U S Debt & Income Taxes . . . Can They be Fixed? or is it to Late!

  

Nothing in life is certain except death and taxes, right? Right!  But did you know that has not always the case in the U S, except the death part, that is.  You see, the United States didn’t impose a personal income tax until 1861; in an effort to pay for the cost of the Civil War.

The first income tax was a flat tax of 3% on anyone making over $800 annually. This was repealed and replaced a year later with a “scaled tax” of 3% on incomes between 600 and 10,000 Dollars, and 5% on all incomes higher than 10,000 Dollars; it also had a built-in termination date: 1866.    Commonly called the INCOME TAX of 1864; it was 4 pages long.

 

Truth be told, Americans have always resented taxes, as was evidenced by the 1773 “Boston Tea Party” which was an act of protest by a group of angry “Indians” (who were really Colonists in costume) against Great Britain for the implementation of the Tea Act which resulted in the dumping of many chests of tea into Boston Harbor. You might say the Brits reacted harshly, because the conflict escalated to war in 1775. But actually, aversions to taxation in the United States really begin with the protests against British tax policies back in the 1760’s.  More recently, one need only look at the current (2014) National debt which is close to 18 Trillion Dollars to conclude that Americans hate paying taxes.

So how on earth did the early American Government pay its bills? While, modern America can’t or just won’t.  Well, in 1776, the new US Congress sought to raise money by way of loans from wealthy Colonists with the promise to repay the “bonds” after the war. They were in fact redeemed in 1791 at face value, but the scheme raised little money because Americans of the era had little hard money (gold and silver) on hand, and to make matters worse, many of the rich merchants were supporters of the British Crown. To some extent though, the independent nation did manage to collect just enough taxes on imports (“tariffs”), whiskey, and (for a while) even on glass windows to just get by.

In addition, France was secretly supplying the Americans with money, gunpowder and munitions in order to weaken its arch enemy, Great Britain; that’s right, France!  When the French officially entered the war in 1778, the subsidies continued, and the government of France, as well as bankers in Paris and Amsterdam loaned large sums to the American war effort. Yep, these loans were repaid in full but not until the 1790’s; but keep in mind that debt was paid in full long before the implementation if the first American Income Tax of 1864.

The Revolutionary War effort’s cost ended up being in the neighborhood of 101 Million Dollars and that’s in 1776 Dollars.  If the Revolutionary War’s cost seems excessive, just compare that price tag to the 111 Billion Dollars America spent on the war in Vietnam from 1965 to 1975 and if sounds like a real bargain.

Now think about this: In federal fiscal year 2011 alone (October 1, 2010 to September 30, 2011), the government collected $2.3 trillion in revenues, which were comprised of:

47% individual income taxes

36% social insurance withholdings (SS benefits / FICA “tax”, etc.)

8% corporate income taxes

3% excise taxes

1% Custom Duties / Tariffs

0.3% Estate and Gift Taxes

4% Miscellaneous Receipts

The 2010 U S Census data combined with the most recent national population estimates place the current U S population at just over 319 Million (319,020,000) with a birth every 8 seconds, one death every 13 seconds, one international migrant (net) every 40 seconds which gives the U S a Net gain of one person every 15 seconds; still this relatively small group of Americans possess the largest national economy on earth, even though it’s only 4.43% of the world’s population. Comparatively speaking, the world population reached 7 Billion in 2012 and the new projections indicate that 8 Billion will be reached by 2025.

As for taxpayers in the U S, the IRS says that most of the approximately 243 million adults in the United States pay some type of federal tax.  But they contend that only about 122 million Americans pay Federal Income Tax. So it may come as somewhat of a surprise to learn that the IRS now collects more than 2.4 trillion Dollars from individual Tax Returns.   {Those figures are difficult for many of us to comprehend; so here’s a visual: A Trillion is One Million times One Million (1,000,000 x 1,000,000 = 1,000,000,000,000); that’s with 12 zero’s!}  Along about now you should probably also know many tax experts believe that over 46 percent of U.S. households do not pay federal income taxes at all; that’d be sayyy… 46% of 122,000,000 taxpayers  or 56,120,000 individuals (122,000,000 x 46%) who in theory aught to be taxpayers too . . . Considering this little known fact, who can justifiably argue that the current Income Tax system isn’t broken!

Anyway, it took an Amendment to the U S Constitution (the 16^th) in 1913 before an enforced, annual income tax was established.  As fate would have it, with the Amendments passing— growth, corruption and far too often, abuse of individual rights, have become the new “Gold Standard” for the IRS. 

It doesn’t take rocket science to realize that Individual and Social Insurance Taxes are a necessity in today’s America; but Tariff proceeds fall well short of the basic need. Bottom line: When government spends more than it collects in revenues, the resulting debt is an undue burden on tomorrow’s workers and taxpayers. This obvious drain can manifest in the form of higher taxes, fewer government benefits, reduced economic growth, inflation, or multiple combinations of such consequences.

Never the less it seems clear that the IRS’s taxing method has become far too complicated and to easily abused by those at each end of the economic spectrum.  For example in August 2011, the New York Times published an “opinion editorial” written by Billionaire investor Warren Buffett, who claimed that he pays a lower portion of his income in federal taxes than anyone in his office.  On the opposite end: Did you know the Earned Income Tax Credit (EITC) is money the federal government provides to low income working people to help them make ends meet? Yep, the EITC is managed by the IRS, and you don’t have to owe or pay any federal income taxes to qualify for this handout. To get the credit, all you need to do is file a tax return and specifically claim the EITC.  Guess what?  Abuse is not uncommon.

Perhaps a flat rate “scaled tax” similar to the one mentioned in the second paragraph above is a sensible approach for fixing today’s IRS; but that was way back in the 1860’s and you gotta figure, comparatively speaking, annual income was much lower back then. Keep in mind that the average income today (before taxes) is just a few dollars north of $63,000.00.  So, today, a Flat Rate Federal Sales Tax is perhaps the most practical approach.  An excellent example for promoting such a tax collecting system would be when the friendly neighborhood drug dealer that so many “big spenders” have on “speed dial”, buys that “really cool ride”; then he’ll pay Federal taxes too.

Currently, the individual income tax is structured to be progressive; in other words the effective tax rate increases as an individual’s income increases. In 2014, for example, the bottom 20 percent of taxpayers faced an average tax rate of a negative 4.5 percent (think EITC’s), which is essentially a tax subsidy; while the top 1 percent of taxpayers faced an average tax rate of 24.6 percent.  In any event, most tax experts agree that the average Federal Tax rate is a bit more than 11.5%.

There’s another “big deduction” though that must be worked into the equation; some folks simply call it social insurance “taxes” which are reserved for Social Security benefits / FICA withholdings.  This “bad boy” costs the average tax payer in the neighborhood of 12.5%; which is applied to earnings all the way up to 117,000 Dollars each year, and then it drops way down to 0%.

So if you’re like most of us, you gotta figure that Uncle Sam collects around 24% of the average earners income ($63,000.00), even though you could say that the FICA withholdings are, shall we say, placed in a “lay-away plan”. All of the other taxing methods (Excise, Tariffs, etc. – totaling about $384 Billion), are comparatively small sources of federal income in today’s economy.

2.4 Trillion Dollars, remember that figure? Yep that’s how much money the U S Government generally collects from Individual and Corporate Income Taxes, Tariffs, Excise Taxes, Estate and Gift Taxes, etc. these days when combined. 

63,000.00 Dollars equals the average taxpayer’s annual income. By examining the “Where does the money go” chart depicted above we can see that that said taxpayer averages spending a bit more than $49,600.00 of the $63,000.00; a net gain (in theory at least) of $13,400.00 each year; right?  Wrong!  If you factor in 24% Withholdings for FICA and Individual Income Taxes, that same taxpayer should have surrendered a minimum of $15,100.00 to the IRS; well thank goodness for all those complicated exemptions!  But in most cases, the poor guy most likely has to pay State Income Taxes too, so he’s probably gonna end-up in the “red” anyway.  Toss in a city / county tax and a payroll tax, and he’s definitely “underwater”!

So what’s “Mr. Taxpayer” to do?  First he’ll waste no time in cutting back on Entertainment and Contributions to his favorite charity.  If that don’t fix things, there’s always the option to choose abstinence from Tobacco and Alcoholic Beverages and perhaps the implementation of a “work related miles only” policy on what was originally planned to be exclusively the “family” Car.  If he has two automobiles (gods forbid), hopefully only one is a “gas guzzler”, cause one of the two has to go.  If all else fails, he will simply teach his little family of 2.5 to survive without proper Health Care or alternatively, he could give it all up and simply starve.

On the national front in fiscal year 2015, the federal government is projected to spend around 3.9 Trillion Dollars.  We already know the IRS anticipates collecting somewhere near 2.4 trillion Dollars. The chart below will give you a simplified idea as to how that money is spent:

 

Wait! Something’s wrong here.  Didn’t that describe a situation wherein the U S Government pays out more than it takes in?  . . . That was 3.9 Trillion Dollars spent; 2.4 Trillion Dollars received.  After double checking the sources, turns out they’re right.  So just like “Mr. Taxpayer” mentioned hereinabove, Uncle Sam’s over spending too. Simple math makes the situation crystal clear, good ol’ Uncle Sam is 1.5 Trillion Dollars a year in the red (3.9 minus 2.4 = 1.5).  He’s probably been borrowing the “shortfall” somewhere from the looks of the annual Interest payment; if you don’t agree, just look at the Nations multi-Trillion Dollar debt – and you can bet it’s been going on for a good while.

So what’s “Uncle Sam” to do? First thing, he must do (as opposed to “should do”) is look into Discretionary Spending and see what part of that 29% can be eliminated or trimmed; sadly, a quick math calculation with a handy pocket calculator shows that cutting all Discretionary Spending (1.13 Trillion Dollars) is not enough.  You know, Discretionary spending is that part of the U.S. Federal Budget that is supposed to be negotiated between the President and the U S Congress every year as part of the budget process.  Which means it can be changed, enlarged or even (theoretically) reduced to zero, but only if Congress so desires. That’s because the Constitution gives Congress the power to raise and spend money for the federal government. You see, the President’s budget is only a recommendation, or a depiction of his priorities.  Regardless, it’s obvious none of them are doing their job – so next election; why not fire ‘em all.

First though, Sam should be aware that the Discretionary budget does not include Social Security, Medicare and Medicaid. These are in the Mandatory budget segment. However Discretionary Spending includes programs like Defense Spending (70% of the discretionary budget), Homeland Security, NASA, Foreign Aid, The Veterans Administration, Transportation, and Education to name but a few. Point being some of them may be worth saving if at all possible.

Here’s a few of the typical “whipping boys” that generally come to mind when budget cuts are discussed:

One: The U.S. spends 20.1 Billion Dollars a year on foreign aid. Truth is, even if all of this was cut, that would not do much toward reducing America’s National debt, but then, it wouldn’t hurt anything either.

Two: The U.S. military budget ($738.8 billion in 2014) is larger than the next 10 largest spenders combined. The second biggest spender, China, only paid out $166 Billion, on the other hand our old adversary, Russia, spent $90.78 Billion; while our chief ally, The United Kingdom, invested $60.8 Billion in defense which is less than 10% of what the U.S. spent in 2014.

Two-A: The costs of wars in Afghanistan, Iraq and Pakistan equals $4.4 Trillion Dollars from 2001 through fiscal year 2014 (over 338 Billion a year); money & lives forever lost.  Plus the U S has already spent nearly $160 billion for both medical care and disability benefits for the more than two million veterans of these wars.

Three: Every hour, of every day, U S taxpayers are paying 10.17 Million Dollars for the Cost of War in Afghanistan. If we assume there’s 24 hours in the “Afghan” day that computes to more than 244 Million Dollars per day or a little north of 8.9 Billion Dollars per year.

Four: U.S. military operations targeting Islamic State militants (ISIS) in Iraq and Syria continues to cost taxpayers between $7 and $10 Million Dollars each day. That’s an average of 8.5 Million per day, if the U S continues at the current rate; expect that cost to exceed 310 Billion Dollars per year ($310,500,000,000.00).

On the brighter side, it appears that Edwin Starr was right in June of 1970 when his musical single, “War”, became a runaway hit; it held the #1 position on the Billboard Pop Singles chart for three weeks, in August and September of 1970. The song’s power was confirmed yet again when Bruce Springsteen and the E Street Band’s version made the U.S. Top 10 in 1986.

War, what is it good for? Absolutely nothing! – So goes the lyrics of the classic.

Then there’s number Five: In 2015, Mandatory Spending is estimated to be 2.45 Trillion Dollars; yep, that’s a new record.  The bad news is that this slice of the pie includes the “untouchables” like Social Security, Medicare, and Medicaid        . . . Here's the breakdown / itemization:

Social Security - $896 Billion

Medicare - $526 Billion

Medicaid - $336 Billion

Federal Employee Retirement - $139 Billion

Veterans Pensions - $79 Billion

SNAP (Food Stamps) - $78 Billion

Earned Income Tax Credit - $58 Billion

Supplemental Income to disabled children and adults - $56 Billion

National Highways - $43 Billion

Child Tax Credit - $22 Billion

State Child Nutrition - $21 Billion

TANF (welfare) - $17 Billion

Veterans Education - $14 Billion

Mass Transit - $12 Billion

CHIP (Children's Health Insurance Program) - $11 Billion

Farm Subsidies - $11 Billion

Crime Victims Fund - $8 Billion

Foster Care - $7 Billion

TARP (home loan modification program) - $6 Billion

All other mandatory programs - $76 Billion.                                                                                           

The other bad news is that if Congress cut all Foreign Aid, reduced Military Spending to a more reasonable or tolerable number (say, a mere 2 Billion Dollars), and bailed out of all foreign wars or “Police Actions” such as items 1 through 4, listed above, America would still fall short of balancing the budget or reducing the more than 17 Trillion Dollar National debt.

The fact of the matter is that in all likelihood, Mandatory Spending (see itemized in the color red above) will have to be reduced by a minimum of 25% (612 Billion Dollars) plus the elimination of many Discretionary budget items.

If by some major miracle, the U S Congress finally recognizes the detrimental nature of continually maintaining the status-quo (operating in the “Red”) and makes the necessary corrections; they should also overhaul the IRS – maybe they’ll eliminate it altogether and replace it with a National Sales Tax.

Here’s why a Sales Tax might work: Last year, Americans spent 10 Trillion Dollars shopping; not including money spent on food, child care, medicines, housing, et cetera—items that should not be covered by a “new” national sales tax.  The reductions or “cut-backs” referenced hereinabove total 1.489 Trillion Dollars (877 Billion Discretionary; 612 Billion Mandatory).  

Keep in mind that Fiscal Year 2015 requires 3.9 Trillion Dollars, less the above mentioned “cut-backs” (1.489 Trillion Dollars); leaving the need for an additional 2.411 Trillion Dollars.  

A SUGGESTED METHOD TO THE MADNESS:

Start with the “windfall” of 384 Billion Dollars the government derives from Excise Taxes, Tariffs, Corporate Income Taxes, etc.

Revised Fiscal Budget Requirement . . . <2.411> Trillion Dollars (a negative number)

“Windfall” tax earnings . . .                    +0.384 Billion Dollars (a positive number)

Sales Tax Receipts Needed to Balance  <2.027> Trillion Dollars . . .

Using the combined rate of the current withholding “average”, referenced several paragraphs above (11.5% + 12.5%; totaling 24%): 10 Trillion Dollars x 24% =   +2.400 Trillion Dollars which generates a surplus of 373 Billion Dollars that could be applied to the National debt; not much, but it’s a start in the right direction!   Yea, Yea, Yea, a 24% sales tax sounds really excessive but you gotta figure delaying the corrective measure will only make maters worse.  The alternative is: it’s already too late!

By the way, just for fun, some time before submitting your next “current-day” tax return, see if you can calculate what you would’ve owed in 1864. Remember: 3% on incomes between 600 and 10,000 Dollars per year, and 5% on all incomes higher than 10,000 Dollars per year.  You’ll probably be surprised.

Sources:                                                                       http://www.justfacts.com/tax.basics.asp                                                       http://mentalfloss.com/article/56218/what-first-1040-tax-forms-looked                                      http://pgpf.org/budget-explainer/taxes                                         http://en.wikipedia.org/wiki/Internal_Revenue_Service http://en.wikipedia.org/wiki/Taxation_history_of_the_United_States#Income_for_federal_government http://fas.org/sgp/crs/natsec/RS22926.pdf                                                                       http://www.nolo.com/legal-encyclopedia/the-earned-income-tax-credit-a-valuable-credit-low-income-earners.html                                                     http://en.wikipedia.org/wiki/Household_income_in_the_United_States http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/18/who-doesnt-pay-taxes-in-charts/ http://www.creditloan.com/blog/how-the-average-us-consumer-spends-their-paycheck/ http://www.fedsmith.com/2012/12/03/how-much-do-americans-pay-in-income-taxes/ https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/ http://useconomy.about.com/od/usfederalbudget/p/Discretionary.htm http://costsofwar.org/sites/default/files/articles/20/attachments/Costs%20of%20War%20Summary%20Crawford%20June%202014.pdf                                                  http://www.huffingtonpost.com/2014/09/30/isis-cost_n_5906762.html http://en.wikipedia.org/wiki/War_(Edwin_Starr_song)                        https://www.nationalpriorities.org/cost-of/war-in-afghanistan/081114/ http://useconomy.about.com/od/fiscalpolicy/p/Mandatory.htm                     http://www.census.gov/popclock/                                             http://mentalfloss.com/article/31222/numbers-how-americans-spend-their-money http://en.wikipedia.org/wiki/Economy_of_the_United_States http://en.wikipedia.org/wiki/List_of_countries_by_population

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