published Monday, April 15th, 2013

A century of misery

One hundred years ago this year, the states ratified the 16th Amendment allowing the federal government to "have power to lay and collect taxes on incomes." Within months, Americans were filling out the first income tax forms.

In the 1913 tax year, no one who made less than $20,000 -- the equivalent of $458,000 in today's dollars -- paid a dime in income tax. Now Americans earning $458,000 typically fork over $181,368 in federal income taxes.

A century ago, the federal income tax brackets ranged from 1 percent to 6 percent, and that 6 percent top tax rate only applied to those fortunate enough to earn $500,000, or $11.4 million in 2013 dollars. Now, marginal tax rates range all the way up to 39.6 percent and the lowest tax bracket is 10 percent. Some low-income Americans today pay a higher percentage of taxes than the wealthiest taxpayers in 1913.

In today's dollars, the first Tax Day -- the deadline for filing federal income tax returns -- after the implementation of the national income tax brought in $16.6 billion. This year, the income tax will take $2.7 trillion from hard-working Americans.

So why has the income tax grown to take so much money from so many Americans?

Sure, there are more people today than in 1913. But only about three times more. Income tax revenues are 160 times more now than a century ago.

The real reason the income tax is such a burden on Americans is the explosive growth in federal spending. The federal budget in 1913 was about $17 billion in current dollars, or $174 per person. This year, the federal budget is expected to top $3.8 trillion -- an inexcusable $12,050 for every man, woman and child in America.

While no one imagined in 1913 that we would need an Air Force or roads would grow into the expensive necessity they have become, there's still no logical explanation for a 7,000 percent per capita federal spending increase in a century.

•••

There's also no logical reason why the federal tax code is so complex and complying with tax laws is so frustrating.

The 1913 Form 1040 was four pages long, including a one-page instruction sheet. Last year, the instructions alone for the Form 1040 topped out at 189 pages -- the same length as the Ray Bradbury classic "Fahrenheit 451."

The current federal tax code is an eye-popping 73,954 pages, exactly 73,554 pages longer than the 1913 tax code, Americans for Tax Reform discovered.

The 1913 income tax form allowed five deductions and one exemption. Today, there are more than 300 exemptions, deductions and credits, the congressional Joint Committee on Taxation found.

According to the National Taxpayers Union, Americans spent 6.38 billion hours doing their taxes last year, or the equivalent of about 3.19 million employees working 40-hour weeks year-round with just two weeks off. Tax preparation alone will cost Americans about $195 billion this year.

Why doesn't the federal government drop all of the tax breaks, loopholes and carve-outs that create such a confounding tax structure? Why not just develop a fairer, flatter tax system?

Because doing so would cut out the millions of dollars in campaign contributions that members of Congress receive every year to create and maintain preferential tax treatment for interest groups.

Since tax preparation is a multi-billion industry, it's also not likely that lawmakers want to battle the backlash from accountants and tax-prep companies that would result if taxes were made simple enough so that everyone could do his or her own.

Tax Day could become a much less dreaded, frustrating experience if Congress would only spend less and stop trading tax breaks for campaign contributions. Unfortunately, that seems unlikely since responsible budgeting and creating a fairer, flatter tax structure would require principles and courage, two qualities that have become rarer in Congress with each passing year since the federal income tax was created a century ago.

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gjuster said...

If you ever believe what the politicians promise in Washington DC, you are a fool. (Just ask the Indians) Income taxes are about power, otherwise we would have a flat tax. In reality, if our Federal government operated within the limits of the constitution, a federal income tax would not be required

April 15, 2013 at 6:15 a.m.
nucanuck said...

The government expands because of demands put on it by the citizens. Everyone wants their little piece but resents what goes to others. We have welfare for all, rich and poor. None of this is new.

What is somewhat new is the failure to tax for what we spend...getting our benefits on credit. We have become a nation of deadbeats who won't pay for our wars and ethanol subsidies. We have no grounds to complain about taxes until we pay back what we have already spent...and owe.

We can complain about subsidies to special interest groups, but until we change that...we owe the money.

As a general rule, higher tax countries live better than lower tax countries...be careful what you wish for.

April 15, 2013 at 11:13 a.m.
Leaf said...

A century of MISERY?!?! Really? Don't you think that's a bit of an exaggeration? Pardon me if all the history I've read is completely wrong, but didn't the US go from an emerging economy to the undisputed world leader in the last hundred years? Maybe we were doing something right.

You're not a "glass half-empty" type, you're a "why don't I have ten glasses" kind of guy.

April 15, 2013 at 3:41 p.m.
lkeithlu said...

Thank you Leaf. Lets get a little perspective here. Our citizens live in the most free country on earth, with a terrific infrastructure (given the size of the country), product safety, work place safety, good courts, police and fire protection, a powerful military, parks and forests. That we are taxed (and at a much lower rate than our European cousins) is why we have all these things. Is there waste and inefficiency? Of course. But nothing compared to a lot of other countries. Perhaps the editorial staff needs to live overseas for an extended time to see just how good we have it.

April 15, 2013 at 4:01 p.m.
fairmon said...

IKeithlu said....

Is there waste and inefficiency? Of course. But nothing compared to a lot of other countries.

Does that equate to Wrong+wrong=right?

IKeithlu also said That we are taxed (and at a much lower rate than our European cousins) is why we have all these things.

We borrow 43 cents of every dollar spent. Should tax rates be more like our European cousins?

April 16, 2013 at 6:51 a.m.
fairmon said...

We should revisit the amendment and starve the beast. What can be expected when you turn greedy people lose to spend other peoples money.

We have gone from the worlds largest lender to the worlds largest debtor. Where, when and how does it end? It will be painful and very ugly.

April 16, 2013 at 6:56 a.m.
lkeithlu said...

Should tax rates be more like our European cousins?

I suspect it should.

My objection is with the term "misery". Few people live in misery in this country, and the ones that do are too poor to pay taxes. Perspective, folks. Some people need to see more than their own back yard.

April 16, 2013 at 7:17 a.m.
Leaf said...

Speaking of perspective, a ten-second internet search found this list, with data by the heritage foundation, no less, of percentage of tax revenue by GDP. Think of it as the total tax burden of the population divided by the total yearly economic output of the population.

Click on the sort button for the Heritage data. Now, do you really want to live in any of the countries at the top of the list that have very low taxes? Equatorial Guinnea? Libya? Burma? I didn't think so.

The US is still lower than Bolivia, the Ukraine, Japan, Jamaica, Mexico, and all the Northern European countries.

April 16, 2013 at 9:17 a.m.
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