The Free Market 17, no. 5 (May 1999)
No totalitarian state has tolerated even a modicum of financial privacy. That follows from the premise that citizens should not be granted any privacy at all. After all, they might use it in opposition to the government’s plans, or support themselves apart from the government. In contrast, freedom and financial privacy go hand in hand. This is a natural extension of the idea of individual ownership. Just as people put curtains on their windows, bank customers would demand complete confidentially. The government would have no power to tax our incomes, investments, or savings, or indeed to know anything at all about our financial affairs.
This was the American system before the turn of the century (except during Lincoln’s dictatorship). People made as much money as they could, and saved or spent it however they wished. But with income and inheritance taxes came the legal obligation to disclose. As Rep. Robert Adams predicted in 1894, the income tax “will bring in its train the spy and the informer. It will necessitate a swarm of officials and inquisitorial powers.”
Today, the United States has the most draconian financial disclosure system in the developed world. People who keep their money in offshore banks to avoid taxes are considered traitors. And when a citizen demands a zone of financial autonomy, the government wants to know: “What exactly are you trying to hide?” The natural answer of a free people is: Everything. The state has no more right to know about your affairs than your ne’er-do-well cousin (who at least isn’t holding a gun to your head).
The oppressive U.S. system of financial spying is justified in the name of collecting revenue, unearthing “money laundering,” and fighting drugs. Even worse, the U.S. has worked for decades to impose this system on countries around the world.
The Clinton administration recently proposed going even further and imposing “Know Your Customer” regulations on banks. This would have required banks to list their customers as potential launderers and evaders for making a series of “suspicious” transactions. Put in or pull out too much cash in the course of a month or two, and you’d be put on a “Most Wanted” list as a “smurfer.” The burden of proof would rest with the citizen to demonstrate his innocence. In the past, these new regulations would have slid by without notice. Anyone who objected would have been listed as an enemy of the state, investigated and audited, and that would have been the end of it. What the Treasury didn’t anticipate was how regulatory politics have changed with the Internet. A news site called WorldNetDaily exposed the Treasury’s plot, and a bureaucracy that is used to receiving eight or ten comments on its proposed regs received a quarter of a million against them.
In a magnificent defeat for the spying state, the regulation was killed. Under the leadership of Rep. Ron Paul, Congress passed a resolution condemning the power grab, and the Treasury backed off. It was the most significant blow for financial freedom in many decades, and offers a model for how citizen activism apart from the usual political channels can accomplish astounding victories over Leviathan.
Ideally, the U.S. would have a system even more ironclad than Switzerland’s. Bankers would agree never to reveal the contents of their customers’ bank accounts to anyone, especially not the government. To achieve that ideal, however, we have to take away from government the excuses it uses to pry into private affairs. That means abolishing the income tax, and not replacing it with gimmicky flat or national sales taxes. Taxes on profits, dividends, and interest need to be scrapped as well.
Frank Chodorov was once asked how the government would get along without such taxes. His response: “I am not concerned so much with how the government can get along without income taxes as I am with how we can get along with them.”
Chodorov went on to ask a much more fundamental question: What kind of government do we want? If we want a government that engineers society and pretends to provide for all our needs, we will have to put up with the omnipresent surveillance state.
Lew Rockwell is president of the Ludwig von Mises Institute.
FURTHER READING: Richard W. Rahn, The End of Money and the Struggle for Financial Privacy (Seattle: Discovery Institute Press, 1999).
