skip to Main Content

A Voter’s Must Read to Tax History

There is an old saying that is worth remembering when it comes to income taxes: “Those who cannot learn from history are doomed to repeat it.” As increasingly more politicians demand that the rich pay their “fair share,” it would be wise for the less affluent to hold onto their wallets tightly. History teaches us that the refrain about the rich paying their supposed fair share of income taxes has been around since the advent of taxation.

Taxation by a government should be considered a sacrosanct act, meaning that because taxation is a confiscation of assets from citizens, it should be performed with the greatest of trepidation in a country that values liberty. The unfortunate reality is that money is perceived as power; thus, politicians become addicted to this feeling of power. Politicians often tout that taxes are required to fund a variety of good intentions, and it is often easy to find a truly sincere individual to promote these virtues of need. For a politician, however, good intentions are normally a masquerade to a political end, resulting in more political power. This is not left or right issue, nor is it specific to the Republican, Democrat, or any other political party, but instead it is an unfortunate byproduct of a democratic system. Only the citizenry can truly demand that taxation (i.e., the confiscation of our and our fellow citizen’s assets) be considered as the encroachment on individual rights that it is.

America’s Founding Fathers wisely created a government “by the people” with a thoughtful system of checks and balances to best control the beast of government. They were well aware of the propensity of politics and the human desire for power as a pernicious recipe. This inherent understanding served as one of the reasons as to why the Founding Fathers created the “United States” and not merely “America.” The United States was designed as many democracies—individual and independent—with a collective Federal Government whose job it was to mainly deal with foreign affairs, guarantee the defense of the nation, and maintain a common currency. Citizens of the collective states were free to travel, live within, and conduct business throughout all of the United States. This created a competition among the individual state democracies. The states that allowed for the greatest prosperity of their citizens attracted the most people and wealth. If a state became abusive of its power over its citizens, then its residents could pick up and move to a more accommodating state, with the guarantee of the full protection of all the other states within the country.

The Civil War was fought over the most righteous of causes for the abolishment of slavery, but it also was a major step forward for a central powerful Federal Government. As a residual result of the Civil War, in 1913 the Federal Government was empowered to dismantle the Founding Father’s established competition among state democracies by imposing the Federal Government’s right to collect income taxes. Prior to 1913, the Federal Government collected the majority of tax revenue from foreign import tariffs. Any required additional Federal funds were proportioned to the states for them to individually raise as desired. The brilliance of this revenue-collection system lay in the fact that Federal politicians knew that their requests for additional funding would be directed to state politicians. State politicians—who are more engaged with their constituents than are Federal politicians—had no desire to ask their citizens for additional money to fund the Federal Government. This humbled all politicians when asking for additional tax revenue from the states, which reflects the brilliance of our Founding Fathers.

Federal politicians have attempted to dissect the independence and authority of each state and sweep governmental control into the hands of the different branches of the U.S. government, that is, the U.S. Congress (Legislative), the president (Executive), and the Supreme Court (Judicial). This power grab may be intended to serve the good of all Americans; however, under this arrangement, if a citizen disagrees with the decisions of the Government, he or she cannot simply move to another state to escape from imposed tyranny. The democratic competition among independent states is now far more limited, with only some forms and amounts of taxation existing as the predominant difference. This present-day means of tax collection does not reflect the foundation of liberty on which our country was built. We should be free to choose the governmental system that best fits our values and principles and not be forced instead to comply with the demands of a single controlling government. The prevalent divisiveness in our modern culture stems from the fact that states are no longer competing democracies, and U.S. citizens no longer have the freedom to transition away from decisions made for the collective whole as decided by the selective few.

The Sixteenth Amendment of the U.S. Constitution, which enabled the Federal Government to collect income taxes, was passed because it was promoted as a tax on wealthy merchants and industrialists who typically lived in only a handful of states. Prior to the initiation of the income tax, the collective pool of all Americans paid a proportional share, but after passing the income tax, the Government forced the wealthy of the nation to pay a greater share.

The initial income tax was only 1% on modest incomes (less than $75,000/year in today’s dollars) and up to 7% on incomes over ~$10 million (in today’s dollars). By 1918—in just 5 years—the income tax skyrocketed to a 6% charge on modest incomes and up to a 76% charge on high incomes. The reason given for the rapid increase in tax rates was to fund the expenses incurred by the United States’ involvement in World War I. World War II ushered in even higher tax rates of around 20% on very modest incomes and upward of 90% on those incomes over $1 million. A person had little incentive to work when taxed 90% on their income and nowhere to flee from the oppression of high tax rates given that they were implemented by the Federal Government.

In 1916, the Federal Government also initiated an estate tax that originally applied only to the wealthy. The supposed intent of this tax was to prevent the development of family dynasties and to allow for the redistribution of large estates back to the public. Seems perfectly “fair,” especially given that it was only a 1% tax on an estate valued at approximately $1-million (or more) and up to a 10% tax on an approximately $100-million estate.

The very next year, the maximum tax bracket jumped to 25% and reached 77% in 1942. Between 1942 and 1976, modest $400,000 estates were taxed at 3%. In 1977, $500,000 estates were taxed at 18%, and estates valued at $15 million or more were taxed at 70%. Before 1982, these estate taxes would have been expected to be paid even by a living spouse if the deceased spouse had in excess of these amounts.

In 1982, the estate tax exempted a living spouse for an unlimited amount and dropped the maximum tax rate down to 55%. At present, the tax exemption amount on estate, gift, and generation-skipping taxes is $11.4 million if single and $22.8 million if married with portability. These exemptions, however, are temporary, and there are many presidential hopefuls proposing a return to an estate tax on $1 million or slightly more in assets. There is no escaping this tax provision, because even if an American were to renounce his or her citizenship, the U.S. Government would require the estate tax to be paid if such a citizen was to leave the country with an estate greater than the exemption.

In 1969, there was an uproar in Congress when it was discovered that 155 wealthy Americans legally paid no income taxes on the basis of real estate depreciation and depletion of oil and gas reserve laws. Politicians once again determined that something had to be done for the sake of “fairness” and passed the alternative minimum tax laws. The alternative minimum tax code forced approximately 100 families in 1969 to pay a minimum amount of tax, even though they were legally required to pay nothing under the then-current tax laws. Over time, money-hungry politicians learned to use the alternative minimum tax to extract greater sums of money from its high-income citizens. In 2017, over 5.2 million Americans were subject to the alternative minimum tax, and what they were required to pay was nowhere close to the zero tax otherwise stipulated under the regular tax law. Politicians learned how to finagle increasingly more tax money from every-day Americans by manipulating a supposed “fairness” tax that originally targeted only wealthy Americans. Once again, because this tax is implemented by the Federal Government, no citizen can move out of the United States in the hopes of being free from the income tax or the alternative minimum tax laws, because the United States is a global tax system on income earned anywhere in the universe.

Many well-intentioned people with a true desire to help others will look for new tax strategies targeting the wealthy in an effort to increase funding for their respective causes. Duplicitous politicians eagerly exploit such sincerity to gain more tax revenue for the Federal Government, thus completely destroying the freedom our Founding Fathers orchestrated for U.S. citizens. If only there was a way to squeeze Pandora back into her box, then we would have the freedom to choose the democracy that best fits our own personal values and principles. If free college, free healthcare, or any other redistribution of wealth is truly a wise concept, then the citizenry will willingly conform to it, and the competing democracies that offer such wealth-distribution concepts will prosper. If such concepts prove instead to be foolish, then those competing democracies that do not offer such programs will prosper instead, and the public will flee to the states where these democracies reside. Programs that are offered by the Federal Government—as opposed to state governments—and that are forced on all Americans may be perceived as right and good, but in reality, it is tyranny. (Tyranny is defined as “rule by one who has absolute power without legal option.”) Of course not all laws that originate from the Federal Government are tyrannical or misguided, for example, the abolishment of slavery.

For the sake of our freedom, we need to “hallow the ground” of federal and state taxation and demand that politicians create a simple and fair tax system that is non-preferential to either the rich or poor. Taxation is confiscation. It is perceived as fair when the person being taxed has more assets than you do, but it does not take long for the power-hungry Government to adjust the tax code so as to sweep unsuspecting low- and moderate-income citizens under the same tax umbrella as those being “fairly taxed” because they are wealthy. Our Founding Fathers must be mourning America’s loss of liberty. We need to reignite competing democracies among states so as to offer U.S. citizens the right to live in a state that best fits their own principles, no matter the preference of the right-wing, left-wing, or those in-between.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

Back To Top