newsletter
The History of American Taxation
August 2008
Being
in an election year, we are often asked what will happen to taxes when the new
President is elected. The
perception is that Democrats typically raise taxes, while Republicans want to
lower taxes. However, both parties
spend like drunken sailors!
With
our national debt at 10 trillion and growing (and that doesn’t even
consider future liabilities; Social Security and Medicare) sooner or later
Congress will be forced to deal with the long term problems of Social Security,
Medicare, and other entitlement programs which will eventually overwhelm the
federal budget.
A
look at the history of American taxation, which we ran across recently, puts
our comments in perspective.
Notable
Events in the History of American Taxation *
1787
United States Constitution gives Congress “power to
lay and collect taxes.”
1791
Treasury Secretary Alexander Hamilton sets up system of
tariffs and excise taxes.
1815
War of 1812 ends before proposed wartime income tax can be
enacted.
1828
Regional tensions flare as Southerners decry “Tariff
of Abominations.”
1862
1881
Supreme Court declares now-expired income tax was
unconstitutional.
1913
Sixteenth amendment to Constitution authorizes federal
income tax.
1917
Top marginal rate on income hiked to 73 percent as
1926
Top rate, after several reductions, is at 25 percent.
1936
Amid Depression, top rate is 79 percent, and estate and
gift taxes are instituted.
1945
World War II raises top rate to 91 percent, and it stays
there in peacetime.
1964
Tax cut, initiated by late President John F. Kennedy,
brings top rate to 70 percent.
1974
Individual retirement accounts are introduced.
1981
President Ronald Reagan presses legislation reducing top
rate to 50 percent.
1986
Tax reform law closes loopholes, sets top bracket at 28
percent.
1990
President George H.W. Bush lifts top rate to 31 percent.
1993
Tax hike, putting top rate at 39.6 percent, pressed by
President Bill Clinton.
2001 President George W.
Bush begins tax cut that will bring top rate to 35 percent.
One
thing we can safely say is that since many of the tax cuts implemented are
slated to expire in 2010, we will see tax legislation passed in 2009 or made retroactive
in 2010.
Will this give Congress
a chance to overhaul the entire tax system or will they just continue to tinker
with the existing system? That remains to be seen. An economist friend of ours said a study
was done that showed regardless of the tax rates, the tax collected continues
to be 19.6% of gross income, so if the government wants more revenue they
should lower taxes and encourage growth.
Some
of the proposals that have been suggested as a tax overhaul:
1) A Value Added Tax or VAT, but to replace the income tax, we’ve
seen suggestions that this rate would have to be somewhere in the neighborhood
of 25–30%.
2) A VAT plus an income
tax (such as a 20% VAT with a 20% flat income tax).
3) Replace the federal
income tax and the estate and gift taxes with a national sales tax.
4) A flat tax.
The
only thing that’s certain is that the existing tax system is widely disliked
and sooner or later Congress will be forced to deal with the growing national
debt. History has shown that
governments ultimately try to inflate their way out of debt.
With
all this in mind, our focus is to continue to build wealth in a well balanced,
globally diversified portfolio to provide a comfortable income on an after-tax basis;
because the one thing you can count on is that the tax system will continue to
change regardless of who is in office.
History also suggests that the market has does well in spite of which
party is in office.
* "Tax Milestones." RESEARCH.
June, 2008, p. 61.
www.researchmag.com
Securities
through KMS Financial Services Inc.
520.884.7550
jpw@financial-architects.com brienne@financial-architects.com
3971 E. Paradise Falls,