The history and constitutionality of our federal tax system (by Jared Chatterton)
December 19, 2017 - Posted by: admin - In category:
Here is the latest submission from my friend and accountant colleague, Jared Chatterton. As you will see, Jared is a nice blend of wisdom, expertise, and humor. Enjoy:
Every tax season I encounter a random progressive buckaroo who strolls into my office and with a confident drawl says – “I’m going to have you file my tax return this year as a voluntary citizen even though the Federal income tax is unconstitutional and I don’t technically have to file.”
I don’t even argue or try to impose my limited knowledge on the topic. Instead, I sarcastically agree and suggest they keep the secret to themselves and exercise their self-given lawful right and not file, then let me know when the IRS catches up with them a few years later. For some reason, they lack the confidence to test their conviction.
How did we get into this tax mussiness? It all started in July of 1776. There was no income tax in the early years of our country until 1791 to 1802 when the US government was supported by taxes assessed on distilled spirits, carriages, refined sugar, tobacco, snuff, property sold at auction, corporate bonds and slaves.
The War of 1812 prompted the first national sales tax on gold, silverware, jewelry, and watches. A few years later, in 1817, Congress eliminated all internal tax sources and supported the government by imposing tariffs on imported goods.
The tariff system worked for many years until 1862 when we needed money to support the Civil War. The Act of 1862 was born which established the Office of Commissioner of Internal Revenue and Congress enacted the nation’s first income tax which was similar in structure to today’s system of graduated, progressive taxation. A person earning $600 to $10,000 a year paid tax at a rate of 3% during this time.
In 1866, tax collections reached their highest level in the nation’s 90-year history — more than $310 million!
In 1868, Congress started moving away from the income tax and focused its collection efforts by imposing taxes on tobacco and distilled spirits and the income tax was eliminated entirely in 1872.
The income tax had been lucrative in years past so it naturally resurfaced 22 years later in 1894 but was short-lived after being declared by the U.S. Supreme Court a year later as unconstitutional, because it was not apportioned among the states in conformity with the Constitution.
Hmmm…what do you do when the Constitution doesn’t conform to your pecuniary desires? Easy – just amend it. In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system giving Congress the legal authority to tax the income of both individuals and corporations.
In 1918, the government collected a tax of $1 billion, rising rapidly to $5.4 billion in 1920. With the advent of World War II, employment increased and so did tax collections — to $7.3 billion. A wage withholding requirement was introduced in 1943 which was a game changer increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.
It’s easy to for those in the highest marginal tax bracket of 39.60% to express dissatisfaction with today’s tax structure but in 1945 the highest tax rate was 94.0% on interest and dividends.
In 2016, the IRS processed 152,544,000 income tax returns and collected $3.6 trillion, 49% of which came from individual taxpayers, 31% from payroll taxes, 11% from corporations and 8% from miscellaneous sources such as excise and heavy highway vehicle use taxes.
It’s been 240 years since it all began and the simplification and equitable tax system endeavors of our friends in D.C. have evolved into a tax code that is infiltrated with confusion and inconsistencies.
The Tax Cuts and Jobs Act that will become law later this week is a massive cluster of hit and miss attempts to do something significant and beneficial to our tax system. I’ve browsed the 1,000 pages and all it accomplished is an extra layer of job security for professionals in the tax preparation, planning, and compliance industries and for that, I thank them.
In the meantime, we’ll march on without the promised postcard tax return program and look forward in anticipation to the year 2026 when all the provisions of the new tax bill expire and the lawmakers are forced into introducing yet another emergency patch at the very last second by kicking the can another one or two years.