Income tax’s birthday

When you send in your income tax return and payment this year, send along a birthday card. It was 100 years ago this year (1913) that the 16th Amendment to the Constitution was passed and the income tax was voted into law. Its purpose was to go only after the rich and the rate was “reasonable.”

In 1913, the first $4,000 was excluded for a married couple and the next $20,000 (the equivalent of $374,200 in 2010 dollars) was taxed at 1 percent. The maximum rate of 7 percent applied to income exceeding $500,000 (the equivalent of $11 million in 2010 dollars).

These rates lasted until 1915, and then the politicians realized the cornucopia of cash this new tax produced. Congress raised the tax to 15 percent for income of more than $2 million and soon to 77 percent for all income exceeding $1 million. During the 1920s, the maximum tax rate was reduced to 25 percent on income exceeding $100,000 and our country had the great economic recovery of the Roaring Twenties!

After the beginning of the Great Depression, a new administration raised the tax rate gradually to 79 percent on income exceeding $79,500. During World War II, the rate was increased to 94 percent on income exceeding $200,000. (Many doctors were later charged with tax evasion when they tried to keep more than 6 percent of their wages.)

In 1952, the tax rate was adjusted to 92 percent for income exceeding $200,000. Under President John Kennedy, the rate was reduced to 77 percent of income exceeding $200,000. Taxes stayed at that approximate rate until they were reduced by President Ronald Reagan and Congress to 50 percent for income exceeding $100,000 and 28 percent for income exceeding $30,000. Taxes were later increased to 40 percent for income exceeding $250,000 and to 35 percent for income exceeding $325,000.

All of these tax rates listed above, increases and decreases, were pushed down through and effectually paid by the smaller earners.

It is the principal of tax law that the wider the base, i.e. percentage of taxpayers paying in, the lower the tax rate is necessary to bring in larger amounts of money. The narrower the tax base (the number of taxpayers), the higher the rates must be to bring in comparable amounts of money. By excluding 50 percent of the taxpayers from paying taxes, the rates must be increased proportionately to the remaining populace. And the more exclusions from taxable income, the higher the tax rate necessary. Thus, Mrs. John Heinz Kerry received $8 million and Ross Perot $143 million as tax-free income as reported on their tax returns, when they or their spouse ran for president. These exclusions narrow the tax base.

Secondly, from the government’s perspective, it is important that the taxpayers not realize now much they are paying in taxes. Thus, since 1943, through payroll deductions, your paycheck is “net” of taxes, because people became very upset when they had to pay all their taxes on one day, i.e. March 15.

There are two “hidden” taxes on the horizon. First is a carbon tax on every bit of carbon released into the air. It would produce hundreds of billions of dollars in taxes annually, and would be passed on to all taxpayers in increased prices on all your purchases. Likewise, a value added tax is envisioned that applies to everything you buy, but the beauty of if, from a political point of view, is that the taxpayer never sees it. It will be computed at every stage of production of an item, but it is not shown as a tax on your purchase price. This tax can bring in trillions of dollars, sight unseen.

The purpose of a tax collector was once defined by J.P. Colbert, the finance director for Louis IV, King of France, when Colbert said: “The art of taxation consists of plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”

Very truly yours,

Michael B. Lange,