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Even a flat tax can become a fat tax
November 15, 2011 - Rob Weaver
The concept of a flat tax has crept back into the political conversation. One of the selling points of a flat tax is the supposed simplicity of such a tax, as compared to the current income tax.
It’s important to remember two things when resuming this national discussion. One, even the federal income tax was simple when introduced. To illustrate, I’ve attached a portable document file of Form 1040 from 1913 -- all three pages -- plus the page of instructions.
Let’s pause for some history. The 16th Amendment, passed by Congress on July 2, 1909, and ratified Feb. 3, 1913, basically cleared the way for the income tax. But it wasn’t the first time the U.S. had an income tax.
Congress passed the Revenue Act of 1861, which included a tax on personal incomes to help pay for the war between the states. The tax lasted longer than the Civil War, finally being repealed after 10 years. In 1894, Congress enacted a flat-rate income tax, but the U.S. Supreme Court ruled it unconstitutional because it was a direct tax not apportioned according to the population of each state (Article 4, Section IX). The 16th amendment changes that, and let the federal government tax personal income without regard to the population of each state.
Now, back to the present. Last year, my wife and I, filing jointly, paid a marginal rate of 25 percent. Actually, with deductions and reductions which included the penance of filling out Form 1040 — now known as the long form — it was much less than that. But not as little as the 1 percent we’d have had to pay in 1913, when the top rate was 7 percent.
This brings up the second point to remember: Even if a tax wouldn’t grow in complexity, that is no guarantee it wouldn’t grow.
In 1913, that new federal income tax (on earnings from March 1 to Dec. 31, to be accurate) generated $37 million; the federal budget that year was slightly less than $3 billion. If you look at the form, you’ll notice the tax was on income of more than $20,000; adjusted for inflation, that would be about $440,000. The top rate applied to income of more than $500,000 — or $11 million in today’s dollars.
In essence, it started out as a tax on millionaires. And now you pay it.
As the reach of the income tax grew (remember, it started out small and simple) so did the reach -- and expense -- of the federal government. Adjusted for inflation, federal outlays in 1913 would have totaled less than $66 billion in 2010. Federal spending that year topped 3,550 billion (that’s $3.55 trillion) -- about 53 times more than the budget in 1913. The federal income tax tapped individuals for about $889 billion.
And it’s still underfunded. That’s why I want to see the size and scope of the federal government reduced as a main means of erasing the budget deficit. Any additional tax should be used to retire the national debt.
On the Web: www.irs.gov/pub/irs-utl/1913.pdf
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