Taxes

Some Taxing Facts

By, 04/16/2008

Story Highlights:

  • While it's perfectly acceptable to complain about them, Americans will always pay taxes.
  • Ugly truths about taxes help put the issue in perspective.

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The vast majority of Americans pay taxes on time and without hesitation. There's a cost to run this country, and as good Americans, we ante up, albeit with the obligatory grumbling about wasted tax dollars on pricey toilet seats.

First, how did we end up with our current system? The taxation history of the US can be divided in two parts: Pre-16th Amendment and post-16th Amendment. The US government slapped Americans with its first personal income tax on August 5, 1861 as a way to pay for the Civil War. At the time, the tax was 3% on incomes over $800. The tax was ultimately repealed in 1872. After years of debate, Congress proposed the 16th Amendment, which established the government's right to collect taxes on incomes, regardless of the source and without consideration for state populations. The 16th Amendment was ratified in 1913, ultimately leading to the system we have now.

Many people argue, convincingly in our view, the collection of income taxes is unconstitutional, and certainly the government has no right to garnish our wages. But have fun arguing that with the IRS. The Treasury calls income taxes "our voluntary tax system." The IRS claims it pursues "enforcement programs to promote voluntary compliance" and establishes "strategies to maximize voluntary tax law compliance by emphasizing customer satisfaction." Is this a joke? They make it sound as though we happily skip to the mailbox to send off our returns. But IRS figures show roughly 32 million taxpayer penalties are assessed each year. That doesn't seem voluntary to us. Also, we find it laughable to use "customer satisfaction" and "IRS" in the same sentence.

And just how much do we "voluntarily" dole out to the government in taxes? According to the Tax Policy Center, in 2007, total tax receipts were $2.5 trillion, or a whopping 18.8% of US GDP. (Makes you wonder just how robust the economy could be if the Feds didn't garnish a nearly a fifth of everything we produce.) As a percentage of GDP, tax receipts have remained fairly consistent in the post-war era. Luckily, all that money doesn't simply fall into an economic abyss. One thing we know is the government likes to spend its tax revenues. So, many of those tax dollars eventually see their way back into the economy. In fact, US government spending today comprises 20% of GDP. That's a bit of a silver lining, but not much of one. It's highly inefficient to have all that capital flow through so many places only to be eventually reallocated to the economy. It would be much better just to cut taxes and let folks spend it as they deem necessary.

But who's really paying those trillions in taxes anyway? Recent data from the IRS show the top-earning 50% of taxpayers earned 87% of the nation's income, but paid 97% of all federal income taxes. The other half (those with an adjusted gross income under $30,000) paid the remaining 3%. The top-earning 1% of taxpayers paid about the same amount of federal individual income taxes as the bottom 95%.

Other than the obvious, like handing over hard-earned dollars, taxpayers lament tax time because understanding the US tax code is akin to deciphering hieroglyphics. When the 16th Amendment was ratified in 1913, there were 400 pages of tax code and regulations. In 2006, there were 66,498 pages, according to CCH Inc. Income taxes are so complex, the US has over 1.2 million paid tax preparers, according to the CATO Institute. Said otherwise, the tax system is so vast, pervasive, and complex, it has created its own self-sustaining segment of the economy.

What can you do to lessen your tax burden (legally, that is)? Pack up your things and move to another state. That's what many folks are doing. The two worst states for income taxes, California and New York, are experiencing a net outflow of people while no-tax states like Florida, Texas, Nevada and Washington have huge population inflows. Watch out, New Jersey, Michigan, Illinois, California, Ohio, and New York. Soon there will be no one left to pay your exorbitant taxes!

Put simply, paying income tax stinks. But keep your chin up, you're not alone—plenty of folks feel your pain. It goes without saying the US could have a much better system in place. But all in all, we've got it good. The US remains the world's largest economy and offers opportunities that more than compensate for the fact our government is bloated and largely inefficient. Benjamin Franklin offers a famous quote, "In this world nothing can be said to be certain, except death and taxes." Between the two, we'll take taxes any day. However, on April 15, some folks might opt for the former.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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