A Brief History Of The U.S. Income Tax And Where It's Taken Us
Daniel J. Mitchell writes on his blog that on this day in 1913, Woodrow Wilson signed into law the Revenue Act of 1913, which imposed the income tax:
The law signed that day by President Wilson, to be fair, wasn't that awful. The top tax rate was only 7 percent, the tax form was only 2 pages, and the entire tax code was only 400 pages. And a big chunk of the revenue actually was used to lower the tax burden on international trade (the basic tariff rate dropped form 40 percent to 25 percent).But just as tiny acorns become large oak trees, small taxes become big taxes and simple tax codes become complex monstrosities. And that's exactly what happened in the United States.
We now have a top tax rate of 39.6 percent, and it's actually much higher than that when you include the impact of other taxes, as well as the pervasive double taxation of saving and investment.
And the relatively simply tax law of 1913 has metastasized into 74,000 pages of Byzantine complexity.
Not to mention that the tax code has become one of the main sources of political corruption in Washington, impoverishing us while enriching the politicians, lobbyists, bureaucrats, and interest groups. Or the oppressive and dishonest IRS.
However, even though I take second place to nobody in my disdain for the income tax, the worst thing about that law is not the tax rates, the double taxation, or the complexity. The worst thing is that the income tax enabled the modern welfare state.
Before the income tax, politicians had no way to finance big government. Their only significant pre-1913 sources of revenue were tariffs and excise taxes, and they couldn't raise those tax rates too high because of Laffer Curve effects (something that modern-day politicians sometimes still discover).
...Once the income tax was adopted, though, it became a lot easier to finance subsidies, handouts, and redistribution.
...But as the decades have passed, the Leviathan state in Washington has grown. And in the absence of genuine entitlement reform, it's just a matter of time before the United States morphs into a bankrupt European-style welfare state.
He thinks today might just be the anniversary of the worst day in American history.
An object lesson for those calling for just a small VAT to close the deficit.
DrMaturin at October 3, 2013 6:06 AM
It was also a giant bait and switch. Propose it at a low rate 2% to 7% to allay nay sayers, then in 1917 jack the rate up to 57%. And over half your income is taxed away.
I predict the same will or has happened with Obama care. Push the law on people claiming the penalty for not joining is low, and then jack it up.
Joe J at October 3, 2013 7:05 AM
It has occurred to me today that the current shenanigans in Washington might be the beginning of the collapse. I can see the possibility of the following scenario:
1. No agreement is reached. After several months, the executive branch goes into a sort of a caretaker mode, deciding what and where to spend without Congressional authorization.
2. The first move will be to restore full funding for entitlements. Once that is done, the government will find that most other functions must be stripped of revenue to pay for it. Law and regulatory enforcement will continue on a selective basis, according to where these functions can bring in revenue and/or provide political advantage (which means the TSA will continue to be fully funded). Most other functions, including defense, will be essentially shut down once employees decide to quit working for IOU's.
3. In fairly short order, the entitlement spending alone will exceed the remaining revenue capacity. The Federal Reserve, no longer able to borrow because of failed auctions, simply cranks up the printing presses and routes the newly minted money straight to the Treasury. The result is not hyperinflation exactly, but it does result in welfare reciepients finding that although they have money, there is nothing for them to buy with that money. Some riots occur. But the main thing that occurs is that most of the entitlement classes stop supporting the existing government. They demand that the situation be fixed, but there is nothing the government can do. The loyalty bond is broken.
4. Meanwhile, the middle-class economy continues to sort of funciton on a combination of barter and de facto currencies. Eventually a preference cascade sets in and employers and employees start to use an alternate currency of some sort -- either the currency of some other country, or more likely, some made-up currency that is "minted" and exchanged through the Internet in some fashion.
5. People began to realize that the existing federal government neither guarantees law and order nor provides them with any services. States and communities began nullifying federal law, and the federal government no longer has the resources to enforce its decrees. What happens after this? There are a number of possible scenarios. Some are good, some are very, very bad.
Cousin Dave at October 3, 2013 7:15 AM
Sounds like a plausible scenario Cousin Dave. I am not sure exactly how it will play out.
Theoretically DOD has been funded but the Air Force at least, is still furloughing their civilians. They can only do this legally for 21 days. After that they are forced into a big messy RIF.
This could be interesting when you have employees like my husband on overseas tours, with most of the benefits of active duty military. If they RIF him, they have to immediately cough up his moving expenses home, and reinstate him in his old job.
I suspect the dems have their fingers in the wind, and if the polls turn against them, they will back down.
On the Republican side it will be much more difficult to back down. House members are elected every two years, and most republicans will face a primary challenge next year if they fold on this issue, or the debt ceiling.
I see this as kind of like the Iraq war. I might not have picked this particular hill to die on, but once you have made your stand you lose automatically by backing down.
Isab at October 3, 2013 10:02 AM
I don't disagree with him. Now, the easiest way to modify the income tax would be to STOP the with-holding.
Make the citizens write one big check on April 15. Then they would see exactly what they are paying to the government.
My children (all adults) laugh at me because when I fill our income tax, I get 1-200 dollars back. They will brag about getting 2-3000 back.
I just tell them that I'm not stupid enough to let somebody have all my money without paying interest for 16 months. One gets it, I'm afraid the other two don't....
Mike43 at October 3, 2013 1:35 PM
Actually they should make the tax due date the first Monday in November.
Jim P. at October 3, 2013 6:11 PM
Mike43: "They will brag about getting 2-3000 back."
Yes! I know so many people that think this way; and like you, I get very little back because I don't give it to them in the first place.
And Jim P, I like your idea of making tax day the first Monday in November.
I feel somewhat the same way about property tax here in NJ. Too many people (as is their right) have their property tax embedded in their mortgage and don't really see the "tax." They just see the "mortgage." If they paid their tax seperately from their mortgage they would see how high it really is.
Charles at October 3, 2013 7:53 PM
I investigated the thought of changing my withholding to something like 10 exemptions and then self-escrowing the difference. But I found out that if you don't pay the estimated quarterly taxes the IRS will fuck you with a penalty that is more than the regular withholding. If I knew more than a million people were doing it along with me and we had gratis lawyers I might do it. Until then I, and you, are fucked.
Jim P. at October 3, 2013 8:34 PM
I just tell them that I'm not stupid enough to let somebody have all my money without paying interest for 16 months. One gets it, I'm afraid the other two don't....
Posted by: Mike43 at October 3, 2013 1:35 PM
If your income is fixed, and doesnt vary much from year to year keeping your witholding close to what you will ultimately owe is a good thing. It can be a bit hard to juggle if you live in a state that also has a state income tax.
And if you have quite a bit of investment income, you are on a roller coaster as to what you might end up owing from year to year.
When the bank stopped paying me any interest, and all the interest was reportable, and taxable anyway, i stopped worrying about it. Add to that, the real rate of inflation is 10 points over the interest rates the bank gives, so your money is only losing value at 9 to 10 percent a year....
I would rather get back money when I file, than wipe out what few liquid assets we keep on hand, paying on tax day.
When interest rates were reasonable, it was worth keeping track of, but I spent my time figuring out how much needed to be put into the 401k to keep our tax bracket from jumping up eight percentage points
Give the kids a break. When they are older they may figure it out, but right now, they get joy out of windfalls, and things like a new car.
Unfortunately every time I even think about a new vehicle, I do the math, and back away.
Isab at October 3, 2013 8:36 PM
The improvised currency part already exists, look up 'bitcoins'
Robert at October 5, 2013 3:25 AM
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