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Taxing the Rich


President Obama’s American Jobs Act of 2011 (S.1660) recently went down to defeat in the Senate. Two Democrats joined with all forty-six voting Republicans (Sen. Tom Coburn did not vote) to kill the $447 billion plan.

The most egregious part of this bill was that it “amends the Internal Revenue Code to impose on individual taxpayers in taxable years beginning after 2012 an additional tax equal to 5.6% of so much of their modified adjusted gross income as exceeds $1 million.”

Since the top tax rate is now 35 percent, this 5.6 percent surcharge would have allowed the government to confiscate more than 40 percent of any income over $1 million.

The president supported the tax hike to pay for his new stimulus plan: “The approach that the Senate is taking, I am comfortable with in order to pay for the jobs bill.”

Senate Democrats repeated ad nauseam their mantra about “the rich” needing to pay their “fair share.” “Republicans will be hard pressed to explain why they allowed teachers and firefighters to be laid off, rather than have millionaires and billionaires pay their fair share,” said Senator Chuck Schumer. “It is time for millionaires and billionaires to pay their fair share to help this country thrive,” said Senate Majority Leader Harry Reid.

But a look at the U.S. tax code throughout history shows that “the rich” have always paid their “fair share.” Indeed, from the very beginning, it is the rich who have been targeted.

The first attempt to target just “the rich” actually failed. In 1894, Congress imposed a 2 percent tax on incomes above $4,000. Less than 1 percent of households were above that threshold in 1894. After it was ruled unconstitutional in Pollack v. Farmers’ Loan & Trust (1895), the road to the Sixteenth Amendment began to be paved.

In June of 1909, President Taft proposed, in an address to Congress, a 2 percent tax on corporations and a constitutional amendment to allow a tax on personal incomes without having to be apportioned among the states and without regard to the source of the income. (It is a myth that the government could not tax incomes before the Sixteenth Amendment — see the series by Sheldon Richman, “Beware Income-Tax Casuistry.”) The Sixteenth Amendment was proposed by Congress in July of 1909 and thereafter sent to the states for ratification. It was ratified by the necessary three-fourths of the states in February of 1913, and it read, in part,

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.

Thanks, Taft.

Congress wasted no time in passing the Revenue Act of 1913, which instituted the dreaded income tax. President Wilson signed it into law in October of 1913. It states in its relevant parts,

That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States … a tax of 1 per centum per annum ….

In addition to the income tax provided under this section (herein referred to as the normal income tax) there shall be levied, assessed, and collected upon the net income of every individual an additional income tax (herein referred to as the additional tax) of 1 per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $50,000, and 2 per centum per annum upon the amount by which the total net income exceeds $50,000 and does not exceed $75,000, 3 per centum per annum upon the amount by which the total net income exceeds $75,000 and does not exceed $100,000, 4 per centum per annum upon the amount by which the total net income exceeds $100,000 and does not exceed $250,000, 5 per centum per annum upon the amount by which the total net income exceeds $250,000 and does not exceed $500,000, and 6 per centum per annum upon the amount by which the total net income exceeds $500,000.…

That there shall be deducted from the amount of the net income of each of said persons, ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggregate income of both husband and wife when living together.

Thanks, Wilson.

There are two things to be noted about the first income tax under the Sixteen Amendment, which applied to the years 1913–1915. First, the exemptions of $3,000 for a single person and $4,000 for a married couple (note the marriage penalty from the very beginning) equate, according to the Bureau of Labor Statistics, to $68,650 and $91,533 in today’s dollars. And second, the proportion levied on the highest tax bracket is seven times higher than the lowest one.

The tax rate in the highest tax bracket has fluctuated widely over the years. It rapidly shot up to 67 percent in 1917 and 77 percent in 1918 before falling slightly to 73 percent in the years 1919–1921. The highest rate was back up to 79 percent in 1936. In 1940, it reached 81 percent, in 1942, 88 percent, and in 1944, a whopping 94 percent. Something else drastically changed in 1942 as well. Instead of the top rate applying to incomes in excess of $5 million, like in 1936–1941, it now applied to all incomes over $200,000. After dropping briefly, the top rate stayed near or above 90 percent from 1950–1963. It has fallen steadily since then, but this does not mean that “the rich” have stopped paying their “fair share.”

According to the most recently released IRS data (Excel file), in tax year 2009, the top 1 percent of taxpayers (in terms of adjusted gross income) paid 36.73 percent of all federal income taxes. The top 5 percent of taxpayers paid 58.66 percent. The top 10 percent of taxpayers paid 70.47. The top 25 percent of taxpayers paid 87.3 percent of the taxes, and the top 50 percent paid a whopping 97.75 percent.

The 5.6 percent surcharge on incomes over $1 million now proposed by Democrats wouldn’t make a dent in the debt or the deficit. And if all of the taxable incomes of all American millionaires and billionaires were simply confiscated, it still wouldn’t even equal the deficit.

The government doesn’t need any additional revenue sources. The problem is simply that members of Congress, Democrats and Republicans, have an insatiable desire to spend money — other people’s money — the majority of it on projects that are clearly unconstitutional and immoral and beyond the scope and purpose of a limited government.

The income tax is a vast income-redistribution and social-engineering scheme. It was never just about raising revenue. It was born of envy and class warfare, and it is maintained by coercion and violence. It is theft on a grand scale and wealth destruction writ large.

We don’t need gimmicks like the FairTax or Herman Cain’s 9-9-9 plan, both of which provide the government with essentially the same amount of taxpayer money as it currently receives. The income-tax rates don’t need to be made fairer or less progressive. The income-tax base doesn’t need to be expanded. The income-tax code doesn’t need to be simplified or shortened. The income-tax system doesn’t need its loopholes closed. The whole rotten system needs to be abolished and replaced with nothing.

Nothing short of its wholesale elimination will cut off funding for the welfare-warfare state and allow Americans of all classes to keep their money in their pockets and out of the hands of the monstrosity known as the U.S. government.

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