Welcome to our current system of taxation.  You know the simple process of picking dependents, spouses, claimants, merchants, clergy, politicians, hobbits, muggles, bigots, tempests, magistrates, and pets that all qualify you for various tax breaks.  Of course you pay a certain tax based on how much money you make.  Most states also make you pay taxes based on how much money you make as well.  It’s so simple that there is not an entire industry employing millions devoted to it.  Oh wait…

The main reason we broke off from the British was because of taxes.  We soon realized a life of freedom is as much fun as college.  It’s great for a while, but not sustainable.  During the Civil War, again just before 1900, and finally with an amendment in 1913.  the United States established an income tax to raise money for the government.  Since 1913 we’ve continued to be taxed, and government has become much more important to the role of our economy.  The income tax, in various forms, taxes individuals, companies, and just about every legal entity on the income it generates.  There are exceptions of course.

The tax is progressive in nature.  So the more you make the more you pay.  It is not a flat rate for everyone or a fixed amount.  When you make $10,000, you might pay 5%, but if you make $100,000, you might pay 30%.  Because the brackets are confusing and vary based on legal status, I’ve made up those amounts.  If you’re truly interested in some of the brackets, check out this table.  The rates are adjusted based on need of the government.  Many political philosophies are driven from the proper amount that should be taxed from the people.  The rule of thumb here in the states is 35% of your income is taxed at varying levels, but in Europe 60% is not unseen.

There are advantages to this program, but of course there are also disadvantages:

The income tax allows for progressive taxation on the amount of money you make.  A person making $20,000 a year will pay less (percentage wise) than someone making $200,000 a year.  This is an effective strategy to distribute the wealth.  Considering most of the population fits into the lower brackets, most of the population should favor such a program.

This current system also allows for a stable income stream for the government.  Even at 10% unemployment, 90% of the workforce is still making money.  As the workers make money, the government can maintain an income stream, even in a depression.

One final advantage is the ease of which we are taxed.  Most of us have our taxes taken out of the paycheck for us.  This makes for a reliable method of collecting taxes.

Our current system is very complex.  So complex in fact that an entire industry exists to simply exploit loopholes.  The government must enforce every line of the tax code, and this requires an IRS that employs almost 90,000 people.  The IRS and tax audit industry might do more for the economy if they were retrained in some other manner.

Our current tax code is also unfair to the wealthy and favors the poor.  Some argue that the income tax is a tax on success.  In 2007, half of all income tax revenues were paid by the richest 5% in the country.  They do have the money, but even my broke self does not feel it’s appropriate for them to pay so much.  40% of Americans did not pay an income tax at all.  It can be argued that certain income levels should not be taxed, but it can also be argued that everyone should be treated fairly, and everyone be taxed at the same rate.  This remains a controversial subject.

Despite the tax on success, Warren Buffet has been known to say it is unfair that his secretary pays 30% in taxes while his accountants manage for Buffet to only have to pay 17% on his income.  This is almost a contradiction from the disadvantage above.  My lack of being able to explain the hipocracy further is simply another disadvantage.

Every system of taxation has it’s pros and cons.  The United States government has stuck to this system because it still works.  The tax code may be long, but the government makes it’s money, most of us are happy, and we still pay some of the lowest taxes of any developed nation on the planet.

Here is a link to a graph of the mean income tax rates of many developed nations.  The green bar for each country is the personal income tax.

Photo: ChuckHolton

Be Sociable, Share!
categories: government