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Wednesday, June 24, 2020 Leer en Español

Give the Government an Inch of New Taxes and They Take a Mile

Governments often break their promises, especially about taxes.

Image credit: The New York Public Library on Unsplash

One thing governments show us over and over again is their promises are almost always broken. This should concern us greatly since the “war” on COVID-19 will bring many promises from Congress that will never be realized but will cost us a lot of money anyway.

Our federal government promised to balance the budget every year, even enacting a debt ceiling in 1917 to ensure they don’t accumulate too much debt. Instead, they continue to be fiscally irresponsible with our money by perpetually running large deficits and have added trillions to the national debt since then. The coronavirus has only compounded the debt problem, severely deepening it at an astonishing pace.

The feds promise us all the time their legislative bills will solve problems they were designed to help but get opposite results. Obamacare promised to get 43 million people without health coverage on the insurance rolls but there are still 27 million uninsured since it was enacted ten years ago. It also promised it would lower premiums for insurance but the opposite has happened. Social security was supposed to be fiscally sound but we currently have a $34 trillion present value unfunded liability. The CDC and FDA are supposed to protect us from pandemics but have failed miserably in their jobs as evidenced by their blunders during the coronavirus debacle.

Perhaps the worst example of broken promises is the federal income tax. When this tax was first implemented, we were promised it was aimed only at the rich and tax rates would not go up over time. Of course, the truth is completely the opposite.

Most people think the income tax has been around since the country was founded, but income taxation was unconstitutional until the 16th Amendment was passed in 1909 and implemented in 1913 (Lincoln did enact a temporary income tax to fund the Civil War but ended it quickly). Prior to the income tax, the federal government received most of its revenue from tariffs and excise taxes on things like alcohol. But these taxes unfairly hit people with lower incomes as they had to spend a larger percentage of their incomes than the wealthy on imported goods and luxuries like whiskey.

In reaction to this, lawmakers felt an income tax paid for primarily by the rich would lessen the need for tariffs and excise taxes that disproportionately hurt the poor. Of course, once the feds were able to exact taxes on income, there was no limit to how high they could raise tax rates or other ways they could tax. Not only were personal incomes subject to tax, corporations had already been subject to corporate income taxes. Then came social security payroll taxes in 1935 and those excise taxes are still with us.

The initial income tax did indeed target just the rich. The income tax rate in 1913 was just one percent on income up to $20,000, the first bracket threshold. The personal exemption (the maximum amount of income not subject to tax) was $3,000 for a single person and $4,000 for a married couple. Since the average household income at the time was just $687 per year, not many people paid income taxes (only 4 percent of income earners were liable for any income tax).

The top income tax bracket in 1913 started at a whopping $500,000 of income and was at a rate of just seven percent. The total tax revenues to the feds that year were about $71 million, with John D. Rockefeller paying the most at around $2 million himself. The new income tax was meeting its promises to have the rich bear the burden.

However, it wasn’t long before they raised tax rates and lowered exemptions, subjecting more people from the lower and middle classes to income taxes. Needing more revenues for funding of World War I expenses, in 1918 the personal exemption was lowered to $1,000 while the tax rate for incomes up to $4,000 was tripled to six percent. Income tax rates for incomes above $500,000 soared to 76 percent.

Since then we have seen many increases and decreases in the income tax. Under Franklin D. Roosevelt in 1944 the top rate skyrocketed to 94 percent on incomes over $200,000. Even the lowest bracket was increased to a 23 percent rate while the personal exemption was decreased to just $500. Many more workers were now subject to the income tax since the median income that year was $2,595. Since then, income and payroll taxes have significantly impacted the lower classes.

Today the federal tax rate starts at 10 percent for incomes in excess of the personal exemption of $12,400 for a single person or $24,800 for married couples. The top rate is historically low at 37 percent. It may seem that things are better today, but a fairer comparison would be to look at the income thresholds and exemptions on an inflation-adjusted basis.

Using an online inflation calculator we can determine what the original brackets and exemptions would have been today, adjusting for inflation since 1913: The personal exemptions of $3,000 for singles and $4,000 for married couples would be nearly $77,000 and $103,000 today respectively. The first bracket threshold of $20,000 would be over $516,000 today.

Imagine if these were our income tax rates and brackets now. A single person making less than $77,000 would pay no taxes. If they made more than that, income over that amount and up to $516,000 would have a tax rate of just one percent! That would amount to just $4,400 in taxes on taxable income of $516,000. That same individual today would pay nearly $87,000 in federal income taxes, over nineteen times as much as in 1913!

Social security taxes are no different. When first implemented in 1935, the tax rate was just 2 percent on income up to $3,000, split evenly between employee and employer. Now it is 12.4 percent on income up to $137,700! On top of that, they impose Medicare taxes of 2.9 percent on 100 percent of income—for a total payroll tax of 15.3 percent on middle class incomes!

The point of all this is any government, especially the feds, will never cease in its hunger for more revenue. Once they get a foot in the door, be ready for them to come crashing into your home, demanding even more money from you. The coronavirus is the perfect excuse. Expect Congress and President Trump to impose greater taxes on us from all angles. And if Joe Biden or another progressive Democrat were to win the presidency, you can bet tax rates will go up even more—for everybody.

Next time you hear a politician claim the tax s/he is advocating for will be low and temporary, think about what happened to the income and social security taxes.

  • J. Kyle deVries is a financial planner residing in Southern California. He is the author of an Amazon #1 New Release entitled, Bern, Baby, Bern!: Why Bernie Sanders’ Policies Would Incinerate the U.S. Economy.