D. Dowd Muska

 

Imagining an Affordable Income Tax

April 12, 2012

Rates, deductions, credits. W2s, 1099s, and the AMT. Who pays, who doesn’t, and what’s “fair.” The questions Americans ask about the federal income tax focus on the now -- what do I owe, why is it so complicated, what am I getting for what I’m forced to pay, which presidential candidate’s plan hurts me less.

Left unexamined are the long-term trends. And there’s a good reason why fedpols and the IRS don’t want taxpayers to know much wonky backstory about the mechanism that generates the plurality of Washington’s lucre. Run the numbers, and you’ll uncover the appalling price we pay for the income tax’s ravenous appetite.

Let’s start at the midpoint of last century and stop in 2010. To fans of Justin Bieber -- heck, to graying Xers with fond memories of Duran Duran -- 1950 must seem primeval. But workers who entered the labor force at age 18 that year turn 80 in 2012. The CDC estimates that average life expectancy in the U.S. is 78.3. Millions of the folks who began employment in 1950 are still with us.

The income tax raised $15.8 billion in 1950, representing 5.8 percent of gross domestic product. Adjusting the numbers to 2010’s cost of living, the tax dunned every U.S. resident for $944.

In 1960, after a decade of strong economic performance, the income tax’s burden was heavier. It filched 7.8 percent of GDP. Per capita, the levy rose to $1,674.

Ten years later, America had endured assassinations and riots, and the insanity of Vietnam raged on. But economic growth, combined with “progressive” rates, garnered a gusher of additional revenue. A bit under 9 percent of 1970’s GDP went to D.C. in income taxes -- nearly $2,500 for every man, woman, and child.

Ronald Reagan assumed the presidency with the help of Nixon-Ford-Carter blunders that took a savage toll on the economy. The income tax’s share of 1980’s GDP had barely budged from where it stood a decade earlier. But its population-based metric continued upward, rising to $2,852.

By 1990, when Washington elites began their creepy obsession with tin-pot boogeyman Saddam Hussein, supply siders had successfully rolled back some of the income tax’s greediness. Its portion of GDP had dropped to 8.1 percent. But wealth-creation in the ‘80s pushed many earners into higher rates. In addition, the proliferation of pass-through entities meant that business-derived income began to add to the revenue total. Thus, while rates were cut, the per capita tax take continued on its established trajectory.

Twelve years ago, at the height of the dot-com boom, the income tax’s GDP grab was 10.2 percent. Each American’s 2010 allotment was $4,521.

In 2010, the worst -- okay, perhaps second worst -- recession in the postwar period sent unemployment soaring. So it’s not surprising that income-tax revenue as a share of GDP plunged to 6.3 percent, and Americans’ individual cut dropped to $2,910.

That’s a lot of numbers, and making sense of them is as easy as filling out your 1040 over lunch. But one thought experiment clarifies just how destructive the income tax has become.

Imagine that in 1950, fedpols decided that the income tax needed to be capped. Suppose that they committed themselves to never letting its population-based cost, allowing for inflation, expand beyond what it was that year.

It’s a ludicrous fantasy, of course, but here’s the math: The income tax’s per-person bill for 2010, minus the comparable figure for 1950, multiplied by 2010’s population, yields a sum of $607 billion. That would have been a real stimulus -- money retained by workers and entrepreneurs, to spend as they thought best. (Run the calculation for 2000, and the value for that year is over $1 trillion.) Remember, this what-if scenario applies to the income tax alone, leaving out the levy placed on corporations, excise taxes, and the assessments that generate revenue for “social insurance.” 

The bottom line? In real terms, limiting the income tax to its 1950 level -- or even 1960, or 1970 -- would have annually injected an enormous amount of resources into the real-world sector over the last few decades. Deficits would have been held down, the country would be more capable of competing in the global marketplace, and we’d all be much richer.

Just think of it: The income tax, at its 1950 price.

But don’t daydream for too long -- you need to get to work. April 15, 2013 isn’t that far away. The federal government’s grown accustomed to looting your livelihood. It has no plans to stop.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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