woody zimmerman 118 2007(Edited from an article of April 2004)

At our house April 1st is a favorite date for more than the usual silly reasons of practical jokes and improbable scenarios that end with shouts of “April Fool.” For it was on this day that my wife and I met. The date was April 1, 1961. (Obviously, I was a mere boy at the time.)

I tell people that I was just minding my own business on our college choir’s tour bus, when this beautiful babe “threw herself at me.” (My mother had warned me about this, but did I listen?) My wife recalls it differently, but we both agree that it was the ultimate April Fool joke for us.

However, I love early April for more than these romantic reasons from my past. I also love April because it is what we have come to call “tax season.” Yes, I admit it. I love that time of the year when we all spend many hours – or else pay tax consultants lavishly – to prepare our income tax returns. Indeed, I have just completed my own return after spending much of two weeks gathering and sorting receipts and using a software package to prepare the forms.

Like most Americans, I approach the annual task with a distaste bordering on nausea. Usually I procrastinate until a week before the deadline, although this year I actually started earlier. I use a commercial tax-preparation software package. It is invaluable because it instantly recalculates the entire return after any change. (Experienced returniacs know the frustration of redoing numerous “schedules” of the return after inserting last-minute changes.)

Why, then, do I love tax season, if I hate doing my return, like anyone else? The answer is that as a political conservative, with libertarian leanings, I appreciate that tax season is one of the few times when all Americans must actually confront the ponderous, extortionate tax system we have today, as well as the reason we have it. We “celebrated” (if that can be the correct term) its 100th birthday last year. Why we have it boils down to Envy. How envy became the annual nightmare of the Income Tax is a cautionary tale for all of us. Here’s the dismal history of how we got it – or, more accurately, how it got us.

By the early 20th century a few industrialists, miners, bankers and railroad tycoons had made vast fortunes in emerging industries like steel, oil and railroads. Dollars were backed by gold, so they bought far more than the greenback of today. But, notwithstanding the mega-success of some, dollars were generally a lot tougher to earn than today. Many workers earned just a single dollar for a long day of hard toil. Maids and other servants made even less.

Orphanages and poorhouses cared for people who were in real want, but there was nothing like the welfare “safety net” of today, whereby government furnishes significant income and in-kind services for prolonged periods. Without work and income, circa 1900, you were in deep trouble. Many people in such circumstances lived on the streets, without shelter, or wandered as vagrants.

In this economic environment – far more demanding but also less restrictive than today’s – the spectacle of rich people ostentatiously displaying their wealth in mansions and kingly living styles generated much resentment among the millions who were just scratching along. Populist politicians began to fan the flames of envy to gain political advantage.

This produced two political initiatives. First was “trust-busting” – a government-led effort to break up the huge monopolies in oil, steel, railroads, etc., which could actually threaten both the economic health and wartime safety of the nation. Because of those monopolies, some prices – which now appear low from our inflated vantage point – were actually very high.

Although we now consider gasoline outrageously expensive, for instance, prices during the early years of the century were really far higher than today’s – even without the high gas taxes we pay today. I read that the price of gasoline, if translated commensurately from the 1920s into today’s cost of living and wage levels, would now be $10 a gallon. At a time when people were still working for $1 a day, a man could spend a whole day’s pay filling his tank with 20¢-a-gallon gas – if he had a car (which was unlikely, if he was making $1 a day).

The second initiative launched against the “malefactors of great wealth” (as the rich were popularly tagged) was the income tax. Conditioned, as we are, to having 25% of our pay “withheld” as tax, before we even see it, we find it difficult to grasp that this was not always so. At the dawn of the 20th century, people actually took home their full earnings on payday. The man on the street could imagine nothing else. (They didn’t know when they had it good.) The major funding for the federal government came from import duties and excise taxes.

The fly in the ointment was a handful of high-profile rich people, like the Carnegies, Vanderbilts, Rockefellers, Goulds, etc., who had accumulated fortunes in the hundreds of millions – wealth beyond the dreams of avarice – without paying a farthing in tax. This is impossible to imagine today, and was becoming hard to swallow then. People who complained that others had made so much money without paying any tax evidently failed to notice that they, themselves, had not been taxed, either. “Envy politics” had been born.

An income tax was imposed during the Civil War, but it was phased out in 1872. In 1894, farm and labor discontent spurred enactment of a peacetime income tax. Pressured by trade associations, Congress passed the Wilson-Gorman tariff bill, which included an income tax. Soon after enactment, however, a conservative Supreme Court ruled the tax unconstitutional (Pollock v. Farmers' Loan and Trust Company), pronouncing it a “communistic threat” to property.

But the dogs had been let loose. During the Progressive Era, sentiment for the income tax grew so strong that in 1909 President Taft proposed amending the Constitution to permit it. An amendment was drafted giving Congress authority to impose taxes on the proceeds of any lawful business without apportionment according to population or equal treatment of all taxpayers.

Support for the amendment came from a coalition of: (1) progressives alarmed by rapid concentration of industrial wealth; (2) conservatives who believed the government needed a modern, elastic and reliable system of government revenue to cope with national emergencies. By February 1913 the Sixteenth Amendment had the approval of the required three-fourths of the states. The nose of the Income Tax camel was under the tent. We soon got the whole camel.

Thereafter, income tax legislation was quickly enacted. The “normal” income tax rate in 1913 was 1% on annual income up to $20,000 – the first $3000 being exempted for single taxpayers, and the first $4,000 exempted for married taxpayers. (This took 90% of workers off the tax rolls.) Higher (i.e., “super tax”) rates were applied to incomes above $20,000, with the maximum super-tax rate of 7% applied only to incomes above $500,000. (Contrast this with today’s top rate of 39.6% on incomes above $450,000 – comparable to about $30,000 in 1913 dollars.)

Today, the personal exemption is $3,900, and the individual standard deduction is $6,100. Somehow, the inflation that escalated income tax rates from a 1913 range of 1-7%, to today’s 10-39.6%, didn’t increase the exemption or standard deduction commensurately. If it had, today’s personal exemption and standard deduction would total about $50,000 per person.

Of course, those original rates, which would seem idyllic today, didn’t last very long. The top rate quickly leapt to 77% during World War I. By the 1950s – within my working lifetime – the top tax rate was actually 92% on incomes above $400,000. Naturally, very few paid that rate, since people earning that much could buy advice on how to shield their income from taxation.

Data from the Congressional Joint Committee on Taxation shows that income tax rates have been adjusted (by my informal count) no less than 57 times since 1913. An abbreviated table of tax rates in the lowest and highest brackets is furnished below. (Please refer to http://www.winke.com/wts/wts./histusrt.htm for the complete table and qualifying footnotes.)

               

Years

Lowest Rate (%)

On Income under

Highest Rate (%)

On Income above

1913-15

1

$20,000

7

$500,000

1918

6

4,000

77

1,000,000

1922

4

4,000

56

200,000

1924

1.5

4,000

46

500,000

1925-28

1

4,000

25

100,000

1930-31

1

4,000

25

100,000

1932-33

4

4,000

63

1,000,000

1936-39

4

4,000

79

5,000,000

1941

10

2,000

81

5,000,000

1942-43

19

2,000

88

200,000

1944-45

23

2,000

94

200,000

1946-47

19

2,000

86.45

200,000

1948-49

16.6

4,000

82.13

400,000

1950

17.4

4,000

91

400,000

1951

20.4

4,000

91

400,000

1952-53

22.2

4,000

92

400,000

1954-63

20

4,000

91

400,000

1964

16

1,000

77

400,000

1968

14

1,000

75.25

200,000

1971

14

1,000

70

200,000

1981

13.825

2,100

69.125

212,000

1983

11

2,100

50

106,000

1985

11

2,180

50

165,480

1987

11

3,000

38.5

90,000

1988

15

29,750

28

29,750

1991

15

34,000

31

82,150

1993

15

36,900

39.6

250,000

2000

15

43,850

39.6

288,350

2003

10

14,000

35

312,000

2013

10

17,850

39.6

450,000

Over the ensuing century, wars have generally occasioned the highest tax rates. (See yellow-shaded years.) Democratic presidential administrations (gray shading) have generally kept rates higher than Republican administrations (blue shading). Some of this is explained by the fact that Democratic administrations involved us in all four major wars in the 20th century. (Surprise!)

Wars or not, however, the Democratic Party has clearly favored “soaking the rich”, while Republicans tended to lower rates whenever possible. (Eisenhower, 1953-’61, and Kennedy/Johnson, 1961-’69, were exceptions to this rule of thumb.) The years 1954-’63 were the longest period of stability in the tax rates. In 1988 (Reagan), rates reached their lowest levels since 1930 when just two income brackets were established, with rates of 15% and 28%, respectively. As few as two rate strata had never before been established in the entire 75-year history of the income tax. (Naturally, it was too good to last.)

Tax-withholding – previously mentioned – was first established during World War II. President Roosevelt actually vetoed it, but it was passed over his veto by a worldly wise Congress that realized half of the country would be in tax-default, at year-end, unless taxes were pre-collected.

Although tax legislation of recent years has exempted increasing numbers of low-wage workers from taxation, the fact remains that millions of non-rich citizens today are taxed at rates reserved for zillionaires in the early years of the 20th century. Nor is the modern tendency to exempt low earners from the income tax necessarily a good thing. Many economists are becoming concerned that nearly half of the working population now pay no income tax. These voters can be indifferent to tax rates, since they are unaffected by them. Analysts say it is fundamentally unhealthy for a large segment of the population to have no personal stake in taxation levels.

The period 2003-2012 was also a long period of tax-rate stability. After President Obama was elected, however, a furious debate erupted over raising income taxes on what the president called “millionaires and billionaires.” He preached from the old Democrat sermon-book, in which the first article of faith is: “the rich must pay their fair share.” Republicans mostly resisted this push, arguing that raising taxes during a severe recession would be disastrous. Nevertheless, Mr. Obama finally managed to restore the top tax rate to 39.6% – the level of the Clinton era – on incomes above $400,000 a year ($450,000 for married taxpayers).

Many inferences could be drawn from these data, but space does not permit. Suffice it to say, the April Fool’s joke is on us for thinking we could establish a tax that would touch only “rich” people. We shouldn’t have done that.

The Bible says Envy is a sin. The Income Tax amounts to visitation of the “sins of the fathers on the 3rd and 4th generations.” Even reckoned in strictly secular terms, envy-based public policy usually comes round to bite us. We need to learn from this and not keep repeating the error.

Keep the income tax in mind the next time you hear a politician say he’ll make the other guy pay “his fair share.” The “other guy” will eventually be You. And it won’t seem “fair” at all.

We should know this by now, but a hundred years on we still haven’t learned it. As the old song asks, “When will they ever learn…?”