Income tax

The Long Sordid Tale of the American Income Tax

The high cost of the 16th Amendment

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It's the time of year again when most Americans will be filing their income taxes. As if that's not painful enough all by itself, here's a little more salt for your wounds.

First, some history: In 1913 the U.S. federal individual income tax was enacted following the passage of the 16th Amendment, which granted Washington the authority to take a piece of citizens' paychecks. According to the Tax Foundation, the top tax rate that year (adjusted for inflation) was 7 percent on income above $11.5 million; the lowest rate was 1 percent on income under $463,826.

Oh, how things have changed. The tax code today is a 76,000-page monstrosity, and the current top marginal rate of 39.6 percent will hit all married filers with taxable income of $466,950 and higher.

According to the Congressional Budget Office, the federal government collected $3.249 trillion in taxes in 2015. Almost half of that amount came from the income tax, meaning that the average income tax per return was $10,300. Most of it is withheld from our paychecks during the year—thanks, Milton Friedman!—and the rest is owed come April. If you've over-withheld (i.e., if you extended an interest-free loan to the federal government), you will get a refund.

But don't go thinking you can refuse the withholding, invest that money, let it grow in the market, and then pay your entire tax bill at the end of the year. The Internal Revenue Service (IRS) is eager to get its hands on your cash right away, so it penalizes anyone who owes more than $1,000 (after subtracting their withholding and estimated tax payments) or who's paid less than 90 percent of their tax burden for the current year or 100 percent of their tax burden for the prior one—whichever is smaller. With the IRS, each time you play, you lose.

Not everyone owes $10,000 per year, of course. The federal income tax is progressive, which means the top earners pay a much larger share of the tab. According to IRS statistics, in 2013 the top 1 percent of households paid about 37 percent of federal income tax revenues collected, while the top 10 percent paid roughly 70 cents of every dollar collected through the federal income tax.

For all the talk of the rich not contributing their fair share, the United States has a more progressive tax system than the social democracies of Europe, even if our top tax bracket is technically lower than theirs. This is in part because lower-income Americans benefit from refundable tax credits like the Earned Income Tax Credit and the Child Tax Credit, which offset their federal income taxes and, for some, their payroll taxes too.

The United States also starts applying its top rate at a higher level of income. In France the top rate is 45 percent, but it's applied to all income above $170,396. In the U.S., on the other hand, a couple has to pull in nearly half a million dollars in a year before the 39.6 percent rate kicks in. So while the French have a higher marginal rate, it applies to a lower level of income, making that country's tax system more regressive than ours.

The flip side of America's progressivity is that the bottom 50 percent of households in the U.S. only shoulder 2.8 percent of the total tax burden. Though it was politically fatal to say so out loud, then-presidential candidate Mitt Romney was right in 2012 when he remarked that 47 percent of Americans don't pay any federal income tax. In 2015, that number dropped to 45.3 percent, or a total of 77.5 million tax "units" (that is, individuals and married couples), according to the Urban-Brookings Tax Policy Center.

But not even those who owe no federal income taxes get off scot-free. The incredible complexity of our income tax scheme makes it costly for everyone to comply with. According to the IRS, filing an income tax return will take each taxpayer an average of 8 hours and cost $120 per non-business return. As Joshua Caherty at the Tax Foundation explained, the cumulative compliance cost of filing all those individual tax returns in 2012 was over $20 billion. "The time consumption is further burdensome," he said. "Considering 8 hours each…Americans spent over 1.35 billion hours filing individual taxes." And that cost gets much higher if you add in the distortions created by the income tax, like when people decide to buy a home rather than rent solely to get a tax break.

There's also considerable anxiety associated with filing taxes. Google "income tax filing" and "stress" and you'll find millions of websites offering advice meant to help people reduce the mental anguish of tax season. One of the reasons stress levels are so affected is that the IRS is incredibly powerful—and unlike other crimes, when someone has a conflict with the IRS, the constitutional presumption of innocence doesn't exist: You're guilty until proven otherwise. And while you're being investigated, the IRS can seize your assets and otherwise make your life a living hell in ways you may never fully recover from.

Don't count on the IRS to help you figure out how to comply with the tricky and convoluted tax code, either. For that, you'll need to hire a professional, since several years ago the agency stopped answering questions during tax seasons. The reason? A lack of resources to assist taxpayers, it said.

In the rush to file their returns, many Americans will not look closely enough at their W-2s to realize they probably paid more in federal payroll taxes than in federal income taxes last year. In fact, only high-income earners or those who get most of their income in non-wage form typically see their income tax burdens exceed their payroll taxes.

In 2015, the feds took $1.065 trillion from our collective paychecks for Social Security and a small part of Medicare. The current tax rate for the former program is 6.2 percent paid by employees and 6.2 percent paid by employers; for the latter program it's 1.45 percent paid by employees and 1.45 percent paid by employers. These rates apply to income up to $118,000.

But don't be fooled: As most economists will tell you, the person who officially pays the tax isn't necessarily the one who actually shoulders its burden. While an employee many only see her income shrink by 7.65 percent due to the two federal payroll taxes, she's also coughing up the employer's share in the form of lower wages.

Eight out of every 10 dollars collected by the federal government comes from payroll and income taxes. Unfortunately, we don't have the comfort of knowing that this revenue is put to good use. Much of it goes to pay for programs that should be privatized or handled at the state level, such as education and transportation; programs in desperate need of fundamental reform, such as Medicare, Medicaid, and Social Security; and programs that could be seriously constrained, such as military spending.

But let's end on a happier note. On April 15, when your taxes are due, you can find a little peace in knowing that Tax Freedom Day is just around the corner. That's the point in the calendar year when the nation has collectively earned enough money to pay off its total tax bill for the year. In 2014 the Tax Foundation estimated that we spent about 30 percent of our national income on taxes at all levels. Thus, we achieved tax freedom three-tenths of the way through the year, on April 21. Only after that do Americans start earning money for things other than running their government—whether they agree with its priorities or not.

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  1. I think those that are very wealthy have more say in our government than those that are less wealthy. Here’s what strikes me as strange. You would think that those that are paying for the lion’s share of the taxes would want the government to not spend any more money than it brings in, so that they don’t have to pay yet more. But it seems to me that there are those that want all this big government, without having to pay for it. Hence, the $20 Trillion in National Debt now. Who is it that wants all this big government but doesn’t want to pay for it? The already wealthy, which I believe have the most say/influence? Or the less wealthy? If it’s the less wealthy I would be interested in knowing how they are achieving such a thing since they have less say/influence/money.

    I want to say as someone who considers himself to be pretty poor monetarily speaking(I never make enough to owe any federal income tax at the end of the year), that I don’t believe in a government that can spend more than it brings in. But what say do I have in that? Some kind, but apparently not enough. I think we as a nation should either pay off the National Debt or default on it, all of it. One of the two.

    1. If you want more influence you need only vote Libertarian. Every Libertarian spoiler vote packs ten times the vote-changing wallop of a vote wasted on looter parties. The income tax making it from the communist manifesto to the 16th Amendment if proof of that. No communist or socialist party candidate was ever elected president, yet those spoiler votes cast for communist surrogates (Anti-Monopoly, People’s Party) from 1884 to 1912 WON and changed the constitution to saddle us with that tax back before anyone knew that communism meant genocidal dictatorships with death camps. Only the LP is working to undo that error, and we must understand that the verb TO WIN means to change the laws, not get the footlights reflecting off of our candidate’s teeth.
      Graphs: http://www.hankphillips.com/caseforlp07.html

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  2. Anyone here besides me like Gold? According to the current law, it’s money. Article 1 Section 10 says that the States shall pay their debts(bills) only in Gold and Silver coin. And The Coinage Act of 1792 passed by Congress defines the dollar as 371.25 grains of Silver. That’s 0.77 troy ounces, which is what pre-1964 Silver Dollars contained. A person knew where they stood in world when a dollar was a Silver Dollar.

    FDR issued Executive Order #6102 outlawing Gold, and demanded that you give it to the U.S. Government. Then after the Government got all the gold it could get from it’s citizens, it revalued gold to a higher paper dollar price. It’s good to be The King. But I thought we were supposed to have a Republic. Did the 1965 Coinage Act “repeal” the definition of the dollar? If so, then what is the definition of a dollar?

    I’d like to ask a question that Judge Andrew Napolitano asks, “Do I live in a Nation of Sheep?”

    1. *sits back and waits for spittle flecked PB to show up*

      1. I haven’t seen PB around here in a while, come to think of it.

        Granted, I’ve been pretty busy lately and not paying as much attention, so maybe I’ve just missed him.

        1. He comes around about once a week.

    2. “FDR issued Executive Order #6102 outlawing Gold…”

      So……during the reign of the great god of “progressivism” we outlawed a mineral (gold) and a vegetable (marijuana). I’m unaware of any animal that was outlawed — will need to do more research.

      1. The Japanese?

        1. Sorry, one of those links was the wrong migratory bird law.

          Did you know you aren’t allowed to shoot common robins because they’re technically “Migratory”?

          1. Did you know that if you own an outdoor cat that kills songbirds, technically you are a felon?

            1. Oh drat, now we have to send them all to that gubmint shelter from the other article.

            2. Those three felonies a day aren’t going to just magically happen, sarc.

            3. I have one cat that likes to catch birds, which I don’t particularly like. But she catches a lot more mice and chipmunks and fuck those guys.

            4. Utter nonsense. No one owns a cat – especially not an outdoors cat. You just feed them is all.

          2. I think they are just plain migratory, though they are present year round in some places.

            And yes, I did know that. And for some reason waterfowl are the exception.

            1. Arg, yes, zeb, you’re right. The robin wasn’t the eggregious example I was looking for. There was one bird with a little bit of migratory wobble at the western edge of its range that was otherwise year-round that was extraordinarilly silly to call migratory.

              1. Chickadees maybe? Or cardinals?

                1. It’s the European Swallow. Not to be confused with the African Swallow, which is both non-migratory and able to carry a coconut.

          3. Wasn’t the Commerce Clause the justification for that law? I’m pretty sure it was. The birds cross state lines, so they are commerce between the states. Thus Congress can regulate them.

            1. Yeah, it would have to be. Probably similar reasoning to why the feds claim authority over all “navigable waterways”. I imagine it was in response to the passenger pigeons being wiped out.

              1. To be fair, once upon a time, there was a commcerical reason for dealing with navigable waters

                1. There still is on larger lakes and rivers. If they didn’t also claim authority over every tiny tributary, I’d have little problem with it.

    3. Gold is heavily subject to government price manipulation and forced repossession. So in that sense, unless you’re going to keep it out of the country and/or hidden, physical gold is a sketchy investment.

      1. Gold is heavily subject to government price manipulation and forced repossession.

        Come to think of it, so is lead.

        1. Hide yo bullets

          1. And car batteries.

    4. The problem with gold is its neutron cross-section. Every reactor containment has a gold coin framed on the wall. Ask yourself why. I prefer plutonium, uranium or kilowatt-hours as a basis for coinage and let gold float. At least one expects plutonium to be radioactive enough to feel warm to the touch. A dollar, after all, means whatever you can get thee courts to say it means.

    5. The more you learn about FDR, the more you realize he was a monster.

      1. And he’s a “progressive” hero to this day. The president who ordered what is one of the greatest racial injustices in US history… And we’re supposed to believe that “progressives” are the anti-racists??

      2. He was also Lyndon Johnson’s idol.

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  4. Wasn’t the Fed Reserve also created in 1913? I’m starting to get superstitious.

    1. Yes, indeed. It was what made the income tax and capital gains tax necessary – without which people would have avoided the monetary inflation and elastic dollars of the Federal Reserve.

  5. How can you posssibly criticize the government for the system of collecting income taxes when it’s easy enough to see what enormous good they’ve done with it? Forget the fact that before 1913 when they started collecting taxes there were few highways and no airports, few phones and no broadcast television networks, few water and sewer systems and no fast food restaurants, few health insurance networks and no MRI machines – nearly everybody from the pre-income-tax days died! Do you really want to go back to those dark days of everybody dying? Not many people living today would rather be dead, I’ll bet.

    1. Also, Germany didn’t adopt an income tax in 1913 and look what happened the next year? Just imagine that happening in America! But it didn’t because income tax!!!!

    2. Do you really want to go back to those dark days of everybody dying? Not many people living today would rather be dead, I’ll bet.

      Not to worry – your rulers are doing their best to remedy that.

  6. The tax code today is a 76,000-page monstrosity

    Select two congresscreatures at random. Provide each, separately, a copy of the tax code, a pencil, a calculator, and all the information needed to do the return of a third random congresscreature. Give the two eight hours to fill out the return without help. If their bottom lines do not agree exactly, fire them both without pensions. Repeat until the tax code is “fixed”.

      1. You could make it 80 hours, it wouldn’t matter.

        1. I think my accountant does. 🙁

          1. Does he bill by the hour?

      2. I’m down with that. Fuck ’em.

  7. According to the Tax Foundation, the top tax rate that year (adjusted for inflation) was 7 percent on income above $11.5 million; the lowest rate was 1 percent on income under $463,826.

    I remember reading somewhere that during the debates over this tax an opponent warned that tax rates might go as high as 10%. He was laughed off as a fearmonger who was just exaggerating. So when a politician proposes a new tax today and says “it’ll only affect rich people” and “it’s so small, just pennies a day!” I think about the income tax. And refuse to believe the politician.

    1. Camels and tents. The Lefties’ favorite analogy.

      1. you misspelled “policy”

  8. “The long sordid tale…”

    Talk about clickbait. Total letdown. Not even any Mexicans or pot, let alone the other member of our unholy trinity

    1. You mean income tax isn’t a euphemism for violent anal sex?

  9. I find it a bit interesting that the first income tax only applied to rich people.

    1. Income tax has always been driven by the politics of envy.

    2. LIttle did anyone realize that rich would soon come to mean anyone with crying dollar more than what someone else thought he should have.

  10. First, some history: In 1913 the U.S. federal individual income tax was enacted following the passage of the 16th Amendment

    First income tax was during the Civil War, no?

    1. Yes the first income tax was added right after the revived tariff of abominations (passed before Lincoln was elected) led to the Civil War. Interestingly, next to it is a dry law forbidding bartenders to serve drinks to soldiers in DC. That multifaceted tax was parodied in Lysander Spooner’s essay “No Treason,” in which the collectors’ oath and bond is satirically translated into plain English. The second income tax was a large factor in the Panic of 1893 (when it was debated) and had to be repealed to end the depression that resulted.
      Jon Roland over at constitution.org knows where these records are and the outfit accepts donations.

  11. Historically, the article is wrong. The US Individual Income tax laws were written in 1862, not 1913. The same laws written then were first compiled in a Code in 1939. The code was recompiled in 1954. There are tens of thousands of pages but most of those concern complicated tax write offs etc for multi national corporations. The US INDIVIDUAL Income tax is contained in a few lines in Subtitle A, C, And F.
    The writer subscribes to the libertarian/conservative mainstream history of the tax, which is deeply flawed, and is the reason they lost NFIB v Sebelius and are inneffective in helping grassroots Americans fight this beast. The words used in the article like “income” are poorly defined. The income tax is the American version of the British Public Office Duty and because the lib/cons establishment does not understand that they cannot help Americans or expand liberty.
    Everything in Title 26 points to the public sector, not the private. If only Veronique and Reason Staff would take the time to parse the withholding statutes in Subchapter C for example they would see withholding is only authorized for public entities.
    A libertarian in Michigan fortunately understands the income tax, and has written an excellent book on it called “Cracking the Code” which has enabled thousands of Americans to get full refunds on not only income tax but also the dreaded payroll tax. But will the libertarian conservative establishment read the book?

    1. More to the point, will officious infiltrators get off their asses and vote libertarian and get ten times the tax-repealing clout? If voting libertarian really were “wasted”, why would the prospect trouble our opposition to the point of apoplexy? You’d think opposition looter parties would be happy to see us suicidally “wasting” our votes, unless, incidentally, that meant repealing the communist manifesto income tax first published in English in “The Red Republican”….

    2. When Parliament passed the Stamp Act in 1765, Americans had never before experienced direct taxation. They rebelled. In 1767, Parliament passed the Townshend Acts, which levied taxes on an array of British goods. The colonists responded by boycotting British imports. Parliament repealed most of the Townshend Acts in 1770 (except the tax on tea), and in 1773 passed the Tea Act, which essentially told Americans they had to buy their tea from the East India Company through government-approved merchants. Though the act actually lowered the cost of British tea, Americans were so outraged at Britain’s assertion of authority that they forbade tea-bearing ships from docking. And, of course, in Boston they threw 342 chests of tea into the harbor.

      All of these taxes, by the way, were passed to finance the British Army. The newly independent United States taxed its people directly to pay off the war and ongoing conflicts with France, but in 1802, under President Jefferson, all direct taxation upon the American people was ended. That lasted for a decade, until we had to finance the War of 1812. That war was paid off by 1817, and Americans experienced no direct taxation from their federal government until 1861.

      1. That means that “Manifest Destiny,” including James K. Polk’s war with Mexico, and the expansion of the country from coast to coast, was financed without a single direct federal tax being levied upon the American people.

        The federal income tax imposed to finance the Civil War had two tax brackets — 3 percent and 5 percent — and was repealed in 1872. It remained off the books until 1913, when the 16th Amendment was ratified. The federal income tax rates in 1913 ranged from 1 percent to 7 percent. That highest rate applied to people earning $500,000 a year or more. Today, a married couple earning that much would pay a federal income tax rate of 35 percent, and with all taxes combined could pay more than half their income in taxes.

        The greatest tax outrage in American history is Washington’s gradual convincing of the American people that giving so much of their income to the government is just and fair.

        Better article:

        http://spectator.org/articles/…..party-time

    3. The parts of Title 26 Subtitles A, C, and F that apply strictly to personal income tax whether 10,000 pages or 500 pages are still needlessly complex.

      Add on everything related that is from CFR and you have a monster.

      Even with the aid of software that attempts to hold your hand I’m still left scratching my head to fill out a 1040A

  12. Income tax all started during the civil war and was supposed to be a temporary tax… Tyrannical Lincoln signed it into law. Government then got greedy and ended up bringing it back and they have raised the percentages drastically over the years…..

    1. It was temporary. The thing was repealed after Lysander Spooner made it a laughing-stock. The same looter politician who backed the Civil War measure also pushed for the next income tax that ushered in the Panic of 1893 and the depression it predicted.

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  14. 45% adult Americans will pay no federal income tax this year.

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  18. The Whiskey Rebellion, 1791.

    1. Technically not an income tax, but an excise tax.

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  20. Yeah I just filed my automatic extension, like I do every year, with a much smaller than usual check. Turns out I made less in ’15 than ’14 so my quarterlies pretty much paid the bill for a change. I was delighted and couldn’t wait to tell my wife the good news that our income was declining. With any luck, my income will drop again this year and the parasites will suck a little less blood from my increasingly anemic carcass next year. Funny how those incentives work.

  21. RE: The Long Sordid Tale of the American Income Tax
    The high cost of the 16th Amendment

    On the contrary.
    If it wasn’t for the 16th Amendment, Amerika would not be racing toward socialist slavery.
    Where would our socialist slavers ruling over us get their money if wasn’t for the 16th Amendment?
    Did anyone every think of that?

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