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US Tax System Is Worse Than You Thought (Bring Us Back to 1913)

“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates” – John F. Kennedy

Historical Perspective

  • When the US federal income tax was first introduced in 1913, it used to be a lot, lot simpler and a lot easier to file taxes; so easy in fact that it was basically like filling out your federal tax return on a postcard
  • Individual federal income tax rates started at 1% in 1913, and the maximum marginal income tax rate was only 7% on incomes above $500,000 (more than $12 million in today’s dollars)
  • Personal exemption in 1913 was $3,000 for individuals ($72,850 in today’s dollars) and $4,000 for married couples ($97,000 in today’s dollars), meaning that very few Americans had to pay federal income tax since average income was only about $750
  • The Tax Foundation has historical federal income tax rates for every year between 1913 and 2013: https://taxfoundation.org/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-inflation-adjusted-brackets

Opportunity Cost

  • In a 2012 report to Congress, the National Taxpayer Advocate estimated that American taxpayers and businesses spend 6.1 billion hours every year complying with the income tax code; Americans will spend an estimated $10 billion for the services of tax preparation firms and $2 billion on tax-preparation software programs like TurboTax
  • 6.1 billion hours would be equivalent of more than 3 million Americans working full-time, year-round (or 2.1% of total US payrolls); by way of comparison, federal government currently employs 2.8 million full-time workers and Wal-Mart currently employs 2.2 million workers worldwide and 1.3 million workers in the US
    • At the current average hourly wage of $21.90 an hour, the dollar value of the opportunity cost associated with tax filing would be more than $131 billion (slightly more than the 2016 GDP of Washington DC)
  • In Japan, you get a postcard in early spring that says how much you earned last year, how much tax you owed, and how much was withheld; if you disagree, you go into the tax office to work it out; for nearly everybody, the numbers are correct so you never have to file a return

Tax Progressivity and Tax Burden

  • Just how progressive is the US federal income tax system? Very, very progressive:
    tax shares
  • Almost all federal income taxes (97.3%) are paid by the 50%, more than 2/3 of income taxes are paid for by the top 10% and nearly 40% of taxes are paid by the top 1% of taxpayers
    • For all the criticism and negative publicity the “Top 1%” get, that group pays such a disproportionate share of our collective tax burden
      tax burden
  • In 2014, top 1% earned 20.6% of the total income reported to the IRS and paid 39.4% of all federal income taxes collected; the bottom 95% of US taxpayers earned 64% of total income (almost 3x as much as top 1%) and paid only 40.5% of the total income taxes collected

Bowling vs. Taxes

  • Here’s a thought about the way we tax income vs. the way we score bowling
    • Under the scoring rules of bowling, you get rewarded, not penalized, for being successful
    • If you get a spare, the scoring system rewards you by adding the pins from the next ball into the current frame and if you get a strike you get rewarded by adding your next 2 balls into the current frame
    • Under our progressive income tax system, you get penalized, not rewarded, for being successful, productive and entrepreneurial, because the more you earn, the higher the tax rate you pay
    • Top marginal income tax rate has been as high as 91% in the 1950s and 1960s, and 70% in the 1970s
    • If we scored bowling the way we tax income, we would subtract, not add pins for a spare or strike
    • If we taxed income the way we score bowling, we would have lower, not higher, tax rates on our most successful income-earners

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.” – Arthur Godfrey

Originally published by the American Enterprise Institute (April 16, 2017) and featured on Mauldin Economics

Image Source: Getty Images

 

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1 Comment on US Tax System Is Worse Than You Thought (Bring Us Back to 1913)

  1. The 1%, for the most part, are rent-seekers; their money is begot by playing bank and real estate games and other endeavors that produce $0 in value, and things Vonnegut would describe as ‘crimes that haven’t been made illegal yet.’ Certainly not through any virtue such as hard work…

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