People forget that the country thrived for 137 years without an income tax, the Federal Government’s primary source of revenue today. During that time it survived the revolution of its birth, the War of 1812, and the greatest cataclysm it ever would face: the Civil War. The 16th Amendment, ratified in 1913, gave constitutional authority to the Federal Government to tax individuals and corporations. The Feds had tried to do this several times before but had run into constitutionality issues. This time they did not when in 1916 the Supreme Court upheld the constitutionality of the tax in its decision Brushaber v. Union Pacific Railroad Company. At the time of its enactment, the income tax applied to those making above $3,000 a year, assessing a 1% tax on them and a 7% tax on those making more than $500,000 a year. In 1913 few individuals made enough to qualify for the tax, so the bulk of revenue came from businesses.
Unlike most libertarians I am not opposed to a federal income per se. Predator drones are expensive, as is the kit Marines use to perform their duties as travel agents to Paradise so when I write my check out to the IRS in April I always specify where I want them to spend my cash. It’s easier for me to stomach the government using my money to provide health care for aging Vietnam War vets than payouts to farm corporations in the form of agriculture subsidies. I’m sure the IRS pays no attention to that memo line, but it would be great if some IRS worker saw it and deposited my check into the account for military pensions rather than the trough where special interests feed.
The problem I have with income tax is its transparency, or rather the lack of it. Withholding taxes has to be one of the cleverest ploys a republican government has ever done to the citizens it supposedly serves. As a result of withholding people don’t have a clue as to the actual amount they pay in taxes. Add in the Byzantine rules of the tax code with its tax deductions and loopholes, and you have an opaque system that allows the government to pick the pockets of its citizens without them being aware of it. It is only at the end of the year when the truth is revealed in the calculated value on a 1040 line that states “Total Tax.” Most people skip that line to see what the size of their tax refund is or in less common cases, how much they owe. Few dwell on the total tax figure, and some even see the refund as a gift. It turns out that according to a CBO report on the 2009 tax year, for those making less than $43,400 it is indeed a gift.
The key in the above graphic is the percentage column in the middle. Notice how it doesn’t match the current tax bracket rates because it takes into account deductions and credits that make the bracket rates meaningless. The truly remarkable thing about this report is it is a step towards a flat tax whereby we could forgo the hiring of accountants, the struggle with software, the upkeep of receipts and records, and simply apply he percentage in the middle column to our gross income. I tested it with my own tax return and it worked remarkably well.
So say you earn $25,000, putting you in the second quintile. The government would cut you a check for $650. If you made $250,000, you would pay the government $36,500. You wouldn’t even have to tell the government anything. Your employer would send in your W2, and the government could send you a bill or a check, showing the amount of your earnings and income tax – percentage of before-tax income you owed. Democrats and Republicans could argue about those percentages, but everything would be known. They could even set average rates for billionaires like Warren Buffett and George Judenrat Soros that would assuage their guilt (well, maybe not for the latter.)