I’ve found that people seem to take the income tax in America for granted. It seems to be that everyone just takes it in stride and figures that it is necessary. I’ve even heard a great deal of people refer to paying your income taxes as “patriotic.” Joe Biden went as far to say that paying more income taxes is patriotic. What does an income tax really represent? How and when did Americans begin to be taxed on their incomes by the federal government? These are simple questions that have complex and frustrating answers.
It turns out that our original Constitution specifically prohibited a personal income tax in a bit of a round-about manner. Nevertheless, the federal government implemented an income tax during the civil war in 1861, which was repealed ten years later. The government again tried to implement a personal income tax in 1894, but that was repealed a year later after being ruled unconstitutional by the Supreme Court. It took until 1913 for Congress to finally legalize a personal income tax on American citizens, and they had to add an Amendment, the 16th, to the Constitution to do it.
The first federal personal income tax in the modern era was in 1913 an amounted to 1% of earned income for everybody earning under $20,000, which in today’s dollars would amount to over $400,000. People were only taxed the maximum amount of 7% of earned income if they made over $500,000, or about $10.4 million in today’s dollars. By comparison, for 2008 the federal personal income tax schedule has persons making under $32,550 paying 15% on their taxable income and the maximum tax rate of 35% kicked in at $357,700; quite the difference from 1913 when you only had to pay the maximum rate of a whopping 7% if you were obnoxiously wealthy. The maximum tax rate did rise during World War I all the way up to 77% in 1918. However, people were only taxed at that rate for income exceeding $1 million, or about $14 million today.
Personal income taxes stayed relatively low – never exceeding 5% of earned income for most people – until our old friend Franklin Delano Roosevelt came into office. Though he is thought of as defending the poor, he boosted the lowest tax rate, for income under $2000 (about $23,000 today), to the highest rate it has ever been, 23%. Following that time, the lowest it has dipped is 11% and it stands at 15% today. Another remarkable event that took place in FDR’s term in office was the level for the top income tax bracket came down drastically. In 1941 the top income bracket was taxed 81% for all income exceeding $5 million (about $70 million today). In 1942 FDR changed this bracket to 88% for all income in excess of $200,000 (about $2.5 million today). Two years later it would jump up to 94% for about the same level of income. Granted, this was a time when the United States was engaged in World War II, and during such times taxes and government spending understandably get out of control. The problem is that income taxes never came down much from that time, and the level at which you entered higher brackets kept falling. The funny thing about taxes is that the government can tell you that they are lowering them and they will lower the rates, but they will also lower the bracket levels, so in essence everybody ends up paying more because although their old bracket has a lower rate, they are in a new bracket with a higher rate than they were paying.
So we know how the personal income tax came to be what it is today, but there is much more to a personal income tax than we typically care to consider. There is a reason that the authors of the Constitution prohibited the direct taxation of people’s income by the federal government. The United States Government is essentially asserting that it owns you and your production, so you must give a portion of anything you produce to the government. An income tax is not given voluntarily; it is directly withdrawn from your paycheck or else has to be paid at the end of the year. If you are under the notion that you and your production are under the ownership of the United States Government then this article is of little use to you, but if you feel that you own your production then the income tax must be seen as absolute theft. Should you decide that you feel you wish to keep more or all of what you produce then men with guns will come and force you to give your money to the government or spend your time in a jail cell. If you do not believe that these men with guns will come then try not paying your taxes for a long enough period, and you will undoubtedly be encountered by armed men to drag you to jail.
One obvious problem with the income tax is the socialistic ramifications of it. We always hear people suggesting more progressive tax systems, but if you look at the statistics, our tax system is already wildly progressive (meaning the rich pay more than the poor. For example, the top 1% of income earners in the country pay more than 30% of the income taxes. The top 25% pay more than 80% of the taxes. The top 50% of income earners pay more than 96% of all income taxes in the United States. It would be difficult to institute an even more progressive tax system than the one we already have. In essence, the poor are having their lives subsidized by the rich – one of the cornerstones of socialism and a recipe for a failed society.
Another problem with the income tax are the resources associated with collecting it and avoiding it. Every year billions upon billions of dollars are spent by people and companies to avoid paying more taxes than they absolutely have to and equal amounts of money are spent by the IRS in an effort to collect income taxes. The budget for the IRS in 2008 is $11.1 billion. All of this money spent by companies and the IRS is complete waste. These are essentially transaction costs for a tax system that, if it must be in place, should be much more efficient. This is a good case for a straight flat income tax, if we have an income tax at all.
Perhaps the most severe and threatening problem with the income tax is that it discourages production. The lower income earners do not pay taxes, so every dollar they make they get to keep. On top of that, the lower income earners are able to take advantage of many valuable government handouts. As people earn more money in the lower income levels they experience a phenomena where even though their paychecks are higher, they are not able to spend anymore money because there are less government handouts for their income level. As they move even further up the income ladder, they are faced with increasing amounts of every additional dollar earned being taken away from them. At the 35% income level people are essentially faced with the predicament that you can only keep 65 cents of every dollar you earn. As such, they really only have 65% of the motivation to make that next dollar than they would have otherwise had if there were no income tax. To have a system that directly discourages production within a nation is entirely counterproductive and is the converse of what was intended by the founders of this nation.
Nations that have lowered their income tax rates (i.e. Ireland until lately and Hong Kong) or abolished it altogether (i.e. Dubai) have seen tremendous economic growth and prosperity. Dubai has moved from having its people live in squander to being one of the wealthiest nations in the world. Most of this, if not all, can be attributed to laissez fair government and no income taxation.
The more you know about your rights and your history the less power the government has to take from you. Income taxes are one of the most counterproductive measures instituted by our government and must be scrutinized very quickly.