Taxes & Government -- A Little History.
By Marvin Kusmierz
February 7, 2008
This article evolved out of a personal curiosity to learn more about how much I was paying in taxes each year. I thought it was a rather boring subject, but at each step along the way to answering my question -- I found myself looking deeper and broader on the subject of taxes and government which I thought, "Why not share the information in an article and save some other inquisitive soul a little time?"
I learned some interesting things about the history of government and taxes. For example, did you know the at one time incomes taxes were deemed unconstitutional by the Supreme Court or that the first consitution rendered the federal government impotent?
In The Beginning The Federal Government Was Impotent!
The founders of our nation were dead-set on limiting the powers of a central government. They were not about to allow that to happen after fight for independence from oppresive government of Britain. After declaring their independence from Britain on July 4, 1776, they began work on the "Articles of Confederation"(*1) to form a constitution with this in mind. It took until November 15, 1777 to finalize an acceptable version which need to ratified by the founding states of the new union. It wasn't until 1781 that the ratification process was completed. When it became the law of the land, the role of the nations government was severly constrained to the diplomacy and defense of the nation. It had no power to impose taxes even to service these limited responsibilities. The government was required to request funding for its existence from each of the soverign states where the powers of governing rested.
The states which sent one representative to Congress who primarily charge was to conform to the will of his state. They also left the national government without authority to impose taxes. Instead, the State provided financial support, but only . And, the States power was assured since most major legislation required unaminous approval to become law. However, major legislation required unanimous approval making it essentially impossible for the government to develop income independent of state approval.
In 1781, Robert Morris, Superintendent of Finance, offered a proposal aimed providing the government with a means to deal with a growing national debt. He wanted the government to issue interest bearing debt certificates which would be paid for by a tariff tax imposed on foreign goods (duty of 5%). The States rejected this out of hand -- trading was a State enterprise. They weren't about to let the government tamper with their individual trade agreements.(*3)
The extreme limits self-imposed by the leaders of the new nation became a major concern in that they had gone to far in constraining the ability of the government to act in the nations best interest. Alexander Hamilton addressed these concerns in his writing to James Duane on September 3, 1780,
"Agreeably to your request and my promise I sit down to give you my ideas of the defects of our present system, and the changes necessary to save us from ruin. They may perhaps be the reveries of a projector rather than the sober views of a politician. You will judge of them, and make what use you please of them."
"The fundamental defect is a want of power in Congress. It is hardly worth while to show in what this consists, as it seems to be universally acknowleged, or to point out how it has happened, as the only question is how to remedy it. It may however be said that it has originated from three causes--an excess of the spirit of liberty which has made the particular states show a jealousy of all power not in their own hands; and this jealousy has led them to exercise a right of judging in the last resort of the measures recommended by Congress, and of acting according to their own opinions of their propriety or necessity, a diffidence in Congress of their own powers, by which they have been timid and indecisive in their resolutions, constantly making concessions to the states, till they have scarcely left themselves the shadow of power; a want of sufficient means at their disposal to answer the public exigencies and of vigor to draw forth those means; which have occasioned them to depend on the states individually to fulfil their engagements with the army, and the consequence of which has been to ruin their influence and credit with the army, to establish its dependence on each state separately rather than on them, that is rather than on the whole collectively."
Source of full document: [Deficiencies of the Confederation] American Memory, Library of Congress.
Power Shifts to Federal Government.
The status quo continued until in 1787 when a Federal Covention was called for in Philadelphia, the results of which dramatically shifted the power of government to impose taxes. It also realigned state representation according to its population. (See Amendments to the Constitution - June 27, 1788 for complete listing.)
From that point on the government excercised its power and implemented tariffs and excise taxes at will to finance its obligations. Besides tariffs, internal taxes were imposed on items such as whiskey, sugar, tobacco, snuff, carriages, corporate bonds, slave, and property sold at auctions. Then in 1817, Congress made a dramatic change and dropped all internal taxes and turned its revenue reliance solely on tariffs.
During the Civil War and in need of money to engage the Confederates, the government imposed a series of excise taxes as well as a sales tax, an inheritance tax and even an income tax. After the war, Congress dropped these taxes in 1868 except for the income tax which they held onto until 1872. Then in 1894 they couldn't resist reimplenting an income, however, it was remove in 1895 after the Supreme Court ruled the income tax was unconstitutional.
The First Constitutional Income Tax.
On October 3, 1913, after a great debate in Congress, the first income tax law came into being with the passing of the "Underwood-Simmons Tariff Act." Before its passing, the government relied on tax revenue derived from tariffs and a handfull of excise taxes. The "new" income tax set forth a collection of 1% of all income received by individuals and companies with earnings exceeding $3,000.00. It affected about 2% of American households.(*3)
Since then, the evolution of taxes and growth in government has escalated dramatically as our nation became an economic giant and preminate leader of the world. Our nation's founding fathers might choke at the thought of what has transpired since their passing.
The government resolved the constitutional problem in 1913 when they were able to successfully amend the constitution. The 16th Amendment to the Constitution which effectively removed any inference from the Supreme Court.
16th Amendment to Constitution:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.
Reference [Articles & Amendments to U.S. Constitution] (www.Online-law-degree.com)
In 1943, Congress passed legislation to withhold taxes on wages thereby assuring a constant stream to the government from this source of revenue. Since then, tax laws have bounced all over the place with the changing times and according to physical policy according to which political party ruled the government.
Where Do We Stand Today?
Well, I don't really know? And, I have yet to find anyone who does! The problem is that it all depends on so many variables and levels that it's darn near impossible to track. The following is an attempt to show just how difficult the task is.
What we pay in income taxes is easy to identify. We can see this in our paycheck receipts and each year our tax return lays it all out for us. The problem in identifying what portion is left after paying income tax is also being taxed? These are hidden deep within myrid of taxes affected on how we use that money.
Below is a listing of tax methods that I was able to identify, there may be more as I only spent a couple days researching the internet.
- Federal income (15%-39%) - depending of level of earnings.
- Michigan income tax (4%) - based on federal gross income.
- Social Security (Fed. 6.2%) - self-employed (12.4%)
- Medicare (Fed. 2.9%)
- Michigan sales tax (6%)
- Federal gasoline tax ($0.184/gal)
- Michigan gasoline tax ($0.19/gal)
- Federal tobacco tax ($0.39/pack)
- Michigan tobacco tax ($1.25/pack) - may be going to $2.00
- Federal liquor tax ($2.16/btl.)
- Michigan liquor tax ($0.65/btl)
- Federal inheritance/estate tax (39%-45% over 1.5 mil.)
- Local property tax (varies by community)
- Local special assessments taxes (varies by community)
- Utilities taxes (varies) - energy, telephone, cable
- Federal tariff taxes (varies by product, country)
Each of us can figure out our property taxes if we own a home because we get billed for them. But, if you're a renter, do you really know what portion of your rent goes towards taxes?
But Wait There's More!
As I mentioned before -- every product carries a tax burden which we pay when it is purchased and before any sales tax is applied. This type of tax is what I call the big black hole, because it's easy to get loss once you head down that path. In one study that I read, it stated that taxes raises the cost of an automobile by as much as 20%, and, that's before you pay a 6% sales to Michigan. They didn't explain how they were able to determine this figure, but it we can toy with what how they might have reached this figure.
Like any product you purchase, the producer of it has their own tax burden to deal with. The advantage they have over us is that they can passed their tax cost on to the consumer. We don't sell a product so we can not! Anyway, lets try to follow the tax trail associated with making an automobile. We need raw materials to build it, so we will need to purchase these from another manufacturer that also includes their tax burden in the price. To keep it simple, let's use $1.00 as the base cost at the identified point of when a tax is collected. For our hypothical journey we'll use steel as our product. The following calculates sequences and the tax along the way:
- We purchase our the steel from Japan which pays a tariff of 5% - $1.00 + .05 = $1.05
- As the manufacturer, let's say we pay 20% in taxes: $1.05 + .06 = $1.11
- Our customer, the dealer also has a tax burden of 20%: $1.11 + .22 = $1.33
- The dealer sells the car to a customer who pays a sales tax of 6%: $1.33 + .08 = $1.41
In this example taxes increased the costs of the product by 41%! Now, that is hard to believe -- I hope so anyway? But, lets try another product -- maybe something more simple like a service? For this trial we'll use our tax accountant.
We make our appointment and we know it's going to us $125.00. This self-employed accountant includes their tax costs of:
- Fed. income taxes of 25% or $31.25
- State income taxes of 4% or $5.00
- Social Security taxes of 12.4% or $15.50
- Medicare taxes of 2.9% or $3.63
- Total taxes = $55.38
That's 44% of the $125.00 we paid to file our taxes! That's it -- I give up!
The point is... who really knows? The reality is... that whatever the figure is, these taxes have a significant affect on everyone which varies according to their individual spending habits.
A Summary Please?
Okay -- let's give it a try. We'll use some fictious person. How about our uncle Sam?
Uncle Sam works for the ACME Auto Company. His total gross income for 2003 was $40,000. His tax accountant is able to come up with $10,000 in deductions based on a family of four, reducing his taxable income to $30,000. A breakdown of his tax burden rounded to nearest dollar:
$3,804 = Federal income tax (from table).
$1,200 = State taxes (at 4%).
$2,480 = Social Security ($40,000 x .062%).
$1,160 = Medicare ($40,000 x .029%).
$1,800 = Property tax (3.6 mills at 50% of assessed value of $100,000 adjusted for inflation).
$10,444 = taxes imposed so far.
$29,556 = your spendable earnings.
The Other Taxes
$55 = Service (tax portion passed on by account).
$913 = Cigarette tax (2 packs @ 1.25/pk = 2.50/day x 365 days)
$244 = Gasoline tax (Fed@ .184 + MI@ .19 = .374/gal x 600 gals, avg miles/gal=20, 12,000 miles/per year).
$720 = Sales Tax MI 6% (est. pchs. of $12,000: food, clothing, home, auto mtn., etc.)
$1,200 = Products (est. hidden product taxes of mfr. @ 10% ).
$50 = Services (est. hidden taxes based on $500 - hair cuts, dry cleaning, lawn care, maint. man, etc.)
$60 = Utility taxes (est. @ 2% - $3,000 for electricity, heat, phone, cable tv)
$3,718 = Total or 9.3% of earnings.
$10,444 = Total identifiable taxes or 26.1% of earnings.
$14,152 = Total tax burden or 35.4% of earnings.
You now have $15,495 left to pay your mortgage, insurances, snacks, alcholic beverages, etc. Another way of looking at these figures. You earned $40,000 in wages -- the federal, state and local governements took $13,986.85 or 35% of you earnings. Or, you worked the first four months of the year for the government. While the actual tax amount may vary from one individual to the next, it's clear that taxes represent a major factor in reducing the purchasing power of the majority of citizens.
Where Does Your Money Go?
Now that you have some understanding of how much you are paying in taxes -- the question is what are you paying for, and is your money being put to good used? Again, the conclusion you reach will more than likely depend your subjective opinion about what is or is not good a expenditure.
National Debt end of 2007: $5.031 trillion. (Congressional Budge Office)
I think we can all agree that we want our government to provide essential services that we could not provide ourselves. National defense, diplomacy, transportation system, social security are just a few examples of the important items we expected the government to handle on our behalf, and which most agree they should. But, the government is deeply involved financially in many other aspects of our society that raises some questions about their importance to us as a collective group, and is where most individual disagreement exists.
Cutting waste and unnecessary federal programs isn't an easy task, and while it's easy to point the finger at our government as the cause, quite often it is us that keeps the situation from changing. As an example, the Department of Defense some years back went through a cost savings program in restructuring itself after the cold war ended. They wanted the military to reflect the country's defense needs for the world condition. When they wanted to close many military bases that were no longer essential, they ran into protests from the citizens and representatives of the areas where a base closing was proposed. They had no problem with closing a base somewhere else, but not in their community!
The simple truth is that this narrow self-interest view is a significant factor in the growth and cost of government. As long as we take this narrow view, it is darn near impossible to achieve the effectiveness and efficiencies we say we want in government. The consequences of such waste are more taxes, deficit spending, or both.
In the private sector this problem doesn't exist. We can complain loudly when a business up roots itself and shuts downa plant leaving employees without jobs. However, they close anyway because they are no longer profitable. The community suffers for a period of time, but most adjust and move on. So it should be with government programs -- those that no longer serve their purpose should be closed or discarded. Only then will the government reflect a system based on what is in our best collective interest in meeting needs and doing it effectively and efficiently.
What Can Be Done to Protect Against Our Selfishness?
The truth is that there will always be self-interest either individual or as a group. To overcome this, change is required in the system which feeds upon these self-interest at the expense of our collective interests as a nation.
One way to enforce a change is alter the dynamics that support self-interest -- the legislators! Power in Congress is related to seniority. The longer a representative serves the more they gain in power. These centers of power have a dramatic effect on progress and change. Representatitives at the top of the power cycle may be well intented but they also respond to their own self-interest.
Today, taxes permeate our society to the extent that it is very difficult for the average citizen to comprehend what their true tax burden is. It certainly has its impact on all households that is far greater than what the early pioneers experienced. Those who are wealthy are obviously less affected since wealth frees them from burdens born by the less well off in our society. Our modern day tax system utilizes all forms of taxes -- income, sales, excise and property.
The income tax would appear to be the fairest, it at least is scaled so that those with the a higher income and can afford to pay more do so according to a higher percentage of tax. However, the fairness is dramatically altered by tax deductions that allow good money managers to reduce these higher tax burden. For example a person of means with a fondness for horses could start a ranch business and operate it at a loss. In effect, creating a higher deduction while spending money on something they enjoy. It would seem a fairer system would be to keep a scaled income tax system while liminating deductions entirely. This would in essence be a scaled "flat tax" based on income. A new "reduced scale" would be required to compensate for the elimination of deductions. The same principle could be applied to businesses as well, and, it could be implemented at the state and federal level. Such a simple tax program would steamline tax collection departments reducing costs dramatically.
As tax payers, we most of us believe in paying our fair share of the burden to have the social services that are needed in our modern age. While many may argue about various aspects of government spending, hardly anyone would argue against it's nessessity. We could save a ton of tax dollars by eliminating our Department of Defense, but who would want the government that replaces the current one. No, most tax payers willing accept the fact that like it or not, we need the government to provide security to our way of life.
On the other hand, most tax payers when they become aware of what some of their hard earned money is being used are shocked and angry. The government has rooted itself deeply into our economy in ways that only a few understand. The "Pork" spending by representatives has reached an epidemic level and says a lot about how far our tax system has gone astray from its original intent -- to place a minimal burden on the private sector and only to those who had the
means to pay.
It is hard to believe that less than a decade ago things were in pretty good shape. The government returned to
balanced budgets mainly because revenues were high from strong economy. Political opponents will argue their biased
positions, the Democrats that it was their tutorship that created the booming economy, Republicans that it was
President Reagon's voodoo economics that was the cause for growth. The reality may be neither were the dynamic
influence. Good and bad times are created by conditions in the private sector. Impositions of government have their
effect but not to the degree that politicians would have us believe.
However, politicians certainly can take credit for their responsibility regarding the erosion of the quality of
life for low income families. Government spending programs once in place are hard to eliminate and these programs
have their greatest toll on the poor as state in the food tax example above. We need to ask ourselves just how much
to we want the government to do for us and what we would rather do for ourselves. The later should be the ideal goal
for it is the most efficient in use of money. Each tax taken from you is a choice you give to the government on how to spend your money. Unfortunately, a rare few us take time to understand if our tax dollars are being spent wisely or supporting some politicians pet project.
Ultimately, we are the blame! Our system of government was designed by our fore-fathers to place the citizens of
this nation as the keepers of power. They were not about to replicate the center power of the government they fled
from. Time has eroded what they conceived. A young nation having fought so hard for its freedom from a dominating
government was vigilant of how important the constitution they created was, and how each person had a responsibility
in assuring it continue to meet the ideals it set forth.
As America surged to become an economic giant in the world the role of our government has changed from basic
services of protection, justice and civil projects of general public good to extended services, a world class defense
protecting many nations, and civil projects that help re-elect our representatives. The tax revenue program has grown
proportionately with former. Special interest groups have taken over the role of community interests and have a far
greater influence on legislation. And, these special interest typical do not have the best interests of the general
public in mind. And, as some would believe, not all are from the commercial sector of our economy. Some of the
largest are senior citizens (AARP), education (NEA), medical (AMA) are just a few. And there are even foreign special
interest groups lobbying our representatives. While politicians during their election campaigns scream about the need
to remove special interest money, a rare few are willing to take the first step and say "no" to accepting funds from
Change Requires Responsible Participation of Citizens.
Things will not change until we recognize and accept our responsibility as keepers of the power. When we exercise
our collective responsibility as citizens, our government will react accordingly.
The fore-fathers of our nation had no means by which to predict our modern day society. Even if someone were to
have successfully been able to, who would have believed them? However, they wisely understood the dynamics of
governing, and they put in place checks and balances in the system by creating separate powers of the Presidency,
Congress, and Supreme Court that served as a government of the people, for the people and by the people.
They put the power in our hands by making our representatives accountable to the communities they represent by
winning our votes to participate in government on our behalf. The Houses of Representatives is specifically set up by
districts within a State to assure the interests of small communities are heard. The Senate is comprised by two
representatives from each State to assure the interest of each State is equally representative and not just the
largest States. The President is voted into office by the Electoral College designed to proportionately distribute
votes according to each States size while assuring the smallest State a significance in the process.
The governing structure that our fore-fathers so carefully put in place for us is highly dependent on citizen
involvement by participating wisely in the election process. Unfortunately, the statistics of the 2000 Presidential
election which draws the greatest voter interest shows that only 51 percent of those eligible to vote did so. What
this means is that nearly half of eligible voters have opted out of their responsibility! And, in effect have
transferred their power to those that vote. In another sense, it has the negative effect of making it easier for
politicians to regain their seat by catering to their constituents. One can only wonder what impact
they would have if the non-voters accepted their responsibility and participated in our nations future?
For the time being -- it is up to those who vote to be keepers of the power. To hold our representatives
accountable to the voter and force their compliance with what is in our communities best interest. This doesn't mean
"pork barrel" spending projects. Remember, such expenditure of tax dollars is wrong and a waste of our treasury!
Also, remember that while one district may feast on pork -- the day will come when the provider of the pork is gone,
any your hard earned tax dollars to be used for some other politicians self-interest.
So, the next time you complain about the taxes -- stop! Don't waste your time griping! Immediately -- register to vote and act on it each election, send a letter or email to your represent stating you opinion, learn their voting
history, learn what legislation is pending before them and let them know the decision that you want them to make. It
your life, its your children's future and as keeper of the power, it's your duty to help our government be of the
people, for the people, and by the people.
We live in a great country which is still very young in comparison to most nations. Most of us are willing to pay our fair share to financially support the responsibilities we have taken on as a nation. And, they are many in a modern world in which nations are no longer isolated by their geography. This places a heavy burden on nations to find new solutions to resolve their differences. And, with modern weaponry, individuals and small groups can be as great or even greater threat than a hostile nation to our well being.