Jason Guidry's Blog

The Taxes We Know About

As previously mentioned, our Federal Government uses what is known as a graduated (or progressive) income tax.  In short, the Internal Revenue Service (IRS…known to some as the Infernal Revenue Service) has tax rate tables which lay out how much tax you must pay based on your income. This is a graduated/progressive income tax because the more you make, the higher your tax rate. So poor people pay very little (if any) income tax, while the rich (You know…the people who create jobs for the rest of us. I’ve never worked for a poor person. Have you?) pay their share and then some more. The most current tax tables (Tax Year 2009) levy taxes as such:

Source: Internal Revenue Service, Revenue Procedure 2008-66

There are still more taxes withheld from your pay. The Social security portion of you tax burden is another 6.2% of your income (can only tax up to the first $106,800) and another 1.45% for Medicare (taxed on your total income).

Below are a few examples of taxes paid (before any deductions for dependents, home mortgages, etc…) of a married filing jointly household:

Truth be told, the complex tax system we have allows us to reduce our income tax by way of adjustments. These adjustments lower our income and therefore may also lower your income tax. Your Social Security and Medicare taxes are not affected by any of these adjustments. Some of the most common adjustments to your income are home mortgage interest deductions, student loan interest deductions, state and local taxes, charitable contributions, and retirement contributions (but don’t worry…once you start collecting your retirement the IRS will tax it).  To further confuse us, there are also deductions (taken after adjustments have been made), tax credits, earned income credit, and all kinds of other tricks and hidden gems to lower your tax burden. Unfortunately, most of us will need to incur the additional expense of a tax professional to really capitalize on this. As I said before, the tax code is 17,000 pages of confusion and complexity. All this ultimately leads to difficulty in compliance.

The Taxes We Don’t Know About aka ‘Corporate Taxes’ aka Embedded Taxes

More often than not, one of the first things politicians like to do when they need to raise tax revenues is to tax corporations. It’s usually an easy sell to citizens since they figure they are just sticking to some rich corporation and its CEO’s. Well, corporations don’t actually pay any taxes. You heard me right. They don’t pay taxes. They just collect them from us. Huh? Puzzled by this? Let me explain.

Taxes are just a cost of doing business. And what do corporations do when they incur a cost of doing business? They roll that cost into the price of the goods and/or services they offer. They do this by having a full time staff of tax planners who estimate the company’s yearly tax burden and figure out how to pass this cost on to its customers. Estimates vary on exactly how much tax is embedded in the goods we buy, but most seem to fall around 22 percent. What does that mean? That means 22% of the price of everything you buy are embedded taxes. Sad thing is the federal government knows this happens. The even sadder thing is most of us don’t realize this. The government uses these ‘corporate’ taxes to take a back door into our wallets. Most people would be in an uproar if the federal government proposed a 22% tax increase on us, so they hide the tax as a corporate income tax and most of us are none the wiser.

Let’s apply that 22% to one of the tax groups from the chart above. The family which earned $100,000 paid a total of $25,025 in taxes leaving them with $74,975 of spending power per year. Now, take 22% of that $74,975 and you have another $16,494.50 worth of taxes paid by this family. All total that is $41,519.50 worth of taxes. That means 41.52% of this family’s income has gone to taxes! That’s almost half of this family’s income gone to the federal government. Depending on what state they live in, there is likely to be state, county, and even city income taxes on top of the normal sales taxes. And don’t forget about property taxes too. This can easily eat up half of their income! Sounds crazy, but it’s all true.

So now what? We can definitely do with some tax reform and some fiscal responsibility on part of our government. In my next blog, I’ll talk about the FairTax (HR25/S296) and how it can be a historic improvement to our tax system and put our economy in high gear.

Jason

Every year in the United States, there is a mad dash to file our taxes before the April 15th deadline. How did it come that we must report our income to the federal government and give it a slice of our hard earned pie? Today’s blog post is a brief history of the origins of the Federal Income Tax. Check out FairTax.org for an alternative to our current income tax code, but the FairTax will be discussed in many other blog posts.

Most people are completely unaware of this, but the United States did not have any form of permanent federal income tax until 1913. For the most part, our federal government relied on revenue from tariffs and taxing alcohol and tobacco. So, for the first 137 years of our nations history our Federal Government managed to function without securing revenue from our paychecks every month. There were some brief periods of federal income tax during times of war though. The Civil War saw the first time our government used a graduated income tax (the more you make, the higher your tax rate is) similar to what we have today. The Civil War was also the first time our nation saw an ‘inheritance’ tax. Ten years later our leaders wisely did away with the income tax and returned to the previous method of revenue generation. Another form of income tax was introduced in 1894, but was judged unconstitutional just a year later. It wasn’t until 1909 that the tide started to turn in favor of a Federal Income tax, and it started out as a joke…sort of.

There was at this time a growing resentment toward rich industrialist who became wealthy from the labor of the lower class. In 1909, a Democratic Senator from Texas named Joseph Bailey introduced legislation to establish a national income tax.  His motivation for this was purely political. He had hoped to use this legislation as a tool to embarrass the Republican party since they were typically viewed by the public as siding with industry and the wealthy. Senator Bailey expected the Republicans to openly oppose this legislation. To his surprise, a largely liberal Republican Senate was in favor of a Federal Income tax. President Taft was also in favor of it. The President even went so far as to send a letter to Congress stating this should be passed as a Constitutional Amendment, and not just a bill. After some political maneuvering the Amendment was passed and sent to the states for ratification. The income tax was largely marketed as a way to stick it to the rich. This was an easy sell to a working class who where resentful of the millionaires who built their fortunes off their hard work. On February 23, 1913, enough states had ratified the amendment to make it law. Connecticut, Rhode Island, and Utah voted against the 16th Amendment. Virginia, Pennsylvania, and Florida did not even bother taking the amendment up for consideration.

So how much did we get taxed when the 16th Amendment was originally passed? If you made under $20,000 (approximately $430,000 in 2008 dollars) you paid 1%. If you made over $500,000 ($10.7 Million in 2008 dollars) you were taxed 7%. How much income tax do you pay now? Good luck figuring that one out. The tax code is insanely complex today. It is so complex that the IRS doesn’t even understand it. Try calling them for help…then call again and talk to another person. You will likely get a different answer every time.

My next blog we discuss the beast that our income tax code has become. Until then, start reading the current Income Tax code. It’s only about 17000 pages long. Yeah, I said seventeen thousand pages.

Jason