“Taxes are what we pay for a civilized society.”
Oliver Wendell Holmes quote that graces the IRS Building in Washington, D.C.
Happy “Tax Day” everyone and Happy Birthday 1040 form! We are all familiar with the saying that death and taxes are the two things certain in life, but do we know why we pay those taxes and where they all really go? It’s an interesting question, and I thought that this year, which marks the 100th anniversary of the Federal Income Tax 1040 Form, is the perfect time to research the answer.
The familiar and famous 1040 tax form was originally created in 1913, when a mere 3 percent of Americans paid federal taxes. Today that number is 54 percent. It’s all thanks to the 16th Amendment, which made income tax possible when Congress passed the tax code.
Today taxes and who pays them are the subject of much debate. This, however, is nothing new. We all remember the Boston Tea Party, which surprisingly, was not against taxes per se, but rather tax loopholes. It’s no secret that higher income makers use a higher number of deductions, but when it comes down to it, most people just want taxation to be fair. A recent Pew Research Center report showed that 71 percent of Americans feel it’s a moral obligation to report taxes and that it’s a civic duty to pay them.
In a nutshell, taxes are what we pay to keep the government going. The federal government collects taxes to pay for its various public services. What does it do with all those taxes? In fiscal year 2012, the federal government spent $3.5 trillion, of which $2.5 trillion came from federal revenues. The remaining $1 trillion came from borrowing, an amount that will ultimately be paid by American tax payers. Three areas get the majority of the money:
Defense and International Security – $689 billion
Social Security – $773 billion
Medicare/Medicaid/CHIP – $732 billion
In addition, “safety net programs” that provide aid to those facing hardship received $411 billion and interest on our ever-mounting national debt totaled $220 million.
The remaining one-fifth of federal spending goes to programs such as providing health care and benefits to veterans and retired federal employees, assuring safe food and drugs for our citizens, protecting the environment, investing in education, science and medical research, and basic infrastructure like roads and airports.
Another way to look at it is on a per-month-basis. Each day during the month of November 2012, the U.S. government earned around $5 billion but it spent $11 billion a day. Here’s a breakdown of where that $11 billion went:
The Department of Health and Human Services – $3 billion/day
Social Security – $2.5 billion/day
The Department of Defense – $1.8 billion/day
Interest on our national debt – $854 million/day
Our national debt right is now an astonishing $16 trillion. What would happen if we ran our household budgets like the federal government runs its? We’d all be broke and/or bankrupt. We, as a nation, are simply spending way more than we earn.
“It’s as simple as a family that does that,” says Arthur Brooks of the American Enterprise Institute. “The problem is right now you have a situation in which the government in its overspending ways tries to rationalize it by saying that actually the problem is we’re under-taxing the American public. It’s like your irresponsible brother-in-law runs up his credit cards and goes bust and says the real problem is because you’ve stopped sending hi m checks.”
Raising taxes is not always the answer. One must live within one’s means, right?
This, is nothing new. Andrew William Mellon was an American banker and industrialist who served as Secretary of the Treasury from 1921 to 1932. He was appointed by President Warren G. Harding in 1921 and served for nearly 11 years under both Presidents Coolidge and Hoover, making his the third-longest tenure of a Secretary of the Treasury in U.S. history. Mellon believed that high taxes robbed people of their hard-earned money and were basically unfair.
Mellon came into office with a goal of reducing the huge federal debt from World War I. To do this, he needed to increase the federal revenue and cut spending. He believed that if tax rates were too high, people would try to avoid paying them. His theory was that by lowering the tax rates across the board, he could increase the overall tax revenue and he wrote about it in his 1924 book, Taxation: The People’s Business
Mellon proposed tax rate cuts, which Congress enacted in the Revenue Acts of 1921, 1924, and 1926. Rates in lower brackets were also cut substantially, relieving burdens on the middle-class, working-class, and poor households.
In the end, Mellon’s policies helped reduce the overall public debt from $33 billion in 1919 to about $16 billion in 1929, but then came the Great Depression and Mellon soon grew unpopular and controversial.
It all sounds eerily familiar and current, doesn’t it? It’s where we stand today, but as Ronald Reagan once said, “We can’t spend ourselves rich.”
So happy 100th anniversary 1040 Form and Happy Tax Day everyone!