4th of July – The First Battle Against Unfair Taxation

July 4, 2013

Just a few days ago, a video started making its rounds of the internet, demonstrating exactly how little the American people seem to know about their own history (you can watch it here: http://www.youtube.com/watch?v=SRkFDcX_72c). Many don’t know from which country we declared our independence, and when the Declaration of Independence was signed.

Activist and author Mark Dice interviewed random people and asked questions about American history, was shocked and alarmed at the results. No, people, we did not declare independence from either China or Mexico; no, Jesse Ventura was not one of the founding fathers; no, was not on November 2nd, and no, it was not in 1842.

So in celebration of our nation’s independence from Great Britain over 200 years ago for reasons of unfair taxation, here are a few facts about our country’s tax system that you may not know, courtesy of the Tax Foundation.

4th_of_july

First Income Tax

The modern income tax was first levied in 1913, with the ratification of the Sixteenth Amendment. It has been contested every since, with protesters claiming that the federal government does not have the jurisdiction to tax citizens, and with others claiming that the amendment was never properly ratified.

The top marginal rate in 1913 was 7% for household incomes of $500,000 or more, and was levied on fewer than 10% of American households. In 2012 inflation-adjusted dollars, a household would have to be making over $11.5 MILLION in order to be subjected to the highest rate.

One hundred years later, in 2013, the top marginal rate is 39.6% and applies to households making over $400,000, which includes about 10% of the country.

Highest  Tax Rates

During World War I, the top rate was increased to 77% and was levied on households making over $1 million (approximately $18.5 million in 2012 dollars.)

After World War I, the top rate was decreased several times by Treasury Secretary Andrew Mellon, who suggested that lower tax rates would spur economic growth. By 1928, the top marginal rate had been reduced to 24% and was being levied on households making over $100,000 ($1.2 million in 2012 dollars.)

The highest ever marginal rate was 94% during the years of 1944-1945, when the country was encouraged to “pitch in for the war effort”. This rate was applied to taxpayers who made over $200,000 per year (approximately $2.3 million in 2012 dollars) and clearly

The rate was dropped in 1946, but only to 91%, and it was lowered into the 70+% range in the 1960s with the advent of the Vietnam War.

Modern Rates

In 1981, the so-called Reagan-era tax cuts began, and by 1988 the top marginal rate had been reduced to 28%. As a component of the economic theories known as supply-side or trickle-down policy, it was expected to act as an antidote to the stagflation (low economic and high unemployment) that had gripped the country during the 1970s.

Since the Reagan tax cuts, the top marginal rate was increased to 39.6% under President Clinton, then brought down to 35% under President George W. Bush. Under current President Barack Obama, the top rate is returning to 39.6% for the 2013 tax year.

Claims for Fairness

While it is true that under today’s tax code, the top 1% of taxpayers pay approximately 40% of the total income taxes collected by the federal government, it is also true that they control 40% of the wealth in America.

And while the bottom 50% pay only 4% of the income taxes, the bottom 80% of Americans own only 7% of the country’s wealth.

Claims for tax fairness tend to emphasize one fact over another, without painting a full and complete picture of the income and wealth distribution in America.

Many people feel that the wealthy are paying far more than their fair share, and others feel that the wealthy should be taxed to an even greater degree. Either one side or the other plays the victim and makes its case for changes to be made for its benefit.

The tax fairness debate will likely never be resolved. So go ahead and enjoy your weekend, with barbeque and fireworks, and be happy that you know more about the American Revolution than the average random person that Mark Dice interviewed recently. And now you know more about the history of the income tax, as well.