How the U.S. income tax works

[Warph]

Tax time is upon us once again, and we all heave a collective sigh of resignation. There is nothing we can do about taxes, true. But have you ever wondered where income taxes came from, and why we pay them today? This is actually a fascinating story.

It all started in 1894, when Congress passed the "Revenue Act of 1894." It was a very simple tax. If you made more than $4,000 per year, you paid a 2 percent tax on your income. In 1894, $4,000 per year was a tremendous amount of income - an indication of great wealth. So the income tax of 1894 did not affect very many people, and the amount of tax was small.

Even so, the Supreme Court found the tax to be unconstitutional and struck it down. To get around the Supreme Court, Congress did the only thing it could do - it proposed a constitutional amendment and got it ratified. The 16th amendment reads, "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." This amendment specifically allows there to be an income tax in the United States. It was ratified in 1913.

Now you might be wondering: why in the world would the citizens of the United States ratify an amendment like that? Why would the citizens give congress the ability to create a new kind of tax? It is because, at the time, people were worried about the wealthy having too much money and power. The income tax was seen as a tax that would only be applied to the wealthy, in order to curb their power. The first income tax laws applied only to the very wealthy. As late as 1940, only about 5 percent of the population paid income tax.

Another feature of today's income tax system is the idea of a payroll withholding. Before your tax is due, the government takes it automatically out of your paycheck and holds your money in escrow until April 15. You get no interest on your money and cannot use it in any way. Where did an idea like this come from, and why would Americans allow it?

This idea came in 1943 as a way to fund WWII. By withholding the tax up to a year ahead of its due date, the government got the money faster and used it to pay for the war.

So in 1943, the government has two key things: a constitutionally-approved tax system, and the ability take money out of people's pay checks without them ever holding the money in their own hands. All of the ingredients are in place for a massive expansion of the tax system. And sure enough, the system expanded.

One way to track the expansion is to look at the size of the tax code. In 1945, the federal tax rules fit in about 8,000 pages. By 1965 it took about 20,000 pages. In 2006, the number had grown to 66,000 pages. How many pages is that? A phone book might have 1,000 pages, so imagine 66 phone books lined up on a long shelf. It would be about 20 feet of phone books. That's our tax code.

If you look at the instructions for the basic 1040 form, you see the same kind of thing. The 1040 form is only two pages long. In 1945 it took four pages of instructions to explain it. By 1965 it took 17 pages. Today it takes more than 140 pages.

The complexity of the tax code means that many people can no longer file their own tax returns. So there are now more than one million paid tax preparers in the United States. Many of them are employed by the top three tax preparation companies: H&R Block, Jackson-Hewitt and Liberty. Together these companies handle more than 20 million customers per year.

Somehow, we all manage to muddle through, and we file something like 100 million individual taxable returns in a typical year. Using very round numbers here to keep things simple, these tax returns represent income of about $5 trillion. The total tax collected on that income is about $1 trillion, or roughly $10,000 per 1040 form, on average. That money combines with social security taxes ($900 billion), corporate income taxes ($260 billion) and other things like tariffs to create about $2.4 trillion in total federal revenue in 2007. It takes over 100,000 IRS employees to handle the load.

So, as you are burning the midnight oil to complete you tax returns, scratching your head over some incomprehensible rule or form, you now know a little bit of the history that got us here. We've come a very long way since the first income tax in 1913!

[Teresa]

Dear IRS,
     I am sorry to inform you that I will not be able to pay taxes owed April 15, but all is not lost.
I have paid these taxes: accounts receivable tax, building permit tax, CDL tax, cigarette tax, corporate income tax, dog license tax, federal income tax, unemployment tax, gasoline tax, hunting license tax, fishing license tax, waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax, Medicare tax, city, school and county property tax (up33 percent last 4 years), real estate tax, social security tax, road usage tax, toll road tax, state and city sales tax, recreational vehicle tax, state franchise tax, state unemployment tax, telephone federal excise tax, telephone federal state and local surcharge tax, telephone minimum usage surcharge tax, telephone state and local tax, utility tax, vehicle license registration tax, capitol gains tax, lease severance tax, oil and gas assessment tax, Colorado property tax, Texas, Colorado, Wyoming, Oklahoma and New Mexico sales tax, and many more that I can't recall but I have run out of space and money.

     When you do not receive my check April 15, just know that it is an honest mistake. Please treat me the same way you treated Congressmen Charles Rangel, Chris Dodd, Barney Frank and ex-Congressman Tom Daschle and, of course, your boss Timothy Geithner. No penalties, no interest and no hard feelings.

P.S. I will make at least a partial payment as soon as I get my stimulus check.

[Diane Amberg]

 

[pam]

Lol

[Warph]

I stumbled across something on the IRS Web site I never expected to see: quotations from great minds on taxes.

The first two agitated me:

"Taxes are what we pay for civilized society.'' — Oliver Wendell Holmes Jr., U.S. Supreme Court justice

"The power of taxing people and their property is essential to the very existence of government.'' — James Madison, U.S. president

Hey, fellows, I don't mind paying taxes for a civilized society.  It's paying for the uncivilized part that grates on me.  And I'm happy for the existence of our government, but, goodness, why does its existence have to be so big?

Here is a telling quotation from: Frederick the Great, an 18th-century Prussian king:

"No government can exist without taxation.  This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.''

Yes, Freddy, levying without oppressing is a grand art — much the way it is an art for a loan shark to break five fingers without harming the wrist.

Two great thinkers offer flowery words on the subject:

"Like mothers, taxes are often misunderstood, but seldom forgotten.'' — Lord Bramwell, 19th century English jurist

"To tax and to please, no more than to love and to be wise, is not given to men."
      — Edmund Burke, 18th century Irish political philosopher and British statesman

Hey, Brammy, my dear sweet mother may be misunderstood and I'll never forget her, but I don't remember the government ever bringing me milk and cookies after clearing out my bank account.

And though I admire Burke, the father of conservatism, he failed to envision America in 2007.  Some Americans are not only pleased with taxes, but they hope to impose more of them on the rest of us.

Three of our thinkers make fine points:

"The hardest thing in the world to understand is the income tax." — Albert Einstein

"Taxation WITH representation ain't so hot, either." — Gerald Barzan, humorist

"A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform." — Russell B. Long, U.S. senator

Ah, now we're getting to the thick of it.  Our tax code is the hardest thing in the world to understand.  It was made that way because our representatives, seeking favor and dough, slipped in gobs of loopholes for their buddies.

Our government calls this "tax reform," and it is the reason our tax code now runs, according to the Cato Institute, 61,000 pages in length and takes the average American nearly 30 hours to comply with. 

One quotation made me sad:

"Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund." — F.J. Raymond, humorist

Well, F.J., next to being shot at and hit, nothing is quite as unpleasant as the sizable checks I've had to write every year since I've retired.  Shoulda kept working.  Hell, I worked for the government for many years and they should give me a break on taxes, some how, some way.

The concept of taxes agitates me so much, particularly this week as I am buried in a pile of receipts, that I was drawn to the more humorous quotations:

"I am proud to be paying taxes in the United States. The only thing is - I could be just as proud for half the money." — Arthur Godfrey

"People who complain about taxes can be divided into two classes: men and women." — Unknown

"The income tax has made more liars out of the American people than golf." — Will Rogers

The IRS says that it does not endorse any of these quotations.  I don't fault it for being cautious.  Enforcing our incomprehensible laws, rules and regulations is the hardest job in the world.  The IRS is often blamed for the mess that Congress created.

Still, I'm sure the IRS wants to keep a distance from this one:

"Where there is an income tax, the just man will pay more and the unjust less on the same amount of income." — Plato

Well, then. I guess tax woes have been around for a while.

=============================================


Tax Quotes: http://www.irs.gov/newsroom/article/0,,id=110483,00.html

[Teresa]

The IRS.
Three little letters that can strike fear into the heart of any hard-working American.
Ultimately the only way to stimulate the US Economy is to reduce taxes on businesses, which will in turn allow them to hire more people. Employed people make better consumers. I could go on and on forever but I'll just zip it for now.. 

[redcliffsw]

Look at what this lady has to say.....


Part 1

Part 2

[Teresa]

I added the first video ( part 1 )to your post redcliffsw

[pam]

 

As long as you feed the monster it's gonna continue to grow

  Amen Amen Amen  AMEN