It's late afternoon on a gorgeous spring day in New York, a time when many people might be expected to relax and smell the roses. The taxman cometh But not Jose Torres. He knows that Thursday is April 15, and he's worried about the deadline for filing his federal income tax return and paying the bill. "And I'm not feeling good right now at all," he says. Michelle has met the deadline. Still, she is also anxious about whether her tax forms were filled out correctly.
"People are always afraid of filing their taxes. Every year there are new tax laws, tax regulations. People aren't sure. So people are always afraid," says Michelle. History of taxes Personal income taxes were not always so complicated. In fact, there was no personal income tax at all until 1913. Before that, the federal government got its funds from customs duties, tariffs, and from excise taxes on alcohol and tobacco.
Economics professor Richard Sylla of New York University's Stern School of Business says that when the U.S. Congress first established the federal income tax, only the wealthiest 10 percent or so of Americans had to pay it, and then, only at a rate of just six percent of their gross income, or less.
"The rates went up a little bit in World War I, but came down in the 1920s. Then they began to go up in the 1930s and the Depression when Franklin Roosevelt came in and thought the rich ought to pay a bigger share," says Sylla. "But the real gain in the income tax came in World War II. In the war, the rates went up to very high levels, as high as 90 percent. It was done as a sort of wartime measure, but it stayed on ever after and made the income a greater source of government revenue." Complicated forms According to Sylla, that is when the tax code began to get complicated. "Some of those high rates were perceived by people who paid them and government officials as confiscatory, taking too much money from people. And so then Congress began to add a lot of loop holes so nobody really paid the 90 percent. They got oil depletion allowances and all kinds of special rates for capital gains," he says. "And congressmen, they do the bidding of their constituents. And sometimes they get campaign contributions from very wealthy constituents, and so they sneak special breaks into the tax code that helps some of these wealthy constituents, and they are rewarded with campaign contributions and things like that. It's just the way our system works." That system has become so complicated that Sylla, who boasts a Ph.D. in economics from Harvard, often made mistakes in figuring out how much income tax he owed. Today, he relies on a computer program to help him out, while others turn to national tax preparation chains like H Block.
Added responsibilities Sylla notes that the business of the federal government itself has changed radically over the past two centuries. During most of the 19th century, state and local governments were far larger than the federal government, which used about four percent of gross domestic product to provide its services.
"But in the 20th century, as the US became a superpower, fought major wars and became the main source of defending the world against the Communists — and now, sort of policing the world in a way — the U.S. government grew to be a bigger fraction of the GDP," says Sylla. "So that now the taxes take about 20 to 25 percent of the GDP, and government spending at the federal level is at 20 to 25 percent of the GDP." Most federal tax revenue goes to pay for programs such as Medicare health insurance for seniors, road building and national defense. It's a price many everyday New Yorkers like Jimmy are willing to pay — sort of. "Well, I think it's a necessary thing for society. It's supposed to help with public things — sanitation, police, things that other people need. So I think it's a necessary thing," says Jimmy. "I just think it's too high. There is a lot of waste." Where does it go?
A huge proportion of federal taxes go to pay the interest on the national debt, which according to the U.S. Department of the Treasury stands today at almost $13 trillion.
Professor Sylla says the deficit itself is rooted in the contradictory ways Americans view government and its proper role.
"I think there is a bias in this system where government spending programs are popular but the taxes necessary to pay for those programs are unpopular so we don't raise our taxes enough to pay for what we want government to spend. And then we have more debt. We can't continue to have this disconnect between large spending programs and an aversion to taxes to pay for them." Thoughts for everyday Americans to mull over this tax season, as they stand in line at the post office waiting to mail the government its annual due before the April 15 midnight deadline.
