American Taxation Explained

Legal Obligation

We pay taxes because federal, state, and local governments enact tax laws. Failure to pay taxes can result in public tax liens, penalties with garnishment of wages, seizure of private property including homes and bank accounts, and even imprisonment. Based upon these facts, taxes are not voluntary and paying taxes cannot be considered patriotic duty, religious charity, or social responsibility.

Tax revenue funds the operation of government itself, as well as government services. The federal government collects more than double the taxes of state and local governments combined. On a regular basis, Americans vote to elect government officials at all levels of government office to serve the will of the people. Once elected, citizens may feel politicians have a moral duty to act on their promises, but citizens have no say in government actions and must endure the consequences until the next election.

According to Census.gov as of 2019, the average American household has the following average tax burden:

$56,516 Income

$14,702 Federal Income Tax (26%)

$ 5,055 State Income, Property, & Excise (8.9%)

$36,749 After tax income

Throughout the nation, citizens pay an average Sales Tax of 7% for any goods they buy, not including sin, luxury, or other taxes. Interest on savings or investments, capital gains, and paid retirement are also taxed by federal and state government. Upon death, the federal and state governments require a final tax return for the deceased and any estate is taxed.

Per the Internal Revenue Service, the average corporate tax rate in 2019 for small businesses was 26% of net income. On top of salaries paid, business owners pay an additional 22% in payroll, unemployment, and withholding tax per employee. After paying corporate tax, business owners are additionally subject to personal taxes.

Boston Tea Party

On December 16, 1773, at Griffin’s Wharf in Boston, Massachusetts, American colonists disguised as Iroquois Indians dumped 342 chests of tea imported by the British East India Company into the harbor, because of frustration and anger at Britain for “taxation without representation”.

In the 1760s, Britain was deep in debt, so?British Parliament?imposed a series of taxes on American colonists to help pay those debts. The?Stamp Act?of 1765 taxed colonists on virtually every piece of printed paper they used, from playing cards and business licenses to newspapers and legal documents. The?Townshend Acts?of 1767 went a step further, taxing essentials such as paint, wood, glass, lead and tea.

The British government felt the taxes were fair since much of its debt was earned fighting wars on the colonists’ behalf.?The colonists, however, disagreed. They were furious at being taxed without having any representation in Parliament, and felt it was wrong for Britain to impose taxes on them to gain revenue.

Throughout the colonies armed British soldiers or Redcoats harshly ruled the streets. Colonists had come to America for religious freedom and more opportunity. The total of all the taxes is a topic of controversy and believed to be a rate of approximately 10%. American colonists were not citizens of England, received no benefit from the taxation, and were under armed tyranny. The Boston Tea Party was the main event that started the Revolutionary War and afterward American taxation.

Revolution and Civil War Funding

It's rarely recognized that Robert Morris, Haym Salomon, and John Hancock personally funded a significant portion of the war effort to pay troops and provide loans to the fledgling new nation. The Continental Congress had no control over each sovereign state and printed its own currency, provided debt certificates and bonds, and borrowed an estimated 6% of the total war effort from foreign countries like France. Each state also printed its own unique currency and offered individual state debt certificates and bonds.

In 1791, Alexander Hamilton, the first Secretary of Treasury, became the Father of Banking when the first United States bank was established under George Washington. The first United States bank had a 20 year charter and assumed the States' debt in exchange for the use of the dollar as the national currency. Federal revenue came in the form of excise tax on liquor and tobacco of 1% - 3%, import tariffs on goods of 15% - 20%, and sales of western land. (Verifiable rates on levies and tariffs are difficult to confirm and either scrubbed from or lost to history.)

A tariff is a tax on foreign imported goods to protect domestic production and jobs. U.S. businesses that buy imports pay the additional tariffs to the federal government hoping to prosper in the marketplace.

According to Archives.gov, some historians argue that the Civil War was as much about taxation as slavery. After the War of 1812, the tariff rate was raised to 35% for the federal government to pay off state debt. Although debt was quickly paid off, Northern states grew in population and manufacturing amassing more debt with the Southern states paying 75% of federal taxes in import tariffs with Congress passing the 1828 Tariff of Abominations.

To support the Civil War, Republican President Abraham Lincoln created the Internal Revenue Service and instituted the first "progressive" income tax of 3 percent?on annual incomes over $600 but less than $10,000 and a tax of?5 percent?on any income over $10,000. In 1864, these rates were raised to 5 percent and 10 percent respectively.

World War I Taxes

In 1913 under Democrat President Woodrow Wilson, both the Federal Reserve and Federal Income tax we now pay today were officially established. The?Revenue Act of 1913?imposed a one percent?tax?on incomes above $3,000, with a top tax rate of six?percent?on those earning more than $500,000 per year. Only three percent of the population made enough income to be subject to income tax.

"Soak the Rich" became a popular slogan with the Socialist idea that others shouldn't have more than you and the rich didn't earn their wealth because it was just luck or actually stolen, so they could afford and deserved to be taxed.

By 1917, Congress passed additional revenue or war acts each year to pay for World War I raising the minimum rate to 1 percent for individuals making $7,500 annually with the highest rate of 62 percent for earning $500,000 or more. While only five percent of the U.S. population was required to pay taxes, U.S. tax revenue increased from $809 million in 1917 to a whopping $3.6 billion the following year. (IRS 1040 Year 1917)

Roaring 20s Low Taxes

Republican Presidents Warren G. Harding and Calvin Coolidge served during the 1920s which marked the lowering of income tax called "scientific taxation" by Secretary of Treasury Andrew Mellon. These administrations embraced the industrial revolution, flattened federal spending, and paid down over 25% of federal debt. Tax revenues increased despite just 2% of the wealthiest Americans paying taxes and it was one of the most prosperous times in American history. (IRS 1040 Year 1925)

In 1929, Republican President Herbert Hoover was elected. Whether for greed or political spite, the Board of Governors of the Federal Reserve didn't like the speculation of stocks and directed U.S. central banks to begin denying credit for loans, while simultaneously increasing interest rates. Six months later the booming Stock Market crashed and the entire world was plunged into the greatest economic depression in history.

In 1913, the?Federal?Reserve?Act created the nation's central bank which is owned by no one. Its?Board of Governors?in Washington, D.C., is an agency of the?federal?government and reports to and is directly accountable to the Congress.

President Herbert Hoover asked for a temporary tax increase in 1932, raising the top income tax rate from 25% to 63% and quadrupling the lowest tax rate from 1.1% to 4%. That policy didn’t help consumer confidence or the Treasury. Revenue from the individual income tax dropped from $834 million in 1931 to $427 million in 1932 and $353 million in 1933.

Depression Social Programs Tax Increase

Democrat Franklin D. Roosevelt (FDR) then governor of New York was elected as the nation’s 32nd president in 1932 and is often called the father of "Progressive" liberalism. Drawing inspiration from fascist Mussolini, FDR raised taxes on the poor and the rich (IRS 1040 Year 1936) with increased government control on industry. In 1933, the National Industrial Recovery Act (NIRA) was passed for federal control of fair wages and prices which failed miserably by crippling a free market system and was later ruled unconstitutional by the Supreme Court in 1935.

Per Executive Order 6102, FDR forbid private ownership of gold. In 1935 on top of taxes, 7.65% Federal Insurance Contributions Act (FICA) withholding for Social Security and Medicare was made law. Despite Keynesian economics (government spending bias) and New Deal government policy for infrastructure, the nation would not recover from the depression until after World War II and FICA would never be lowered or repealed.

World War II Funding

At the height of Democrat progressivism and socialism, Time magazine put Adolf Hitler on the cover as "Man of the Year" in 1938. Soon after World War II would start in 1939 and last until 1945. Roosevelt signed legislation hiking the top marginal rate to 77% in 1936, and successive increases raised it to an astounding 94% by 1944 (although wealthy earners seldom actually paid these statutory rates?due to a much lower effective tax rate, particularly after 1940).

Often forgotten or ignored is taxing of the poor - mainly working class people who previously paid no income taxes due to falling below the exemption threshold. In 1940, FDR marshalled through a rapid succession of tax measures that simultaneously (1) raised rates across the board, (2) lowered the exemption level, and (3) ramped up tax enforcement by the IRS. Good triumphed over evil with American defeat of the Nazis to end World War II and the concept of income equity to redistribute wealth from those who worked harder with greater talent or skills never emerged.

At a time of “grave national danger,” Roosevelt told Congress in April 1942, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.”

60's Tax Cuts and 70's Intervention

Following World War II and despite high tax rates for all wage earners, America prospered helping to rebuild most of the destroyed world and the dollar became the reserve and international currency for trade. With the Revenue Act of 1962, Democrat President John F. Kennedy (JFK) cut the corporate tax rate from 57 percent to 47 percent famously saying "rising tides raise all boats". The Joint Committee on Internal Revenue Taxation estimated that the Kennedy plan would result in a tax shortfall of $7.6 billion in 1964, and $11.4 billion in 1965. What?actually happened?was that total revenue rose by $6 billion in 1964 and by $5 billion in 1965. After the assassination, in 1964, Congress passed another tax cut crafted by JFK, this time on personal income tax?from 91 percent to 65 percent at the top, and from 20 percent to 14 percent at the bottom.

The tumultuous 70's were presided over by Republican Presidents Richard Nixon and Gerald Ford, as well as Democrat President Jimmy Carter. Nixon?almost destroyed the U.S. economy trying to cure mild inflation by imposing harmful?wage-price controls on the free-market, adding tariffs, and ending the gold standard for the dollar that?insured the dollar's value - permitting the U.S. government to print dollars to solve every economic woe with the dollar's value falling indefinitely from over-spending until worthless.

President Fold tried to fix stagflation (stagnation with inflation) and the energy crisis by encouraging people to spend less and increasing taxes on oil companies which only fueled the recession. Under President Carter, the Federal Reserve increased interest rates to reduce inflation and increased payroll taxes for businesses and individuals to continue to fund Social Security. Federal Income Tax Brackets for Tax Year 1978 (Filed April 1979) (tax-brackets.org)

80's Boom and 90's Taxes

The economy would not recover from recession until the early to mid 80's during the administration of Republican President Ronald Reagan. President Reagan believed in the free market with government spending and intervention as our main economic problem. President Reagan adjusted tax brackets and deductions for inflation while lowering the top tax rate from 70% to 28%, deregulating business, and encouraging the Federal Reserve to print less money. While government spending was still higher than tax revenues. the 80's would be the second very prosperous time in history for Americans.

Republican President George H.W. Bush and Democrat President Bill Clinton served during the 1990's. Both increased taxes with the former attempting to counter congressional spending to control debt and the latter promising to balance the budget. Having no major wars and a robust economy, President Clinton raised taxes on higher incomes and also increased Social Security tax which impacted all taxable wage earners. Clinton cut the annual deficit in half, but did not lower the federal debt.

2000's and Taxes to Present

Following the dot com bust and the worst terrorist attack in U.S. history, Republican President George W. Bush lowered income taxes on the bottom 50% of taxpayers, reduced dividends and capital gains tax rate, and increased expense deductions for businesses. Bush's tax relief put more money in families' pockets and encouraged businesses to grow and invest with tax revenues outpacing the economy and 52 months of uninterrupted job growth, the longest run on record.??THE BUSH RECORD - FACT SHEET: President Bush Helped Americans Through Tax Relief (archives.gov)

The Bush Administration warned of the risk that government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac posed to America's financial security beginning in 2001.?

Federal government over extending credit led to the housing crisis and the Great Recession from 2007 - 2009 to begin the Obama administration. Democrat President Barack Obama (our first black president) increased government spending with $2 trillion economic stimulus, raised healthcare excise and medical payroll taxes over $250 billion annually for individuals and corporations (not including penalties for not participating in the Affordable Care Act), and increased government regulations - plus government for the first time took control of private banks and auto manufacturers in exchange for "bail-outs". Full List of Obama Tax Hikes | Americans for Tax Reform (atr.org) Despite the Keynesian economics, the nation would see another recession from 2015 - 2016 and federal debt increased to $19.9 trillion.

Both beloved and hated for his demeanor and direct communication to the people via Twitter, Republican President Donald Trump under the 2017 Tax Cuts and Jobs Act lowered individual and corporate taxes by over 10%, increased deductions, increased tariffs, and decreased government regulations - along with repealing fines for Obamacare individual mandate. Ninety percent of Americans?saw?an increase in take-home pay that helped foster historic lows in unemployment and national prosperity for all. The strategy was to eliminate government debt in 8 years by increasing government revenues through tariffs and more tax revenue from an unrestricted economy. Economy & Jobs – The White House (archives.gov)

Before the full effect of these policies and planned budget cuts, tragedy struck and CARES Act with related stimulus measures increased the national debt to $27 trillion. In the best economy since World War II, the COVID-19 pandemic struck and President Trump panicked shutting down the economy in early 2020. Democratic Socialists seized on the pandemic to incite ANTIFA and BLM riots, sequester the population, cease public education, ban religious and cultural activities, and force business closures. Despite unprecedented economic achievements, government stimulus, and Operation Warp Speed to distribute COVID-19 vaccines in less than a year, Democrat President Joe Biden was elected in 2020.

Claiming to be a moderate, Biden ran on systemic racism, social injustice, and climate change. In his first 100 days in office, President Biden signed over 100 executive orders Federal Register :: Executive Orders to destroy any Trump legacy:

1. Proposed $1.9 trillion stimulus spending and taxing of the rich by increasing the highest tax rate for individuals to 39.6% and corporate taxes from 21% to 28% with the highest capital gains rate in the world from 20% to 39.%.
2. Cancelled the Keystone XL pipeline with over 10,000 jobs lost, repealed previous deregulation, allocated approximately $200B to Paris Climate Agreement, and opened the borders in the name of climate change.
3. Allocated federal spending of over $250 billion in international abortion and transgenderism and forced sports competition of females with biological males, including sharing bathrooms.
4. Unfroze $1 billion in Iranian funds seized for terrorist activities destroying Middle East peace with anti-Semitism toward Israel while declaring government and military bias for all appointments by sexual preference, gender, race, and color over whites - especially heterosexual males.

These actions were immediately followed by continued civil unrest, a dismal jobs report, soaring price inflation for consumer goods with a gas shortage, criminal and pandemic crisis at the southern border, and potential war in the Middle East.

History Repeats Unless Studied

We the people are NOT government, just like government CANNOT take credit for businesses, infrastructure, and values that American people built. According to the Preamble of the Constitution, the role of government is: "establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity." Cumulative tax and spend policies of both Democrats and Republicans have led to our current situation:

• It's virtually impossible to understand how many bills are passed in Congress and where our tax dollars are spent. (Congress.gov)
• In 2020, federal revenue was 3.42 Trillian or 16% of the U.S. GDP. Spending was nearly double of revenues at $6.55 Trillion and debt was $26.95 Trillion. (datalab.usaspending.gov)
• Today taxable individual wage earners (less than 50% of the population) and small businesses (approximately 50% of the economy) are the most impacted by federal tax increases.
• The average taxable wage earner who has owned a home and a car will pay over $750,000 in federal, state, and local taxes in their lifetime.
• Raising federal taxes, interest rates, and government regulations has generally caused increased unemployment, higher inflation, and recession or depression throughout history.
• The main role of the Federal Reserve is to print money and there are no incentives or laws for Congress to reduce spending or debt.

A century later under eerily similar circumstances, federal officials embrace socialism. They peer down over their menacing theater masks hiding behind unwilling police and soldiers - using pleading eyes and railing against faux injustices as they raise taxes, increase government regulations, and continue uncontrollable spending. The average American and small business already receives little benefit for exorbitant taxes and we're quickly losing opportunity, freedom, and hope for a better future.

For more thought leadership, follow Kevin Fream.