When people hear the word "anniversary," one either commemorates a travesty or celebrate an event such as a birthday or wedding. But the income tax? Why not? On October 3, 1913, which is one century ago from today, Woodrow Wilson signed the Revenue Act of 1913 into law. Prior to, the Supreme Court declared the income tax unconstitutional (Pollock v. Farmers' Loan and Trust Co. , 1895), but was circumvented when the income tax had been declared constitutional via the amendment process. This act was the piece of legislation that has made the federal income tax a part of American taxation ever since. I'm sure that there are those on the Left celebrating because it has provided much revenue to fund their favorite pet projects. However, I am much closer to lamenting than I am celebrating this anniversary. As concisely as I can write, I have to beg the question of why should I bother to lament in the first place.
The leviathan tax code has taken on a life of its own. In 1913, the federal tax code was only about 400 pages, and the income tax code started off with a mere four pages. Now, the federal tax code is so complicated that it takes up nearly 74,000 pages, and it's constantly changing. How many people can honestly say that they can read all the stipulations on the income tax code and actually understand it, let alone keep up with all the changes? What about the IRS' incapability of defining something as essential as income? With all the loopholes and exemptions [for special interests] that were created, should the inefficiencies and waste created by the IRS surprise anybody?
The income tax rate has increased dramatically since its implementation (Tax Foundation; Tax Policy Center). Along with the income tax rate, a couple of other factors have increased. Historically speaking, this country has had a much smaller debt-to-GDP ratio prior to ratification of the income tax, and so was the burden of federal spending (in terms of percentage of GDP). Yea for the ratchet effect! Ever since, the income tax has given the federal government much greater ability to spend more and aggrandize in the process. Essentially, the income tax was the means by which government could become the bloated, oversized nanny state that keeps people dependent on government. (As a side note, an increased tax rate does not mean more tax revenue, either, especially when looking at tax revenue as a percent of GDP.)
Although it's nice to mention the joys of how taxation collects more revenue, taxation has a secondary function: disincentivizing behavior. What sort of behavior is an income tax discouraging? Earning income. Considering the progressive nature of the income tax (which is wonderful because whatever happened to equal treatment under the law?), those with higher incomes feel the sting even more, which is unfortunate, especially since those in the highest quintile are the ones in the best position to create more jobs. The income tax ends up distorting business investments and financial planning. If the principle is "the more you make, the more they take," how long will it take before a business owner realizes it's either not worth it to have so many employees or even continue running his business?
Although my purpose of the blog entry is not to come up with an alternative to the income tax at this given moment, how about suggesting a consumption-based tax, even if it is a tad more progressive in nature? Since I wouldn't want to create shock to the system, I would be for a gradual repeal of the income tax, and have it replaced (not in addition to, but in lieu of) with sales taxes, value-added taxes, or other consumption and excise taxes. In addition, I would want a more gradual repeal because we still need to pay off our debt, which is going to need to entail larger revenue in the short-to-medium. Even with all of this, what I hope from today is that it doesn't take another 100 years for the American people to realize just how adverse the income tax really is.