The 16th Amendment to the U.S. Constitution brought us the federal income tax in 1913. A year later, the 1040 tax form was born.
The 1040 had a modest debut but has grown impressively since. The original was so compact it was published on the front page of the New York Times.
Today, it has hundreds of supplemental forms and thousands of instruction pages. The supporting tax laws now total more than 4 million words on 74,000 pages.
The growth of the 1040 matches the spread of the income tax itself. The original Internal Revenue Service had 4,000 employees; now, there are 90,000. Less than 1 percent of Americans filled out a tax form in its first year; now, there are about as many filed returns as there are workers.
The initial 1040 imposed a tax of 1 percent on taxable income above a standard deduction of $4,000 for married couples (almost $100,000 in today’s dollars). The 1 percent tax applied to income up to $20,000 ($470,000 today) and a top tax of
7 percent was applied to taxable income above $500,000 ($11.5 million today). The top tax bracket briefly reached 94 percent during World War II, before settling in at 91 percent after the war. President John Kennedy dropped the top rate to 70 percent (on income earned above $1.5 million in today’s dollars) before President Ronald Reagan reduced the top rate to 28 percent (on income earned above $60,000 in today’s dollars).
Not surprisingly, the growth of the 1040 has matched the growth in the size and power of government. In its first year, the income tax raised about $10 billion (in today’s dollars) and now raises more than $1.3 trillion annually. Interest groups lobby for exemptions, deductions and credits — part of a lobbying industry that benefits politicians and “the organized” at the expense of the general public.
It turns out that federal “payroll” (FICA) taxes on income impose a larger burden on most workers since those taxes are applied to every dollar earned (no deductions, exemptions or credits). Amazingly, those in working-poor households at the poverty line pay no “income taxes” but lose $3,000 to payroll-FICA taxes each year.
Part of FICA’s burden is hidden because it looks like employers pay half of it for their employees. And its burden is more subtle since it is simply withheld from our paychecks. In this way, the 1040 is far worse. It’s rough enough to have the government take so much money from the half of the population who pay “income taxes.” On top of that, though, Americans spend more than a billion dollars and more than 6 billion hours on filing their 1040s.
If they’re going to take our money, can’t they do it more efficiently?
In the recent minimum-wage debate, one of the more reasonable arguments was that the policy hasn’t changed recently. If states or the federal government are going to insist on having a minimum wage, it should be updated regularly. Or better yet, it should be adjusted annually (“indexed”) to deal with the effects of inflation.
One could easily make the same argument about income taxes. We haven’t had substantive federal income-tax reforms since the 1980s under Reagan and a bipartisan Congress. The number of tax brackets was reduced from 16 to two; marginal tax rates were reduced for everyone; and the tax code was finally “indexed” for the effects of inflation.
Since then, many of their improvements have been reversed: top marginal tax rates have increased (to nearly 40 percent); the number of tax brackets has crept back up to seven; and the tax code has become more complex.
A “flat tax” on income could replace current income taxes and the flat FICA tax with a single marginal tax rate on all income earned above the poverty line with the possible exception of charitable contributions.
It could raise the same amount of money with far less cronyism, inequity and inefficiency.
Unfortunately, few of our current national political leaders seemingly have the courage for anything so bold. But talk of hope and change can rise again. As we enter electoral cycles in 2014 and 2016, perhaps the public will make it a priority to insist on more efficiency and equity in our federal income tax code.
Eric Schansberg, Ph.D., is an adjunct scholar of the Indiana Policy Review Foundation and a professor of economics at Indiana University Southeast. Send comments to firstname.lastname@example.org.