Taxation with representation

In our revolution of 1776, we fought a war that overturned an oppressive, rigid, and inescapable class structure that had enslaved us all for millennia. Our newer, more egalitarian design for government inspired others and spread like an infection throughout much of the Western world.

Our little colonial insurgency that kicked off a worldwide sociological revolution may have been inspired by the Enlightenment philosophies of Locke and Montesquieu (with a bit of help from Thomas Paine), but those were new, radical, and complicated concepts not easily conveyed or understood by a mostly uneducated public.

In today's information-rich media landscape, political groups must condense intricate issues into brief soundbites, single-sentence ballot questions, or catchy bumper sticker slogans. In the 1750s, the slogan used to sum up the the complex problems of rigid hierarchy and the harshness of colonial rule was the rallying cry of "taxation without representation."

Well, folks, we now have taxation with representation. How’s that going for you? At this time of year, we play our role in that high-minded exercise by filling out forms and sharing the fruits of our labors.

It wasn’t always like this. Before 1861, we had no income tax. Revenues were primarily collected through tariffs on imported goods and excise taxes imposed on specific items like alcohol, tobacco, and luxury items.

The income tax was initially enacted in 1861 to finance the Civil War. It was repealed when the war ended, but faced with financial strains, Congress reintroduced it in 1894. Then, in 1895, guess what happened? The Supreme Court declared the income tax unconstitutional.

In response, the 16th Amendment, ratified in 1913, established the federal income tax system as we know it today. It was sold to the general public as being more equitable than taxes on imports and selected goods, so with that populist message in mind, the income taxes initially targeted the wealthy.

Since its inception, income tax rates in the United States have fluctuated significantly. Initially introduced in 1913 with a top rate of 7% on incomes over $500,000 (a lot of money then), rates climbed to outrageously high levels to finance World Wars I and II. In 1944 and 1945, top income brackets reached a marginal tax rate of 94%. That only applied to income over a relatively high threshold, but ouch.

In the decades since, upper rates have decreased. The Kennedy administration lowered the top rate from 91% to 77%, and the first Reagan administration lowered it to 50%. In Reagan’s second term, the top marginal rate fell below 40% and has stayed there ever since.

For 2023, a single filer will pay 10% up to $11,000 and 12% up to $44,725, where it jumps to 22% up to $95,375. Beyond that, the rates increase in smaller increments, but watching Congress manipulate the brackets is fun. The scale tops out at 37% for $578,126 or more.

So what does this buy for us? We think of essential things like police protection, highways, and education, but our local governments are handed the bill for most of those items.

Your Federal tax dollars are more likely to be spent on soft items and transfer payments. Social Security, Medicare, Medicaid, CHIP and ACA, aka Obamacare), “Economic Security Plans” (unemployment insurance, food stamps, and the Earned Income Tax Credit), and Federal pensions, including veteran’s benefits, all add up to about 60% of every tax dollar spent. Another 10% is paid as interest on the national debt, funding past budget deficits. That’s seventy cents from every dollar spent off the top every year, without much room for Congress to argue.

Less than half of the remaining 30% funds the military (13% to 14%, give or take a black budget or two). What’s left over goes to education, transportation, natural resources, science and medical research (studying bat viruses), law enforcement, international aid, and the occasional bridge to nowhere.

Somewhere in the middle of that, reasonable people ask why Social Security and unemployment are drawn from a general fund when we have paid into it, how exactly we pay for debt with money that we print, and why it’s a good idea to separate veteran’s benefits from the military budget. All are good questions, but none are easily answered, and Social Security, in particular, should be considered before we cast stones at Bernie Madoff.

So again, we ask ourselves, how is taxation with representation working for us? Perhaps we will have more time to think about that after we finish our paperwork.