The Strange and Wonderful World of American Taxes
The Tax Cuts and Jobs Act of 2017 is only the latest in a long and controversial history of taxation in the U.S. As you can imagine, no one has ever been gleeful about handing over money to the government. And so the debates continue to rage. As you celebrate the end of another tax season, here is a lighthearted look at this quintessential government function.
Taxes have caused a ruckus in North America longer than the United States itself has existed. They date to the colonial era, when Britain imposed tariffs on various goods as a way to raise revenue for the imperial power. While the actual rates were low, most colonists rebelled against the idea that Britain had the right to impose taxes on Americans when they were not represented in Parliament—the infamous “taxation without representation” that sparked a revolution. Famously, in 1773 the Sons of Liberty protested the Tea Act of 1773 by destroying an entire shipment of tea by throwing it overboard, in what came to be known as the Boston Tea Party.
This was but one in a series of incidents that eventually led to the American Revolution, and eventual formation of the United States of America in 1776. However, even democratic governments need funding, so taxes continued. Tariffs on goods continued to be the main source of state and federal revenue until the early 20 century. And people continued to be upset about it.
The first tax on a domestic product (distilled spirits) was imposed in 1791 to recoup losses from the Revolutionary War. Distilled spirits were a crucial source of income for certain rural farmers, because they were easier to transport than grain. Resentment came to a head in the 1794 Whiskey Rebellion, which required an army of 13,000 to suppress the insurgents. Income taxes got their start in 1861 as an effort to pay for the Civil War. However, constitutionality was in question and the law was repealed 10 years later. It was not until 1913 that the 16 Amendment passed, stating that “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.”
The income tax of 1913 levied a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000. By 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000)—this time to finance World War I. The top marginal tax rate was reduced to 58% in 1922, to 25% in 1925, and finally to 24% in 1929. In 1932, the top marginal tax rate was increased to 63% during the Great Depression and then it steadily decreased. Taxes as we know them continued to develop throughout the 20 century. Reagan’s tax act in 1981 was considered historic for lowering all individual tax brackets by 25%. However, Clinton’s act of 1993 saw taxes raise again. Then, in 2001 George W. Bush reduced tax rates but continued to increase tax credits. And, as you know, in 2017 Trump signed an act eliminating many itemized deductions but increasing the standard deduction, and adjusting tax brackets. How many pages is the tax code, really? A quick Google search will find several articles stating that the tax code stands at a whopping 70,000 pages.
Explaining the bloat, The Washington Examiner writes: Amazingly, in the first 26 years of the federal income tax, the tax code only grew from 400 to 504 pages. Even through President Franklin Roosevelt’s New Deal, the tax code was well under 1,000 pages. Changes during World War II made the length of the tax code balloon to 8,200 pages. Most of the growth in the tax code came in the past 30 years, growing from 26,300 pages in 1984 to nearly three times that length today. If the tax code continues to grow at the same pace it did over the last century, it will pass 100,000 pages in 2050. However, tax attorney Andrew Grossman dismisses this number as a myth. The figure traces back to the Tax Foundation, which cites the pages in the CCH Standard Federal Tax Reporter. What this actually means requires explanation for the average Joe.
The Reporter contains not just the actual tax code, but a compilation of resources for tax lawyers and accountants, including legislative history, Treasury regulations, editorial comments, and court cases on relevant topics. So there is in fact no way to reduce the 70,000 page count, no matter what any politician says. As soon as you make any changes to the tax code, they will be added to the Reporter, in addition to more case studies and commentaries. So how long is the actual tax code itself? According to Vox, the last page of the 2016 version of the Internal Revenue Code numbered 4,132 pages. But the page numbers jump from 527 to 1,001 (no one seems to know why) and the code includes all past tax statutes, not just current laws. They conclude that the current code is only around 2,600 pages. Still a little heavy for bedtime reading. I’m being taxed on what?! As we close, here are some strange but true state taxes that you probably didn’t even realize you were paying, courtesy of efile. New York City places a special tax on prepared foods, so sliced bagels are taxed once as food and again as prepared food, thus creating a sliced bagel tax.
In 2005, Tennessee began requiring drug dealers to anonymously pay taxes on any illegal substances they sold. States like Iowa, Pennsylvania, and New Jersey exempt pumpkins from a sales tax, but only if they will be eaten and not carved. In California, fresh fruit bought through a vending machine is subject to a 33% tax! In Texas, Christmas tree decoration services are subject to a tax only if the decorator provides the decorations and ornaments. In addition, there is a tax on holiday-themed pictures that are meant to be placed on windows. In the state of Kansas, untethered hot air balloon rides are exempt from sales tax because they are considered a legitimate form or air transportation. Tethered hot air balloon rides, on the other hand, are considered to be an amusement ride and therefore are subject to sales tax.