Tax Policy, Fairness, and the Economy

The Year 1913 was a pivotal moment in the future of U.S. History and economics.

The ratification of the 16th Amendment in 1913 allowed the federal government to collect income tax without apportioning it among the states.

Before that, the U.S. Constitution did not authorize an Income Tax. 

That was the intent of the Founding Fathers who believed in a limited Federal Government.

The first permanent income tax was implemented under the Revenue Act of 1913. The tax rates were basically flat (with some surtaxes on higher incomes). Here’s a breakdown of the tax rates:

• 1% on personal income up to $20,000 (equivalent to roughly $600,000 today).

• Surtaxes up to 6% on higher personal incomes.

• 1% on Corporate income over $5,000

Of course, since 1913, the Federal Government has grown way beyond the original intent.

It took only until 1916 - 1918 when the U.S. entered WW I for tax rates to be increased:

• 2% on personal income up to $20,000.

• 12 % on Corporate Income

In 3 Years, the Individual Tax rate was doubled.

The Corporate Tax rate increased twelve times the original 1%.

A Sign of Things to Come as the Federal Government grew its appetite for money.

This series of Reports will define the background and Policy related to Federal Income Taxes. 

This may seem like an arcane subject.  It involves an understanding of where we have been and how it affects U.S. Citizens and the Economy. 

Cogport will try to make it understandable.

This report will focus first on Personal Income Taxes.

Tax Rate History

Over the years, the Federal Tax Acts have created a maze of rules and regulations.  The best description is Byzantine.

Many policies, deductions, and exceptions have been carved out under the influence of Lobbyists and Money In Politics. (See Previous Cogport Posts on this subject)

The U.S. Federal Tax Code is notoriously complex and extensive. As of recent estimates, the Internal Revenue Code (IRC) itself is over 2,600 pages long, but when you include all the tax regulations, case law, and IRS rulings that interpret it, the size balloons significantly.

If you consider all the associated documents like the Treasury Regulations, court decisions, and IRS guidance, the total volume can reach 70,000+ pages. This vast body of law is constantly changing with new legislation, amendments, and regulations, making it a moving target for tax professionals to follow.

No individual can possibly comprehend the entire system.

The size and complexity have often sparked calls for simplification, though actual changes have generally made it more complex over time.

A Summary of Basic Tax Act Changes since 1964 is provided at the end of this Post.  If you like the background detail, it will give you a Perspective of how policies have changed.

A Curious Constant

There is one amazing constant that occurs in the collection of Federal Taxes.

No matter what “Major Changes” are made by each new Tax Act, the effective average rate of tax paid to the IRS does not change:

Since 1980, the amount of Total Tax Paid is always between 12% and 14% Percent of Total Personal Income in any year.

So, for all the changes in policy, rates, brackets, deductions and exceptions, the result in tax paid to the IRS does not change much in Total.

Very Revealing.

Of course, the various Tax Acts influence Who pays What.  The distribution of tax liability has significantly changed since 1980.

Here is a Summary of the distribution of tax liability on Personal Income in 2022:

The IRS received about 164 million individual income tax returns.

• Of those returns, 43% of filers paid No Income Tax.

Generally, higher-income earners pay the majority of federal income taxes.

• The top 10% paid 70% of All Income Taxes.

• That includes the top 1% of earners who paid about 40% of all federal income taxes.

The issue always surfaces that the wealthy need to Pay Their Fair Share.

Repeat: 43% of earners Pay No Tax and the Top 10% of earners pay 70% of the Total. 

Summary

So, what is Fair as it relates to future Tax Policy ?

Cogport will address this issue and general issues of Tax Policy in Posts to follow.

David Hollaender              September 24, 2024

Cogport.com

Summary of Major Tax Act Changes In Personal Tax Rates