Why Do We Pay Taxes?

By Author: Jeff Parrack
Total Articles: 4762
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The subject of taxes is, and will always be, controversial. It is also a subject that elicits passionate reactions from many people, and is lied about, misconstrued, mischaracterized and used politically in so many different ways that its meaning is almost thoroughly debauched. For one thing, when you mention "taxes," most people immediately (and only) think of the income tax. The fact is, at 234 years of age, the United States has lived more years without a personal income tax than with one (about 120 to 114). Of course, there are plenty of other taxes than the income tax, including excise taxes, liquor and tobacco taxes, sales taxes, gift and estate taxes, and so on.

So, why do we pay taxes? Those who are unfamiliar with the history of taxation, in the U.S. or anywhere else, may buy into the common notion that taxes, particularly income taxes, are "paying the mortgage for liberty," or some such formulation. At the time of America's founding, however, the attitude was much more practical, and the first few presidents set about finding various revenue sources for the young, new nation. There were a few instances - the ...
... late 1790s confrontation with France, for example - when direct taxes were imposed on owners of land, slaves and other goods, taxes that were based on the value of the holdings rather than income. All of these revenue measures expired at the end of the crises for which they raised funds.

Revenue sources in early America
Even during the War of 1812, the U.S. government did not feel it necessary to impose income taxes. Instead, it issued Treasury notes, raised some excise taxes and enforced high import tariffs. All of these measures were repealed by 1817, and the government collected no income taxes at all until the Civil War. Instead, the government subsisted on revenues from customs duties and the sale or lease of public lands.

During the Civil War, however, the Union not only imposed income taxes, it raised taxes and duties on most existing items. Additionally, it expanded the list of taxable goods to include playing cards, yachts, feathers, gunpowder, billiard tables, drugs, telegrams, leather, iron, pianos, patent medicines and whiskey. Many legal documents also became taxable, and licensure fees were collected from practitioners of almost every imaginable trade and profession. The Civil War also introduced the notion of revenue collection "at the source," namely, withholding.

From 1872 to 1913
After the end of the Civil War, the government's budget contracted dramatically and war funds were no longer needed. Even though the income tax continued after hostilities ended, by 1868 the government was collecting the majority of its revenue from liquor and tobacco taxes, customs and excise taxes. The income tax was once again abolished in 1872. Although Congress passed a flat income tax in 1894, the Supreme Court ruled it unconstitutional the next year as it was "direct capitation" and not apportioned according to state populations as the Constitution then required.

With the ratification of the 16th Amendment in 1913 - a process that some tax protesters claim was done improperly - the Constitution was amended to allow an income tax. The first one pegged the tax rate at between 1 and 7%, the highest rate being for people with incomes over $500,000, which is 10 million dollars in today's currency. The fact is, only 1% of the population even had to pay taxes at that time. During the Congressional debates, the pro-tax politicians called anti-tax colleagues "insane" for saying that the rate would ever go beyond 7% or affect any more than the "very rich among us." However, in 2008 there were just over 140 million individual returns filed, and not just by "the rich."

So, why do we pay?
Let us first recall that Americans pay excise, sales, gift, estate and gasoline taxes daily, too, in addition to most people having tax withheld from their paychecks. Regardless of your philosophical position, or even your political one, the fact is that any government has to have revenue to fund its operations. It is a question of how much the government seeks to do, and what rate it should set for the various levies, that leads to the conflicts over tax policy. Some nations tax incomes at a high rate, and seek to provide cradle-to-grave benefits for its citizens or subjects. Other governments - a growing number, in fact - are discovering that their bloated welfare states could not be indefinitely maintained, and have enacted tax reforms and privatization efforts.

Whatever the right balance of income and other taxes is for one nation may not be right for another, but generally speaking, the more reasonable taxation is, the more revenues are raised (the Laffer Curve) and the more wealth is created by private industry. We cannot tax or spend the nation into prosperity, and government cannot "create wealth," but a healthy economy can ensure that the government does get the revenue it needs to conduct its proper business. It is establishing that very definition - government's proper business - that is at the heart of the tax debates in contemporary America and, increasingly, around the world.
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