Centennials are normally cause for celebration, a chance to applaud some thing or person standing the test of time. But not so for the income tax. Even the IRS is declining to mention that this year is the 100 year anniversary of the 16th Amendment of the Constitution, which authorized the tax.
What’s to celebrate? Like most government programs, the income tax at its inception seemed reasonable and modest. Yet over the years it has morphed into a monster that crimps our economy and dogs our personal finances at every turn. Americans detest it but can’t do anything about it.
The income tax was created in response to unpopular tariffs and excise taxes as well as the perceived need for more government revenue. Populists supported the tax because less than 1 percent of the public would pay.
Tax rates initially were 1 percent for incomes over $70,000 (inflation-adjusted) up to a top rate of 7 percent. Only 358,000 Americans paid a total of $28 million the first year.
Even so, not everyone was sold. The speaker of Virginia’s House of Delegates predicted that “a hand from Washington will be stretched out and placed upon every man’s business. The eyes of the federal inspector will be in every man’s countinghouse … The law will of necessity have inquisitorial features. It will create complicated machinery … An army of federal inspectors, spies and detectives will be sent upon the state”.
The gentleman was spot on. What must have seemed like hyperbolic ranting at the time has become our reality. Americans are forced to disclose to faceless government bureaucrats private information they would not share even with close friends or family. They are subject to enforcement actions not triggered by any legal presumption of guilt and without due process protections. Occasionally, one of them is subjected to enhanced scrutiny and punishments as an example to the rest.
The income tax has come a long way from its humble beginnings. Revenues began to rise immediately to finance World War I and the beginnings of the welfare state. Rates rose steeply during World War II to a top rate of 94 percent. It was also then that the income tax was permanently converted into a tax on the masses rather than only on the wealthy.
Today, the income tax is not only a revenue source, it serves as a primary mechanism to implement the federal government’s redistributionist social policy. The main line of business for the army of lobbyists in permanent residence in D.C. is manipulation of the tax code. It is used to promote thousands of well-connected special interests, ranging from home ownership to energy production of all kinds to local governments’ borrowing capability.
Layer upon layer of tax favors granted by politicians over the years have resulted in a tax code of 73,000 pages. It is so complex that no person alive fully understands it. Experts preparing tax returns for the same payer can produce widely different results, all more or less legal.
The IRS has 95,000 employees to keep the money flowing, but the service estimates that $450 billion is lost annually from taxpayers who underpay or don’t file at all. It’s hard to imagine a worse tax collection system.
A few elections ago, Sen. Phil Gramm seriously proposed a tax return that would fit on a postcard. Predictability, since the income tax is a prime source of power and influence for the political class, the idea went nowhere.
Still, there is no question we would be more prosperous and free with a simpler income tax system. Winston Chuchill once said that the American people usually do the right thing but only after everything else has been tried. Maybe some day we’ll get the political will to do the right thing and radically change this oppressive, inefficient tax. Then at some anniversary in the future we’ll have something to celebrate.
East Valley resident Tom Patterson (firstname.lastname@example.org) is a retired physician and former state senator.