Taxes are the fuel that keeps our government running. It's easy to grasp the concept that a larger government requires more taxes in order to operate. When our government began, those who served did so on a part-time basis. After meeting in Philadelphia and various other places, they would return to their farms, businesses or other vocations. Because the representatives had to travel so far, and travel was so slow, it took quite a long time to draft the constitution and other important founding documents. Today, in stark contrast to the early days, political service has become a career, even to the point of "winning at all cost." In fact, politics has been perceived as a dirty game for decades. But I digress. Let's begin by taking a brief look at how the government was funded in the beginning.
In the early days of America very little was spent for public purposes. As a result, the need for taxation was low. The source of funds for government in the beginning was primarily from a "per-head" tax called a poll tax. Additional taxes were derived from the property tax and taxes on certain products. The forerunner of the income tax emerged in 1643 and was called a "faculty tax," in which taxes were paid on property and the ability of an individual to earn an income from commerce or a skilled trade. As the need for taxes rose, pressure from England grew and the phrase, "Taxation without representation is tyranny" became the mantra of independent thinkers in the 1760's.
Fast forward to the 1900's, specifically October 3, 1913, and we find the 16th Amendment which gave Congress the power to "Lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." In other words, Congress could tax any income, without sharing with any state, and without regard to any survey or ballot or details. My friend, that's a pretty broad power! The income tax rate at that point was one percent on incomes above $3,000 (single) and $4,000 (married). In inflation adjusted terms, that equates to $67,000 and $90,000 in today's dollars. There was also a "super tax" which added an additional 6.0% tax on incomes above $500,000, making the top rate 7.0%. $500,000 in 1913 is the equivalent of over $11 million today.
From 1913, the top tax rate rose to 15% in 1916, to a whopping 67% the following year. In 1918, the rate peaked at 77%, before slowly declining to 73% in 1920. As most of us realize, the 1920's were a major boom period in America. You might say it was a huge bubble which burst when the Great Depression hit. It should be noted that during the 1920's income tax rates fell to a low of 25% in 1925, which helped fuel strong economic growth.
Taxes usually rise during periods of war, as was the case during WWII. In fact, the top marginal bracket hit 94% in 1945 and remained at or above 90% for the next 19 years, until President Kennedy got his wish for lower taxes in the early 1960's.
History has proven that lower tax rates have a stimulating effect on the economy and higher taxes have the opposite result. I'm aware there are many detractors from this position, but again, the data has proven this over and over.
Now, departing from this brief lesson in U.S. history, today, we are staring down the barrel of a national debt of $16.9 trillion dollars. By the time you read this, it may well be $17 trillion! Even though the annual deficit is falling, it is still $787 billion, down from its $1 trillion dollar level just one year ago. The tax law changes that went into effect this year were mainly targeted at the highest income earners. Of course, the expiration of the payroll tax holiday caused tax rates to rise on everyone who earns a paycheck, but the majority of the tax hikes hit the higher income earners. The more income government requires, the more taxes will have to be raised. The problem is that there are not enough "high income earners" to satisfy today's debt and deficits. This means that middle income America will soon be in the scope of the Congressional rifle. As I have written before, a government can over-tax the rich until they are no longer rich. However, the rich will take measures to avoid this, and they can certainly afford to do so. Because the poor have nothing to tax, the middle class will be forced to ante up.
Therefore, before you pull the lever in your next election, ask yourself how much are you willing to pay. After all the sound bites and finger pointing, the facts cannot be changed. Our debt is too high and higher taxes are coming to a neighborhood near you soon!
