Tuesday, October 14, 2008

Q &A: What Were Tax Rates Back In The Day?

This is an expanded answer to a question that was asked on Facebook:

Federal government revenues were largely generated via tariffs and use fees prior to 1914. There was an income tax from 1862 to 1872 to pay for the so-called American Civil War. (note: a "civil war" is technically a war fought over the same seat of power for control of a country. In our case, the South had decided they didn't want to be part of the United States anymore and wanted their own seat of power, not to fight over the existing one) In 1895 the Supreme Court held (Pollock v. Farmers' Loan and Trust) that a direct tax that was not apportioned amongst the states was unconstitutional. In 1913 the 16th Amendment was passed so that Congress could then reach directly into our pockets.

As originally passed, the income tax was 1% on incomes above $3,000 (at least $61,400 in today's dollars after inflation) and an additional 6% on income above $500,000 ($10,233,000).

Today everybody pays over 15% for FICA and MediC (your employer pays half, if self-employed you pay it all). PLUS income tax rates of 10% (AGI up to $8,025), 15%, 25%, 28%, 33%, 35% (over $357,700) [single filer].

So, somebody in Indiana can literally pay (35% + 15% + 3.4% + 1.65% = ) 55% on each additional dollar they earn BEFORE property, sales, excise and inflation taxes.

Note: inflation is the result of growth in the money supply without a commensurate growth in the underlying assets that support its value. Like, when the Federal Reserve introduces hundreds of billions of dollars to the economy to, oh, say bail out big Wall Street firms and buy up bad mortgage notes. Inflation is a decline in the real value of money and is not necessarily a natural occurrence at the macro level.

A bit of additional history to color the discussion, from The FairTax Book by Neal Boortz and John Linder:

"Those who favored the idea of an income tax met with considerable success, capturing the public sentiment with promises that the tax would 'soak the rich' and leave the vast majority of Americans alone. Economic class warfare was as alive and well in the early 1900s as it is in the early 2000s"

And regarding it's passage:

"The historical time line now brings us to Texas Senator Joseph Bailey, a conservative Democrat. Deciding to play the game of partisan politics, Bailey cooked up a scheme to humiliate congressional Republicans. Though he was opposed to the idea, Bailey...

Note: Charlie Rangel (D - NY 15th) introduced legislation to bring back the draft a few years ago despite clearly being against it. This was all a political stunt.

...introduced a bill calling for an income tax. He mistakenly thought that the Republicans would rush in to kill this legislation, thus furthering the image Democrats were trying to cultivate of Republicans as hostile to the poor and concerned only about protecting the wealthy. Wouldn't you know, things didn't turn out as Bailey had planned. Liberal Republicans, backed by Teddy Roosevelt, actually came out in support of the bill. Passage seemed all but certain."

In my opinion, Teddy Roosevelt was one of the top 10 worst Presidents in American history. He in no way deserves to be on Rushmore. We also have his ego and arrogance to blame for Wilson becoming President in 1912, who, of course signed the Income Tax and Federal Reserve into law. The word "idiots" comes to mind.

"Conservative Republicans were panicked. They needed a way to defeat the Bailey bill and the growing threat of an income tax. In one of the worst examples of legislative play-calling in our history, Republicans came up with the brilliant idea of announcing that they would support the idea of an income tax on one condition: if any only if it came about as the result of an amendment to our Constitution. Even though this group of conservative Republicans felt that there was some slight chance the proposed amendment might actually make it through the House and Senate, there was just no way in the world that the legislatures of three-fourths of the states could vote for ratification. Yeah ... right.

Big oops."

It's worth noting that within three years, the top tax rate was already ratcheted up to over seventy percent as we unnecessarily and, in hindsight, tragically entered World War I. Some scholars argue that without America's entry into World War I, it would have basically ended in a stalemate and a negotiated settlement that was not as punitive against Germany. The harsh treatment of Germany after World War I, it is argued, led to the ability for Hitler to parlay his nationalistic message into power and thus leading to the horrors we associate with him and ultimately World War II.

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