In all this excitement over the Internal Revenue Service scandal, a key milestone in American history has passed with little notice. This year, the income tax turns 100, and that brings up issues of major importance.
A tax on what Americans earn through their labor was not, as some imagine, always a feature of American life. This means that a modern country can not only operate, but thrive, without taxing the income of workers.
The federal government previously relied heavily on excise taxes, specific sales taxes on such things as alcohol, and tariffs on imports. The government imposed income taxes to assist in financing the Civil War, but these taxes were temporary.
The 16th Amendment to the Constitution, passed in 1913, made the personal income tax a permanent fixture of the U.S. tax system. It bore little resemblance, though, to what we have now.
In a word, the 1913 income tax was quite simple. It had, count em, three pages of forms and a single page of instructions. American workers could handle that with little difficulty, all by themselves.
The 1913 income tax was also low. An individual or married couple earning taxable income under $20,000 ($458,000 in 2011 dollars) paid only 1 percent of their income in taxes. Just about everybody then could truly say they were part of the 1 percent.
Even then, the tax rates were graduated, with higher tax rates applied to different ranges or brackets of additional income. The highest marginal rate, 7 percent, applied only to any income in excess of $500,000, or more than $11 million in current dollars.
In 2013, by contrast, taxes are now infinitely more complex. There are now more than 500 separate tax forms and more than 7,000 pages of tax-preparation instructions. In 2009, the IRS estimated that between 900,000 and 1.2 million Americans paid tax preparers to help them get through the quagmire.
Current income taxes are also high and, therefore, costly. Just two years ago, the lowest income bracket for a married couple filing jointly was subject to a 10 percent tax rate. The highest bracket was reserved for taxable income of more than $379,150, and the applicable tax rate was 35 percent, or more than one-third.
In 2012, the highest marginal rate was raised, and beginning in 2013, the marginal tax rate on income in excess of $450,000 for a married couple filing jointly is 39.6 percent.
These high marginal rates do not include state income taxes and federal payroll taxes for Social Security and government health care. These additional levies push the tax rates significantly higher, especially for income from wages and salaries.
From its inception, the federal income tax only applied to taxable income. Owing to various deductions and loopholes in the complex tax code, many dollars in income are excluded when calculating taxable income. This shrinks the tax base and requires that rates be higher than they otherwise need to be.
None of this, by the way, is a partisan issue. Republicans and Democrats alike have contributed to an income tax more complex, less transparent, and much more costly to American workers than it was 100 years ago. Theres still more to consider.
Complex and higher taxes have certainly grown the federal government, much larger than it was in 1913. On the other hand, complex and high taxes have not solved many problems such as poverty, which still agitate politicians today. With national debt in the countless trillions, we can say with equal certainty that the income tax has not solved the nations financial problems.
Even so, reform of the tax code seems elusive. Politicians remain reluctant to simplify the tax code and lower the burden on American workers. Without serious reform, prospects for the next 100 years remain bleak.