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The Brushaber case, while not easy to decipher, has been construed
as holding that the Sixteenth Amendment does not overrule Pollock in
declaring general income taxes unconstitutional, and that the
Amendment does not amend the U.S. Constitution on the question of
income taxes. Rather, said the Court, the Sixteenth Amendment applies
to excise taxes; it merely clarifies the federal government™s existing
authority to create excise taxes without apportionment; and it applies
only to gains and profits from commercial and investment activities.5

Watering the Hydra

These fine points were of little interest to most people before World
War II, since few people were actually affected by the tax; but war
again provided the pretext for expanding the law™s scope. In 1939,
Congress passed the Public Salary tax, taxing the wages of federal
employees. In 1940 it passed the Buck Act, authorizing the federal
government to tax federal workers living outside Washington D.C. In
1942, Congress passed the Victory Tax under its Constitutional
authority to support the country™s war efforts. A voluntary tax-
withholding program was proposed by President Roosevelt which
allowed workers to pay the tax in installments. This program was so
successful that the number of taxpayers increased from 3 percent to
62 percent of the U.S. population. In 1944, the Victory Tax and
Voluntary Withholding Laws were repealed as required by the U.S.
Constitution. But the federal government, without raising the matter
before the Court or the voters, continued to collect the income tax,
pointing for authority to the Sixteenth Amendment.6
Today the federal income tax has acquired the standing of a
legitimate tax enforceable by law, despite longstanding rulings by the
Supreme Court strictly limiting its constitutional scope. Other taxes
have also been added to the list, which currently includes an Accounts
Receivable Tax, Building Permit Tax, Capital Gains Tax, CDL License
Tax, Cigarette Tax, Corporate Income Tax, Federal Unemployment
Tax (FUTA), Food License Tax, Fuel Permit Tax, Gasoline Tax,
Inheritance Tax, Inventory Tax, IRS Interest Charges, IRS Penalties,
Liquor Tax, Luxury Taxes, Marriage License Tax, Medicare Tax,

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Property Tax, Real Estate Tax, Service Charge Taxes, Road Usage Taxes
(Truckers), Road and Toll Bridge Taxes, Sales Tax, School Tax, Social
Security Tax, State Unemployment Tax (SUTA), Telephone Taxes and
Surcharges, Trailer Registration Tax, Utility Taxes, Vehicle License
Registration Tax, Vehicle Sales Tax, and Workers Compensation Tax,
among others. Estimates are that when the hidden taxes paid by
workers all the way up the chain of production are factored in, over
40 percent of the average citizen™s income may be going to taxes.7

Was the Sixteenth Amendment Properly Ratified?

A variety of challenges to the Tax Code have been prompted by
inequities in the system. In 1984, a tax protester named Bill Benson
spent a year visiting State capitals, researching whether the Sixteenth
Amendment was properly ratified by the States in 1913. He found
that of the 38 States allegedly ratifying it, 33 had amended the lan-
guage to say something other than what was passed, a power States
do not possess. He argued that the Amendment was properly ratified
by only two States. He attempted unsuccessfully to defend a suit for
tax evasion on that ground, and spent some time in jail; but that did
not deter later tax protesters from raising the defense. In 1989, the
Seventh Circuit Court of Appeals again rejected the argument, not
because the court disagreed with the data but because it concluded
that when Secretary of State Philander Knox declared the amend-
ment adopted in 1913, he had taken the defects into consideration.
Knox™s decision, said the Seventh Circuit, “is now beyond review.”8

So Who Was Philander Knox?

It comes as no great surprise that Philander Knox was the Robber
Barons™ man behind the scenes. He was an attorney who became a
multi-millionaire as legal counsel to multi-millionaires. He saved
Andrew Carnegie from prosecution and civil suit in 1894, when it
was shown that Carnegie had defrauded the Navy with inferior armor
plate for U.S. warships. Knox saved Carnegie again when the
president of the Pennsylvania Railroad testified that Carnegie had
regularly received illegal kickbacks from the railroad. Knox also saved
his college friend William McKinley from financial ruin, before
McKinley won the 1896 presidential race. In 1899, President McKinley
offered Knox the post of U.S. Attorney General, but he declined. He

Chapter 14 - Harnessing the Lion

was then too busy arranging the largest conglomerate in history, the
merger of the railroad, oil, coal, iron and steel interests of Carnegie, J.
P. Morgan, Rockefeller, and other Robber Barons into U.S. Steel. After
completing the U.S. Steel merger, Knox accepted McKinley™s offer,
over vigorous opposition. The appointment put him in charge of
prosecuting the antitrust laws against the same Robber Barons he had
built a career and a personal fortune representing. When the U.S.
Steel merger met with public outcry, Knox said he knew nothing and
could do nothing, and U.S. Steel emerged unscathed.
When McKinley was assassinated in 1901, Knox continued as
Attorney General under Teddy Roosevelt, drafting federal statutes that
gave his wealthy and powerful friends even more power and control
over interstate commerce. Agents of the conglomerates wound up
sitting on the government boards and commissions that set rates and
eliminated competition in restraint of trade. Knox was appointed
Secretary of State by President Taft in 1909, when Senator Aldrich
gave the Sixteenth Amendment a decisive push through Congress.
The Amendment was rushed through right before Knox resigned as
Secretary of State. That may explain why he was willing to overlook
a few irregularities. If he had left the matter to a successor, there was
no telling the outcome.9

Do We Need a Federal Income Tax?

In upholding these irregularities against constitutional challenge,
courts may have been motivated by a perceived need to preserve a
federal income tax that has come to be considered indispensable to
funding the government. But is it? A report issued by the Grace
Commission during the Reagan Administration concluded that most
federal income tax revenues go just to pay the interest on the government™s
burgeoning debt. Indeed, that was the purpose for which the tax was
originally designed. When the federal income tax was instituted in
1913, all income tax collections were forwarded directly to the Federal
Reserve. In fiscal year 2005, the U.S. government spent $352 billion
just to service the government™s debt. The sum represented more than
one-third of individual income tax revenues that year, which totaled
$927 billion.10
As for the other two-thirds of the individual income tax tab, the
Grace Commission concluded that those payments did not go to service
necessary government operations either. A cover letter addressed to

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President Reagan stated that a third of all income taxes were consumed
by waste and inefficiency in the federal government. Another third of
any taxes actually paid went to make up for the taxes not paid by tax
evaders and the burgeoning underground economy, a phenomenon
that had blossomed in direct proportion to tax increases. The report
With two-thirds of everyone™s personal income taxes wasted or
not collected, 100 percent of what is collected is absorbed solely
by interest on the Federal debt and by Federal Government
contributions to transfer payments. In other words, all individual
income tax revenues are gone before one nickel is spent on the services
which taxpayers expect from their Government.11
Even the third going for interest on the federal debt could have
been avoided, if Congress had created the money itself on the Franklin/
Lincoln model. But the obscurely-worded Federal Reserve Act
delegated the power to create money to a private banking monopoly;
and Congress, like the sleeping public, had been deceived by the
bankers™ sleight of hand. The head had thundered and the walls had
shook. The wizard™s wizardry had worked, at least on the mesmerized
majority. Among the few who remained awake was Representative
Charles Lindbergh Sr., who warned on the day the Federal Reserve
Act was passed:
This Act establishes the most gigantic trust on earth. When the
President signs this bill, the invisible government by the Monetary
Power will be legalized. The people may not know it
immediately, but the day of reckoning is only a few years
The day of reckoning came just sixteen years later.

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Chapter 15

Uncle Henry sat upon the doorstep and looked anxiously at the
sky, which was even grayer than usual. . . . From the far north they
heard a low wail of the wind, and Uncle Henry and Dorothy could see
where the long grass bowed in waves before the coming storm.
“ The Wonderful Wizard of Oz,
“The Cyclone”

T he stock market crashed in 1929, precipitating a world
wide depression that lasted a decade. Few people remember
it today, but we can still get the flavor in the movies. The Great
Depression was depicted in the barren black-and-white Kansas drought
opening the 1939 film The Wizard of Oz. It was also the setting for
It™s a Wonderful Life, a classic 1946 film shown on TV every Christmas.
The film starred Jimmy Stewart as a beloved small-town banker named
George Bailey, who was driven to consider suicide after a “run” on
his bank, when the townspeople all demanded their money and he
couldn™t pay. The promise of the Federal Reserve Act “ that it would
prevent bank panics by allowing a conglomeration of big banks to
come to the rescue of little banks that got caught short-handed “ had
obviously failed. The Crash of 1929 was the biggest bank run in
The problem began in the Roaring Twenties, when the Fed made
money plentiful by keeping interest rates low. Money seemed to be
plentiful, but what was actually flowing freely was “credit” or “debt.”
Production was up more than wages were up, so more goods were
available than money to pay for them; but people could borrow. By
the end of the 1920s, major consumer purchases such as cars and
radios (which were then large pieces of furniture that sat on the floor)
Chapter 15 - Reaping the Whirlwind

were bought mainly on credit. Money was so easy to get that people
were borrowing just to invest, taking out short-term, low-interest loans
that were readily available from the banks.
The stock market held little interest for most people until the Robber
Barons started promoting it, after amassing large stock holdings very
cheaply themselves. They sold the public on the idea that it was possible
to get rich quick by buying stock on “margin” (or on credit). The
investor could put a down payment on the stock and pay off the balance
after its price went up, reaping a hefty profit. This investment strategy
turned the stock market into a speculative pyramid scheme, in which
most of the money invested did not actually exist.1 People would open
margin accounts, not because they could not afford to pay 100 percent
of the stock price, but because it allowed them to leverage their
investments, buying ten times as much stock by paying only a 10 percent
down payment. i The public went wild over this scheme. In a
speculative fever, many people literally “bet the farm.” They were
taking out loans against everything they owned “ homes, farms, life
insurance “ anything to get the money to get into the market and
make more money. Homesteads that had been owned free and clear
were mortgaged to the bankers, who fanned the fever by offering
favorable credit terms and interest rates.2 The Federal Reserve made
these favorable terms possible by substantially lowering the rediscount
rate “ the interest rate member banks paid to borrow from the Fed.
The Fed thus made it easy for the banks to acquire additional reserves,
against which they could expand the money supply by many multiples
with loans.

Hands Across the Atlantic

Why would the Fed want to flood the U.S. economy with borrowed
money, inflating the money supply? The evidence points to a scheme
between Benjamin Strong, then Governor of the Federal Reserve Bank
of New York, and Montagu Norman, head of the Bank of England, to
deliver control of the financial systems of the world to a small group
of private central bankers. Strong was a Morgan man who had a very
close relationship with Norman “ so close that it was evidently more
than just business. In 1928, when Strong had to retire due to illness,
Norman wrote intimately, “Whatever is to happen to us “ wherever

Leveraging means buying securities with borrowed money.

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you and I are to live “ we cannot now separate and ignore these years.
Somehow we must meet and sometimes we must live together . . . .”4
Professor Carroll Quigley wrote of Norman and Strong:
In the 1920s, they were determined to use the financial power
of Britain and of the United States to force all the major countries
of the world to go on the gold standard and to operate it through
central banks free from all political control, with all questions of
international finance to be settled by agreements by such central
banks without interference from governments.4
Norman, as head of the Bank of England, was determined to keep
the British pound convertible to gold at pre-war levels, although the
pound had lost substantial value as against gold during World War I.
The result was a major drain on British gold reserves. To keep gold
from flowing out of England into the United States, the Federal Re-
serve, led by Strong, supported the Bank of England by keeping U.S.
interest rates low, inflating the U.S. dollar. The higher interest rates in
London made it a more attractive place for investors to put their gold,
drawing it from the United States to England; but the lower rates in
the United States caused an inflation bubble, which soon got out of


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