The founders of our country, universally, were opposed to the federal government directly taxing the citizens.  The central issue of our independence from England was King George’s taxation of the American colonies without providing us any authority on the use of the funds; we dubbed this “taxation without representation.”  King George did not want to answer to the colonists, so he shielded the colonists from any information as to the use or reasoning behind the high tax rates paid to the crown.  Over time almost every product either imported to or exported from the colonies was subject to an ever-growing tax levied by the King.

After the Revolution, the signatories of the Declaration of Independence proclaimed that the American government would never institute a tax on its citizens and it remained that way until July 1862 when Lincoln created the Commissioner of Internal Revenue as a temporary war tax to fund the Civil War; the genie was out of the bottle.

In 1872 the income tax was allowed to expire, however lawmakers attempted to reinstitute the tax in 1894, but the Supreme Court declared it unconstitutional. 

In February 1913 the ratification of the Sixteenth Amendment to the United States Constitution allowed the government to collect taxes on personal income:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

America was never the same and lawmakers began the spending spree that gave us the federal debt (what we owe) and the deficit (the shortfall between spending and revenue.)

Internal Revenue Service

Internal Revenue Service

Before the IRS, the collection of taxes was limited to real property, a portion of which flowed from the states to the federal government.  Businesses paid taxes on assets and property owners paid taxes to the state on tangible assets.  No tax was collected from private citizens by the federal government.  Tax revenues to the government were extremely limited, which suited the founders concept of a limited government, but not legislator’s concept of a far reaching central government.  The words of Thomas Jefferson, “A government big enough to give you everything you want is big enough to take away everything you have,” was lost to the growing progressive movement of the 20th century.

With the institution of a central taxing authority, corruption followed, a tax code was written and revenues grew exponentially.  As tax revenues increased, so did federal spending, and taxes grew to feed the appetite of an ever-growing federal government.  When FDR instituted the Social Security entitlement, a new category of federal taxes was created known as payroll taxes, shared by taxpayers and employers.

Tax rates grew at an alarming rate from 1940 till 1960 when the top tax rate was 90%.  John Kennedy reduced the tax rates after his inauguration by 3%, however the lowest tax rate, even on those making as little as $10,000, was 26%.

In 1965 Lyndon Johnson signed the Social Security Act, which amended the prior Social Security law to create Medicare and Medicaid, creating a new payroll tax.  Since the Social Security law and its subsequent amendment precluded the federal government from directly spending these funds, the government found that it could spend taxes collected for Social Security and exchange them with government bonds, effectively promises to pay the system back at some future date; this became known as “raiding the social security trust fund.”  Johnson’s social engineering spending spree became known as “the great society.”

Currently 51% of the population pays no income taxes, while the top 5% of earners pay 98% of all collected income taxes.  Progressivity in the tax rates lead by liberal special interest groups have created a tax system so upside-down that income differentials between the upper income ranges and the lower tiers has become greater and greater.  If you’re going to demand an ever-increasing divergence in the taxes paid from the lowest to the highest income levels, the higher income earners are encouraged to demand higher and higher wages.  The so called gap between the haves and the have-nots is in no small part due to higher wage earners supplying a growing percent of federal revenues.

Tax reform attempts in the past have had the goal of lowering marginal rates, but have not succeeded in producing a predictably greater revenue stream.  Economic growth spurred by lower tax rates cannot counteract the ever shrinking tax base which continually moves further up the wage scale.

Currently there are two predominate tax reform programs being promoted: the Fair Tax and the Flat Tax.

The Fair Tax removes all vestiges of the current income tax system, replacing it with a national sales tax collected by the states through retailers.  The Fair Tax eliminates the IRS, private tax returns and shelves the current tax code.  Since no taxes are paid on income, no deductions nor loop holes are necessary.  The Fair Tax only taxes consumption, so the greatest consumers (those at higher income levels) pay a greater percent of the tax.  The less you consume, the less you pay.  All taxes are collected at the time of purchase and because the tax base is as wide as possible, the rates are able to be kept very low.  The Fair Tax pre-bates taxes collected on sales to anyone below the federal poverty level, keeping in place protections for the lower wage earners.  All earners, regardless of income, receive a monthly pre-bate on consumption below the poverty level.  There is no business tax per se, as all taxes are collected at the time of a retail purchase.  Non-retail businesses neither collect taxes nor report income.  The tax code is eliminated completely, the IRS is shuttered and defunded, saving the government billions of dollars.

The Flat Tax keeps much of the current tax code in place, however it eliminates many of the current deductions in exchange for a single lower tax rate.  Since taxes are collected on income, as it is today, the IRS would be the central authority collecting the taxes.  Many of the business and investment tax incentives remain unchanged.  The sole benefit of the Flat Tax is by simplifying the tax code and removing many deductions, a simple one-page tax return for all taxpayers becomes possible.  However because some remain, and the governments hunger to induce political donations provides a distinct opportunity for special interests to reinstitute loop holes, credits and deductions, the opportunity to return to our current situation is ever present.  Much of the progressivity of the current system becomes “flat”, however poverty level preclusions remain in effect.

When you compare these two concepts it’s easy to understand that the greatest benefit for the average person is achieved through the Fair Tax.  Since you only pay on what you consume, it encourages saving as interest and capital growth is not taxed.  Low income earners keep more of their wages, giving them an opportunity to build a nest egg and benefit from asset growth without sharing personal revenue with the government.

Revenue to the federal government is similar with either system, however with the Fair Tax the costs associated with collecting and administering tax revenues is virtually eliminated.  Also with the Fair Tax no private citizen will ever be required to file a tax return, because there is no income tax to report, collect or refunds.

The big concern people have over the Fair Tax is the elimination of deductions for expenses such as real estate interest and taxes.  However, since taxes paid by the average citizen will be a fraction of what is currently paid and no taxes are paid on capital gains, most taxpayers will realize much greater net income.

In order to feed an ever-growing government, pay off the special interests and protect the poor, we’ve created a tax code which even tax attorneys can’t wrapped their hands around.  The IRS, besides being a dirty word to most citizens, is a ponderous and inefficient organization which consumes a greater and greater portion of government revenue while collecting a smaller and smaller portion of potential revenue; all fixed by the Fair Tax.  Tax dodging becomes a thing of the past.  Loop holes don’t exist and enforcement costs drop by over 80%.

The IRS is a relic of history and it’s time to leave it there while creating a system that achieves all that it never could.