The Tax Code Is Evil

I don't mind paying taxes. At all, really. I'm not an anarchist and I believe that the government should raise money through taxation to pay for protecting its citizens.

That said, I am always apalled by the tax system we have in this country. What a crock that rich people use all these idiotic and special interest loop holes and tax breaks to get out of paying as high a percentage as middle-class people pay. And don't get me started on the use of tax breaks as incentives for things like protecting the environment (ie, "we'll pay you to stop breaking the law" -- yeah, that makes sense in a capitalist democracy).

Anyway, the Unknown Broker sent out another great piece today that I want to share:


Yesterday I mentioned that I get crotchety around tax time. I also observed that I believe there is something wrong with a tax system that is so complex that it requires people to hire someone -- at cost of hundreds or even thousands of dollars -- to simply file their taxes.

As for those who attempt to do their own taxes, it is estimated that it takes, on average 27 hours to accomplish the task.

And don’t count on the IRS for help. A recent study showed that phone-in requests for assistance resulted in incorrect answers 14% of the time. Dropping in to an IRS help center increased the odds of bum information to 33%. (Oh, and if their faulty information results in your making errors, you still have to pay any penalties and interest.) If it is so complicated and convoluted that the IRS itself can’t figure it out…what does that tell us?

I'm no Donald Trump, believe me. My taxes are, compared to wealthier folks with more complicated financial lives, relatively straightforward. Yet, the compilation of forms and schedules that I send to the IRS is ...well, not Tolstoy-ish in length, but it does rival the average Hemingway tome in thickness.

I've attached something interesting. The first 1040 income tax form, circa 1913.

Now a little history. There was, prior to 1913, a brief period during which taxes on personal income were levied. During the Civil War the federal government needed money to pay for the war, so Congress passed the Tax Act of 1862. Citizens who earned more than $600 were taxed 3 percent of their income, while people who earned more than $10,000 were taxed 5 percent.

However, most people didn't pay taxes. In 1870, only 276,661 people paid -- out of the approximately 38 million people who lived in the United States.

The Supreme Court declared the tax unconstitutional in 1872, because the Constitution says that Congress can impose taxes only in proportion to a state's population. The 16th Amendment was passed in 1913, giving Congress the right to tax Americans' incomes.

So that brings us back to the original income tax form from 1913. As you open the attached file and look at it you will note a few key things:

1. It is very short. Only 3 pages long and 1 page of instructions.
2. It is very simple. This is what my income is, these are the deductions I am allowed, here is the net amount, and here's how much tax I pay. Boom-boom-boom. Done and done.
3. Take a look at the tax rates.
Tax Rate 1913 Income Level
zero Up to $20,000
1% $20,000-50,000
2% $50,000-75,000
3% $75,000-100,000
4% $100,000-250,000
5% $250,000-500,000
6% Over $500,000

And note that there was no tax - zer0 -- until someone made $20,000 (which is the equivalent of about $340,000 in 2005 dollars)

And the worst case scenario – tax rate-wise in 1913: If you were making $500,000 (the equivalent of about $8.5 million in today's dollars) you paid the princely rate of 6%

Sigh.

Oh, and one final thought on the simplicity (or lack thereof) issue. In 1913, the entire tax code -- all of the policies, regulations, instructions, etc. fit in one small binder. Probably about the length of your own 2005 personal tax return.

Today there are over 1000 tax forms, schedules and publications, and the U.S. Tax Code is 25 volumes in length.

Sigh.

Admit it, you’re feeling a little grouchy right about now too aren’t you?

Yes, I am. And the collapsing stock market doesn't exactly help the mood.