…that the flexibility of the American federal tax code as it stands, some say, is crucial because it can accommodate dramatic changes in the economy and in our national priorities?
First, a little history: Although the first income tax in the United States was adopted in 1861 to help pay for the Civil War, the American tax code as we know it today has evolved from the 16th Amendment, which was passed by Congress in 1909 and ratified by 38 states in 1913.
The 16th Amendment states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among several states, and without regard to any census or enumeration.” Our friend the 16th Amendment gave Congress the legal right to tax the incomes of both individuals and corporations. It’s a nice, general sort of law, and some argue that it saved the United States during World War I: When the tariff-based regime that arose in the wake of the Civil War was interrupted by trade disruptions during World War I, that tax base atrophied, and federal income tax filled the gap. Tax regimes change by necessity, some experts say, and disappear when they no longer meet revenue needs.
Then along came World War II: Just when the government particularly needed a massive infusion of cash, withholding taxes on wages was enacted as part of the income tax, and the tax system was transformed from a “class tax” — one in which only wealthy people had their incomes taxed — to a “mass tax.” Employer withholding was key to expanding the tax base and instrumental in increasing tax collections from $8.7 billion in 1941 to $45 billion in 1945.
Income taxes rose steadily for decades, until Congress imposed the largest tax cut in history in 1981. And voilá, the economy boomed (and — not entirely unrelated, some would argue — within a decade the Soviet Union collapsed).
The argument could be made that without a flexible and durable, albeit complicated, tax code, Hitler might have won, the United States wouldn't have become a super power, and it wouldn't have leapt ahead of the Soviet Union economically and won the Cold War.
Our tax code is the very foundation of American freedom and wealth.
…that the federal income tax code is unnecessarily complicated? Just enforcing it is a waste of money.
The Internal Revenue Code contains more than 3.4 million words. If you printed it out, it would fill 7,500 letter-sized pages. It is, as one critic put it, “a hodgepodge of self-contradicting, Machiavellian and calculatedly incomprehensible rules and regulations.” The tax code is so complicated that even tax professionals can’t keep up: When Money magazine sent a hypothetical family’s tax return to professional tax-preparers in 1998, they got back 46 responses — every one of them wrong.
The tax code “hodgepodge” is also costly in terms of frustration and time: The National Taxpayers Union reports that the average taxpayer spends more than 28 hours on income tax record keeping, calculations and completing the 1040 form. Other sources indicate that all told, taxpayers spend 6.2 billion hours on taxes. If you calculate everyone’s tax hell hours at minimum wage, then that’s $32 billion annually.
According to The Wall Street Journal, enforcement of and compliance with federal corporate and personal income taxes costs the United States $75 billion per year — so a huge chunk of our taxes are being spent to simply administer our tax code. According to some estimates, just by shifting to a flat tax structure, compliance costs could drop by 94 percent.
Let’s make April 15 a new holiday: “1040 R.I.P.”
Should the federal income tax system be reformed?