Friday marked the 100th birthday of the federal income tax, which became effective March 1, 1913. Over the past century the income tax has drastically changed, becoming more complex as the tax legislation grew to more than 73,000, and top tax rates from 7 percent up to 94 percent then back down to 39.6 percent. Has all this complexity helped distribute the tax burden more equitably among Americans?
Not necessarily. A special report published by the Tax Foundation in July 2012 produced some intriguing statistics addressing the tax equity issue.
The federal government has most heavily taxed the highest earners since the beginning of the income tax. In the early years, less than 1 percent of the population carried the entire tax burden, but according to information from Eastern Illinois University, 64 percent of Americans were paying taxes by the end of World War II. Today, the top 1 percent income group pays almost 40 percent of all income taxes, while about 50 percent of Americans pay no income tax, according to the Tax Policy Center.
Although this framework has worked in the past, further narrowing the tax base by increasing rates on the wealthy will not support the government’s financial stability in the current economy. About half of Americans are not held accountable for the basic costs of government. With these costs continuing to increase as the government grows, foundational reforms in the tax system must occur.
Now, what is the most equitable way to raise this money?
Each individual receives some benefit from the federal government, whether military protection, education, retirement, health care, infrastructure or a stable currency. However, only about 50 percent of the population pays the income taxes to fund these programs. Effectively half of Americans receive these benefits for free as income is redistributed from high earners to low earners.
According to the Tax Foundation, the number of households who file income tax returns with no tax liability has increased 20 percent over the past two decades. The level at which the typical married couple with two children will pay zero income tax has reached $47,000.
The income tax is highly progressive, and millions of non-taxpayers receive enough cash back through refundable income tax credits to offset their other forms of taxes. Thus, instead of increasing taxes on individuals that already pay for government benefits, the tax system must change so that every adult pays a minimum amount for the benefits they receive.
This minimum tax need not be huge, just large enough to ensure that everyone is paying a more equitable share of the tax burden. With 58 million income tax filers having zero tax liability, a $10 per month minimum tax would raise more than $6.96 billion in revenue each year.
All Americans receive benefits from the federal government. Holding every adult accountable for funding these benefits instills a sense of ownership and investment that promotes a more efficient use of redistributed resources.
It has been said that death and taxes as the only certainties in life. Amid the birthday festivities, the century-old income tax could certainly use a structural transformation.
Elizabeth Mangels is a fourth-year in accounting.
