taxation
By general consent, the personal income tax is sadly in need of
reform. It professes to adjust the tax to "ability to pay," to tax
the rich more heavily and the poor less heavily and to allow for
each individual's special circumstances. It does no such thing.
Tax rates are highly graduated on paper, rising from 14 to 70
percent. But the law is riddled with so many loopholes, so many
special privileges, that the high rates are almost pure window
dressing. A low flat rate—less than 20 percent—on all income
above personal exemptions with no deductions except for strict
occupational expenses would yield more revenue than the present
unwieldy structure. Taxpayers would be better off—because they
would be spared the costs of sheltering income from taxes; the
economy would be better off—because tax considerations would
play a smaller role in the allocation of resources. The only losers
would be lawyers, accountants, civil servants, and legislators—
who would have to turn to more productive activities than filling
in tax forms, devising tax loopholes, and trying to close them.
The corporate income tax, too, is highly defective. It is a
hidden tax that the public pays in the prices it pays for goods and
services without realizing it. It constitutes double taxation of
corporate income—once to the corporation, once to the stock-
holder when the income is distributed. It penalizes capital invest-
ment and thereby hinders growth in productivity. It should be
abolished.
Although there is agreement between left and right that lower
rates, fewer loopholes, and a reduction in the double taxation
of corporate income would be desirable, such a reform cannot be
enacted through the legislative process. The left fear that if they
accepted lower rates and less graduation in return for eliminating
loopholes, new loopholes would soon emerge—and they are right.
The right fear that if they accepted the elimination of the loop-
holes in return for lower rates and less graduation, steeper gradu-
ation would soon emerge—and they are right.
This is a specially clear case where a constitutional amend-
ment is the only hope of striking a bargain that all sides can ex-
pect to be honored. The amendment needed here is the repeal of

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the present Sixteenth Amendment authorizing income taxes and
its replacement by one along the following lines:
The Congress shall have power to lay and collect taxes
on incomes of persons, from whatever sources derived, with-
out apportionment among the several States, and without
regard to any census or enumeration, provided that the same
tax rate is applied to all income in excess of occupational
and business expenses and a personal allowance of a fixed
amount. The word "person" shall exclude corporations and
other artificial persons.
Sound Money
When the Constitution was enacted, the power given to Con-
gress "to coin money, regulate the value thereof, and of foreign
coin" referred to a commodity money: specifying that the dollar
shall mean a definite weight in grams of silver or gold. The paper
money inflation during the Revolution, as well as earlier in vari-
ous colonies, led the framers to deny states the power to "coin
money; emit bills of credit [i.e., paper money]; make anything
but gold and silver coin a tender in payment of debts." The Con-
stitution is silent on Congress's power to authorize the govern-
ment to issue paper money. It was widely believed that the Tenth
Amendment, providing that the "powers not delegated to the
United States by the Constitution . . . are reserved to the States
respectively, or to the people," made the issuance of paper money
unconstitutional.
During the Civil War, Congress authorized greenbacks and
made them a legal tender for all debts public and private. After
the Civil War, in the first of the famous greenback cases, the
Supreme Court declared the issuance of greenbacks unconstitu-
tional. One "fascinating aspect of this decision is that it was de-
livered by Chief Justice Salmon P. Chase, who had been Secretary
of the Treasury when the first greenbacks were issued. Not only
did he not disqualify himself, but in his capacity as Chief Justice
convicted himself of having been responsible for an unconstitu-
tional action in his capacity as Secretary of the Treasury."
6
Subsequently an enlarged and reconstituted Court reversed the

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FREE TO CHOOSE: A Personal Statement
first decision by a majority of five to four, affirming that making
greenbacks a legal tender was constitutional, with Chief Justice
Chase as one of the dissenting justices.
It is neither feasible nor desirable to restore a gold- or silver-
coin standard, but we do need a commitment to sound money. The
best arrangement currently would be to require the monetary
authorities to keep the percentage rate of growth of the monetary
base within a fixed range. This is a particularly difficult amend-
ment to draft because it is so closely linked to the particular insti-
tutional structure. One version would be:
Congress shall have the power to authorize non-interest-
bearing obligations of the government in the form of cur-
rency or book entries, provided that the total dollar amount
outstanding increases by no more than 5 percent per year
and no less than 3 percent.
It might be desirable to include a provision that two-thirds of
each House of Congress, or some similar qualified majority, can
waive this requirement in case of a declaration of war, the suspen-
sion to terminate annually unless renewed.
lnflation Protection
If the preceding amendment were adopted and strictly adhered
to, that would end inflation and assure a relatively stable price
level. In that case, no further measures would be needed to pre-
vent the government from engaging in inflationary taxation with-
out representation. However, that is a big
if.
An amendment that
would remove the incentive for government to inflate would have
broad support. It might be adopted far more readily than a more
technical and controversial sound-money amendment. In effect,
what is required is the extension of the Fifth Amendment provision
that "kilo person shall . . . be deprived of life, liberty, or prop-
erty, without due process of law; nor shall private property be
taken for public use without just compensation."
A person whose dollar income just keeps pace with inflation
yet who is pushed into a higher tax bracket is deprived of property
without due process. The repudiation of part of the real value of

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309
government bonds through inflation is the taking of private prop-
erty for public use without just compensation.
The relevant amendment would specify:
All contracts between the U.S. government and other