CBO Reports Tax Reality and Inadvertently Shows Path to a Flat Tax

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.

Income Tax Averages 2009 - Copyright 2012 TheRazor.org

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.)

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13 Comments

  1. Jack:

    One figure that seems to often change is the entry level income of the 1%. This chart from the CBO’s office starts it at 271,800 GI. Yet, I’ve seen it stated elsewhere as starting at 343,927 AGI. I will assume the CBO’s figures are the most accurate, but then why are there other figures. I’ve read the 343K in multiple places.

  2. Scott Kirwin:

    Jack
    The lack of consistent facts just makes the issue even less transparent which is why I really like the CBO study. Pretax income is easily calculated; the “secret” has been the percentage of of before tax income because it accounts for deductions, and this is the first time I’ve run across it in this form. I was amazed at the simplicity after I compared it to my own taxes.

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  9. Sara:

    I love the welfare payments to the two lowest quintiles – there is no end to this redistribution thingy.

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