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Happy Tax Day weekend!
It is that magical time when many Americans undertake the annual ritual of sending the government lots of forms with checkboxes and numbers in order to determine how much they owe. Maybe, they will get some pre-paid taxes back as a refund.
The byzantine rules of the Internal Revenue Code are complex, to put it mildly. Creative taxpayers have gotten body oil, cat food, and home lawnmowing all approved as valid deductions.
There are lots of gripes about federal tax law. The left decries “tax cuts for the rich” and often waxes philosophically about some long-lost day when American tax rates exceeded 70 percent. The argument goes that those taxes were the foundation of American prosperity.
The data doesn’t quite follow. From 1950 through 2021, federal receipts as a percentage of our national gross domestic product has generally hovered around 17 percent. In 1979, it was a hair under 18 percent. There were some big outliers in 2000 (nearly 20 percent) during the “dot-com bubble” and a drop in 2010 (just over 14 percent) following the Great Recession.
Meanwhile, headline tax rates are a diversion. What matters is the “effective” tax rate, or how much of your annual income you actually pay in taxes. Looking at 2000, the top 1 percent paid an effective federal tax rate of 32.3 percent. The lowest quintile — the 20 percent of Americans earning the least — paid 6.6 percent. The middle quintile averaged 17.3 percent, according to the Tax Policy Center.
Fast forward to 2018 after the so-called “Trump tax cuts.” The 1-percenters paid 30.2 percent. The lowest quintile of Americans paid 0 percent, while the middle paid 12.8 percent. And if you go further back in time to 1979, when the top “headline” tax rate was 70 percent, the top 1 percent paid 35.1 percent of their income to Washington, while the bottom 20 percent paid 9.3 percent.
You can see where this is going.
For all the machinations, press releases, and hand-wringing, the actual, real, on-the-ground percentage paid in federal taxes as percent of income has barely changed. And during those days when the top 1 percent paid a higher percentage than they do today, so too did every other American.
In order to collect more taxes, advocates have suggested that we should spend more money on IRS agents. The theory goes that more audits, particularly of complex (read: wealthy) tax returns, will find more violations, which will lead to more penalties and taxes.
Not a bad theory.
But there is a different way to solve that riddle. Make taxes less complex, so there are fewer things to audit, fewer ways for “creative” theories to arise, and a simpler reporting process that doesn’t require a cottage industry of compliance businesses. You might call it tax reform.
But here’s the other reality: taxes probably need to go up for everybody, and spending will need to come down for everybody.
COVID gave Washington the perfect excuse to turn the magic money machine on full-blast. America’s “M2” money supply jumped from $15 trillion in February 2020 to nearly $22 trillion in February 2022, a nearly 50 percent increase. The causes of our current inflation spike are complicated, but the massive increase in currency is likely at least a contributing culprit.
Congress’ contributions should not be overlooked either. While the firehose of funds for PPPs, UIs, SVOGs, RRFs, and countless other alphabet soup programs helped our economy rebound, it also caused the national debt to jump. The amount we owe is projected to exceed the amount we produce – our national GDP – in 2027.
The only way to reduce our money supply is to have the federal reserve pull cash out of the economy. They do that by raising interest rates. Which makes our national debt more expensive. Which means taxes will need to go up – and spending go down – to bring things into balance.
Happy Tax Day. But get back to work; Washington needs it.