Tax Day 2023

Apr 4, 2023

Tax day cometh, too juicy an opportunity to let slide by without comment. So, let’s dive right in, shall we?

The income tax was first used in this country in 1861 to help finance the War Between the States. It was a flat tax of 3% on annual incomes over $800. It lasted only a year and expired. Congress, recognizing a good thing when it saw it, couldn’t leave well enough alone and replaced it with a graduated tax of 3% to 5% on annual incomes over $600. The Congress has had an on-again, off-again love affair with it ever since.

Our current tax code, so named Title 26 of the United States Code, was set up by the Sixteenth Amendment to the Constitution. It was passed by Congress in 1909 and eventually ratified by the states in 1913. The main purpose of the Sixteenth Amendment was to settle a squabble between the Courts and Congress over forms of income that could be taxed.  Article 1 of the Constitution specifically limited Congress’ ability to impose direct taxes, which are taxes on property or persons, by requiring Congress to distribute such direct taxes in proportion to each state’s census population. So, the new amendment formally allowed Congress “to lay and collect taxes on incomes from whatever source derived, “direct, from property, or indirect, from wages.” Initially, income was taxed between 1% and 7% depending upon just how much one earned. Tax rates have changed 45 times since and have ranged from 0% to 94% of taxable income. We now endure seven individual tax brackets, five individual filing statuses, a “kiddie” tax, a completely separate and parallel tax called the Alternative Minimum Tax, four tax brackets on estates and trusts, a moving target on death taxes, three different capital gains tax rates plus another rate on collectibles and a new Alternative Minimum Business Tax.

Let’s take a look at how the federal government gets money and spends money:

Income…

  • Personal Income Taxes: 42% or about $20,100 per family. Most of us pay this, but approximately half of U.S. taxpayers owe no income taxes due to various exemptions, deductions, and credits. This means the other half (Us, on average) are paying double.
  • Social Security, Medicare, etc. Taxes: 24% or about $11,300 per family. Most retirement taxes are ostensibly paid half by the worker and half by the company, but this too is a fiction. The company isn’t concerned with what workers take home; their concern is how much it costs to employ them. Thus the “company’s” share of the taxes would otherwise be available to pay to the workers. Further, there is no “lock box” or separate accounts or investments waiting for workers when they retire. All of these taxes are spent either on current retirees or other government programs.
  • Corporate Income Taxes: 7% or about $3,200 per family. While economists disagree on the exact breakdown, there is no question we all pay this in some combination of three ways, 1) as a worker through lower wages, 2) as a consumer through higher prices, or 3) as an investor through lower returns. There isn’t any place else for the funds to come from. Also, as with the next item, there are large inefficiencies as companies lobby furiously and structure themselves suboptimally (in economic terms) to try to reduce their taxes.
  • Excise, Customs, Estate, Gift, and Miscellaneous Taxes: 6% or about $2,700 per family. The estate and gift taxes are particularly inefficient because they cause large (relative to the revenue) non-productive expenditures (from people trying to avoid them) and/or inefficiencies (from economic dislocations).
  • Borrowing: 22% or about $10,500 per family. We pay interest on this as do our children and their children until it is paid off (or we default). Financing almost a quarter of our spending is obviously not a good direction.
  • Grand Total: about $37,300 of tax income and another $10,500 borrowed per family at the federal level alone.

Spending…

  • Income Security & Health: 28% or $13,600 per family. This category includes Medicaid, food stamps, unemployment compensation, assisted housing and social services, and other welfare programs.
  • Social Security: 19% or about $9,300 per family. Our current seniors had their social security taxes spent to fund the previous generation’s retirement, so this is funded out of current taxes.
  • National Defense: 12% or about $5,800 per family.
  • Medicare: 12% or about $5,800 per family.
  • Interest on the accumulated debt: 8% or about $3,600 per family. Fortunately, the federal government is considered an extremely good credit risk and current interest rates, while higher than a few years ago, are still fairly low.
  • Other: 19% or about $9,200 per family.
  • Grand total: about $47,800 spent on behalf of your family.

National Debt…

  • Net Public Debt: about $24.5 trillion or about $187,000 per family.
  • Gross Public Debt: about $31.4 trillion or about $239,000 per family. This includes the net public debt and adds another $6.9 trillion that the government owes to itself. For example, current Social Security “surpluses” are invested in Treasuries, which in reality means it is lent to the rest of the government to spend now.

I could go on and on, as disheartening as all this is, we do live in the best place on planet Earth. Let’s celebrate that, and as we can work on reigning in our out-of-control federal government.