...In Life you can only count on two things...Taxes and More Taxes.
With my attention on the new tax law just passed under the guise of reducing inflation (that must be
a joke) it occurs to me that a brief visit to the Income Tax and alternatives might be helpful.
Prior to the imposition of income tax, government funded itself primarily through excise taxes, tariffs and various customs duties et al. Public land sales also acted as a source of funding. While government was small or relatively so, this worked. Various schools of thought put forth that taxes on goods like Whiskey and many others proportionately effected the workers not the wealthy. However, to buy or not to buy was a freely made decision so other than the very basic necessities of life it functioned like a tax on consumption. Income tax which legally became our tax system in 1913 was a very different approach. As is usually the case, it was sold to the public stating that it would tax only those wealthy folks, a very small percentage of the population.
Wilson signed the bill into law on October 3, 1913. The Revenue Act of 1913 lowered average tariff rates from 40 percent to 26 percent. It also established a one percent tax on income above $3,000 per year; the tax affected approximately three percent of the population. The Democratic Party, led by William Jennings Bryan, advocated the income tax law passed in 1894, and proposed an income tax in its 1908 platform. It gained steam to become the 1913 law. I’d bet many would have thought it was the Republicans but nope, the Democrats in their tax and spend beginnings.
Often forgotten is that Congress Passed the 16th Amendment on July 2, 1909, and ratified February 3, 1913 establishing Congress's right to impose a Federal income tax. This considerably changed the landscape in the USA giving more money and thereby more power to the Federal Government which was a centralized government operating in increasingly invasive ways over the States and populace.
Income Tax Today.
The Internal Revenue Code is today embodied as Title 26 of the United States Code (26 U.S.C.) and is a lineal descendant of the income tax act passed in 1913, following ratification of the Sixteenth Amendment. Most states also maintain an income tax, while some do not. Congress made major statutory changes to Title 26 in 1939, 1954, and 1986. Because of the extensive revisions made in the Tax Reform Act of 1986, Title 26 is now known as the Internal Revenue Code of 1986. Additional changes have been made and rates are called The tax brackets — or marginal tax rates — these are 10%, 12%, 22%, 24%, 32%, 35% and 37%. You can find which bracket you fall into based on your filing status (single; married filing jointly; head of household, etc.) and your annual income. Various items called Deductions can be applied to further reduce taxable income for both businesses and Individuals. A good more extensive view of this can be seen at https://www.bankrate.com/taxes/marginal-vs-effective-tax-rate/#:~:text=The%20brackets%20%E2%80%94%20or%20marginal%20tax,and%20your%20annual%20income.
If you do a quick read of the Tax Cuts and Jobs Act (TCJA aka Trump’s Tax Cuts) you'll see that the new C Corporation tax rate is 21% while the top individual rate is 37%. Also, individuals are allowed a 20% deduction for pass through income as from S Corps and other [ass through entities.
So as we stand, a huge industry exists to help businesses and Individuals calculate their tax hopefully taking advantage of the potential legal ways and methods to keep their tax as low as possible. The IRS maintains a large staff of agents and revenue officers (the ones with guns) soon to be doubled in size to facilitate the collection of tax. Internal Revenue simply refers to money collected to fund government and it’s many many departments, pensions, the armed forces and on and on. The Executive Branch ie the President and his helpers in the Cabinet create a Budget that is intended to be the curb on spending. This is a major way that a President forwards his policies. A good breakdown is available at https://www.itsuptous.org/blog/breaking-down-us-federal-budget-charts-and-graphs. Make no mistake, the Congress is mandated to approve the Budget. What happens if Congress does not approve a budget? If the budget is not completed by the new fiscal year, Congress must pass a continuing resolution authorizing temporary funding at the previous year's levels or face a government shutdown. We should be so lucky. We have not had much recent luck passing Budgets and the continuing resolution seems to have replaced it. That is merely kicking the can down the road and someday it runs out of road.
Within the Tax Code are various attempts to influence tax payer behavior. These are found in allowed deductions and more. To get a certain behavior like having a family or having children the IRC permits deductions for achieving those standards. This is more or less a Positive approach whereas restrictions of certain behaviors is a Negative approach. Don’t conflate Positive and Negative as good and bad here. I am merely using these terms to categorize the behavioral control aspects of the Tax Code. The old adage is that if you want more of something reward it. If you want less of something punish it. This is peppered throughout the tax system. So, in summary, the IRC (Title 26 and revisions) is concerned with rewards and punishments that are focused on collecting tax to fund government through tax and behavioral controls.
Alternative Tax Schemes
You needn’t be anti-government to simply want a smaller more efficient one. Efficiency and Government forms one of the most exaggerated dichotomies of modern times. Anything the Federal Government attempts is doomed to be less efficient than the States and/or local municipalities. The Unionization of Federal employees alone prevents efficiency but there many other factors in play. Management principles often site the flaw in the activity being at a distance from its ,management. This is an observation of the Military as well.
A tax system that requires its Citizens to “voluntarily” file returns then uses an army to extort payment is the stuff that Robin Hood fought. Though I am unsure how effective he was in getting money from the rich and redistributing to the poor ( he was a Socialist), it is a tale of robbery in the name of fairness. The Sheriff of Nottingham was of course a villain going forth into the countryside in search of taxes owed the King. Hooray, we have found a distant ancestor of the IRS.
Taxes are never popular but a sensibly organized society that has some concept of the common good must tax its citizenry to pay the administrative bills. Over time these sensible administrative costs get redefined into social benefits, special interests, pensions etc. and there you have the problem. BIG spending takes BIG taxes. Plus in modern times the government can use Modern Monetary Theory to just print more money and pay for deficit spending, Ultimately the Citizenry pays for that too in the Inflation Tax. What household on Earth can do that. When the checkbook says zero, families stop spending. They can’t write checks out of thin air like the Federal Reserve and Treasury. Congress loves spending money and this unlimited checkbook makes them very happy.
The tax scheme that has been running its course since 1913 is nearing its practical end. By this I mean it is unable to collect enough in taxes to pay for the governments spending so the US and other developed nations must finance their deficits with debt. They issue bonds and attempt to pay as little interest as possible while still attracting buyers. That game is pretty much over. In fact, the buyer of last result is now the only buyer...that buyer is the Federal Reserve Bank. They print the money to buy the bonds and hold them. They’ve done this to the tune of 9 Trillion dollars. Good luck finding secondary market buyers. This money printing IS the only reason we have inflation. They INFLATE THE MONEY SUPPLY and the rest is history.
Over the years some interesting alternative tax systems have been promoted. The one that took hold to a degree was the Flat Tax. Several countries in the Eastern Block use a flat tax. Usually no more than 12% or so and very simple to calculate. One candidate in 1996 and again in 2000 Steven Forbes ran on a Flat Tax platform. He went nowhere but he did get the subject front and center. Since then little attention has ever been given to converting the US system to a flat tax. This mainly because Congress likes being able to carve out tax deals for their big donors and create behavioral controls over the population so complex they need accountants and lawyers just to stay in compliance. By the way, compliance is the entire goal of IRS and compliance means obedience and that is control. Nice hey?
The Flat Tax gets my thumbs up because it is simple and fair. All citizens and all businesses pay the flat percentage no ups and no downs. No special deals or deductions just the flat tax amount. Accountants and Lawyers oppose this for its simplicity because they get Billions out the current tax scheme. That is a special interest with powerful lobbyists so entrenched as to be on a first name basis with 1000s in DC. Lobbying is another big problem but save for that for another day.
Here is how a 10% Flat Tax would be calculated for a family making $200,000:
$200,000 X .10 = $20,000
Send in a check.
No calling your accountant or seeking tax advise from a tax lawyer, just the above.
I suppose there could be some zero tax income level like anyone making $10,000 or less, a few simple deductions and maybe Social Security payments would not be included in income but I still think this approach is fair and could raise enough tax to keep the government running at break even or perhaps a small surplus. That depends on the Congress ceasing its spending spree. This could be done by a Balanced Budget amendment to the Constitution. The chances of that happening are pretty slim and the odds of Congress voluntarily reducing its spending is nil. That gives us a fairly grim outlook.
As much as you might disagree, this is still a tax on income and incentivizes making LESS not more. I understand that a better life and lifestyle might be motivation enough for some to make as much as they can but there are factions that would go the other way. So what to do?
The National Sales Tax
We are most familiar with sales tax at the state, county and local level. As of 2017, 5 states (Alaska, Delaware, Montana, New Hampshire and Oregon) do not levy a statewide sales tax. All others do have a state wide sales tax, then counties and local municipalities pile on their pound of flesh. These sales tax schemes place the selling merchant/retailer in the position of acting as the state’s agent in collecting the tax and forwarding through periodic filings the amounts collected. It works but is subject to evasion. Those who get caught collecting the tax but never reporting it etc. can get into considerable trouble. Also, struggling businesses find it like payroll taxes an easy source of financing. Not a good idea.
A National Sales Tax could be established as a national retail tax and incorporate the existing tax schemes and filings for state level tax as the base from which the national tax get collected. This could be mandated to the states and require them to policies it etc. This would not very popular with the states who would be necessity need more staff and enforcement practices. But it could be worked out.
A 10% retail sales tax imposed by the Federal Government could also be applied to retail services which many states exempt. Census Bureau data says retail sales hit 5.7 Trillion in 2021. a national sales tax of 10% would then bring in $570,000,000 which seems much too low to run the country. But perhaps it should be 20 or 25% and coupled with a flat tax on income? I do believe that a National Sales Tax though not free of collection expenses would be efficient at least when compared to the high man hour the IRS currently requires.
Other Sources of Revenue
In the US there are other tax revenue sources beyond the income tax. Various Excise taxes, transaction taxes. Transfer taxes, Tariffs etc exist and do contribute to the overall revenue collected. These mechanisms already in place could have their rates increased and their base expanded to increase results. However, there is fine line to be walked where rates are in line with what a market can or will bear. A point can be reached in any taxation scheme whee it becomes oppressive and begins to lower the production base thereby becoming a less effective tax. As seen when Trump tax cuts went into effect the business world thrived on the new opportunity to make an improved net profit. This applies to Individual rates too and leaving more money in the Citizen’s pocket has been a mainstay of the Right’s policy platform. The theory includes growth of the top line as a result of fairer taxation incentive and that eventually collects more tax than a higher more oppressive rate. This was proven when Reagan implemented his big tax reforms in 1986. A very successful reform though many deductions were limited and some eliminated. A lot of deal making went into it and a lot of the special interests still got their carve outs. But still, it improved upon the previous big revision of 1954.
The subject of taxes is not a popular one but a necessary one in an organized society. Governments are presumably established to serve the needs of its organizing proponents. The Citizen gets something in return for their tax paid. The more the taxpayer gets in return the happier that system will be. Some more heavily taxed nations still have a pretty happy taxpayer base because they get healthcare, education, paid leave and more. If that is what a populace wants then they should have the choice to elect that route. That of course assumes a somewhat Democratic and free nation. The populace has little input in Dictatorships and in in the US if the wrong Representation gets installed all manner of goofy things happen. Bills get passed that no one asked for and various political agendas eat up the collection plate funds. Too little in the plate? No worries, they can just print more.
DEFICITS
In our daily lives we know that we can’t spend more than we make. Even though using credit does that it still is a debt that must be repaid. Don’t pay and the spigot gets turned off. No free lunch. But the world of spending for Sovereign Nations is bit different. They all have Budgets but these have become suggestions not enforced. Because Fiat Money can be created out of thin air unlike currency backed by Gold or Gold as money itself, a Budget has no real meaning other than the deficit being entered on a ledger. It IS a house of cards and quite a ponzi scheme. As long as no one says “hey, you’re printing worthless paper and I’m not accepting it”, it goes on and on. We’ve had this in spades since The US was taken off the Gold Standard in 1971. Things have never been the same though the freely flowing printing press made it seem so. Deficits get financed by Bond issuance and that has an interest expense. Some day sooner or later those Bonds get too costly and default and the system collapses. A Balanced Budget Amendment could go a long way to avert disaster because it would be an enforced discipline upon those who have none, i.e Congress.
Balancing revenue with spending is real kitchen table stuff. The Congress needs a big kitchen table and an almost literal gun to their head to achieve anything resembling a Balanced Budget. In the 1990s Democrat President Clinton worked with Republican leaders in Congress and balanced the budget and created a surplus. Amazing. The present Congress currently spend first and consider how to pay for it later. That commiseration of how to pay has been replaced by the printing press. Deficit? No problem, just print more cash. This is much preferred than raising taxes and pissing off their voters. That has happened many times over the centuries and it never ends well. Societies come and go even the great ones. Rome, the Tang Dynasty, modern Europe, Venezuela, Zimbabwe are a few to consider. When the trust in a currency goes, it gets rejected as a means of exchange. That will change the USD as the world’s reserve currency and some other system take over. I personally would like to see a return to God’s money, Gold. It is an element:
Gold cannot be made up out of thin air and has served as money for 5000 years. Nations come and go as do there currency schemes and taxation...but Gold is forever. I can imagine a return to Gold backed currencies soon. That will go a long way toward bringing back some fiscal responsibility to the Central Banks. None too soon either. Meanwhile, the best we can do is demand better discipline from Congress, know the tax laws, use them to or advantage wherever possible and pay the least we legally can.
I leave you appropriately with Taxman by the Beatles:
Good Luck,
Donn Marier
DM-Your Own CFO
TAXMAN
Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman
Yeah, I'm the taxman
Should five percent appear too small
Be thankful I don't take it all
'Cause I'm the taxman
Yeah, I'm the taxman
I'll tax the street
(If you try to sit, sit) I'll tax your seat
(If you get too cold, cold) I'll tax the heat
(If you take a walk, walk) I'll tax your feet
(Taxman)
'Cause I'm the taxman
Yeah, I'm the taxman
Don't ask me what I want it for
(Ah, ah, Mr. Wilson)
If you don't want to pay some more
(Ah, ah, Mr. Heath)
'Cause I'm the taxman
Yeah, I'm the taxman
Now my advice for those who die (taxman)
Declare the pennies on your eyes (taxman)
'Cause I'm the taxman
Yeah, I'm the taxman
And you're working for no one but me (taxman)