Friday, December 16, 2011
Boy, is our tax system in a mess.
The mess began in 1913, when the 16th Amendment was passed and Americans were forced to pay federal taxes on their income.
People who made more than $3,000 -- a lot of dough in those days -- had to pay 1 percent to the feds. The top rate, which then applied to the super-rich, was a whopping 7 percent!
Those rates didn't last long.
During World War I, the top rate shot up to 77 percent to finance our war efforts. After the war, it dropped down to 25 percent -- still 17 points higher than it was before the war.
Tax rates held steady until Franklin Delano "Big Government" Roosevelt came to town. Under FDR, the top rate shot up to 78 percent by 1936.
Then, during World War II, the top rate hit 94 percent. After the war, it remained above 90 percent -- into the early 1960s.
JFK promised to get America moving again and he did. Under his administration, the top rate was lowered from 90 percent to 70 percent -- with lots of loopholes to shield income from taxes.
The economy took off, but in spite of the positive results -- lower taxes cause growth, duh! -- the top rate wasn't lowered again until Ronald Reagan came to town.
In 1981, Reagan lowered the top rate to 50 percent. In 1986, he led the charge for simplification, helping eliminate most loopholes and reducing 15 income brackets to two. The top rate was lowered to 28 percent, the bottom rate to 15 percent.
The economy exploded.
But in 1990, George H.W. "Don't Read My Lips" Bush caved to Congress and raised taxes. He also added a third income bracket.
Then, in 1993, Bill "Franklin Delano" Clinton raised taxes yet again, adding two more brackets. Clinton even raised taxes retroactively on dead people -- who'd thought they'd finally found tax relief.
In the mid-'90s, with Republicans running Congress, taxes were lowered somewhat, but were also made extremely complicated as hundreds of changes were made to the tax code.
Whereas the tax code was 16 pages in 1913, it is now more than 70,000 pages -- and growing. Americans annually spend millions of hours and billions of dollars to avoid IRS audits.
I disappear for a week every year as I get my taxes organized for my CPA.
But there is some good news: Republicans and Democrats alike agree that tax reform is one of the best things we can do to get the economy rolling again and address our massive deficit.
Of course, to most Democrats, tax reform means higher tax rates, which is silly. The problem isn't tax rates -- it's tax receipts.
Why not eliminate deductions across the board -- so companies such as GE, which now use loopholes to pay zero, must pay a fixed percentage of their billion-dollar profits -- and lower tax rates?
The net result will be that people and companies that make money will end up paying more in taxes than they do now -- but they won't mind, because with simplified, lower rates, they'll be encouraged to invest and hire. Our deficit will shrink and we'll all be better off.
Unfortunately, President Obama doesn't appear to have any interest in leading broad tax reform -- one of the few issues on which he could rally bipartisan support -- and so it is dead.
Which is why our tax system is -- still -- in a mess.
- Tom Purcell is a columnist for the Pittsburgh Tribune-Review. His columns are distributed by Cagle Cartoons Inc. (Purcell@caglecartoons.com).