by Jon N. Hall 2/13/17
The individual income tax is the largest source of revenue to the largest operation on Earth: the U.S. federal government. In fiscal 2015, the individual income tax alone brought in $1,540,802 million to the feds, or just over $1.54T. To confirm that, see “Table 2.1 — Receipts by Source” on page 37 of Historical Trends at the St. Louis Federal Reserve.
The federal individual income tax (also called the “personal” income tax) has always been highly progressive; those who earn more income have higher tax rates. It’s been the case for years now that the top 5 percent of income taxpayers provide more than 50 percent of individual income tax revenue, while the bottom 40 percent, due to refundable tax credits like the EITC, provide less than nothing.
It was recently reported that the Middle Quintile of federal income taxpayers had an average effective tax rate of 2.6 percent in 2013. Even so, we hear calls for middle class tax cuts. So let’s look at what the middle 20 percent of us have been paying for the last nearly forty years. In “Historical Average Federal Tax Rates for All Households,” the Tax Policy Center lists CBO data on average tax rates from 1979 to 2011 for various categories of federal taxes. The second block is income taxes, the left side of which I used to make the accompanying screen-grab. You can quickly see that the trend has been for the Middle Quintile to pay less and less income tax. The highest effective rate for the Middle Quintile was 8.2 percent in 1981. All through the Reagan, Bush 41, and Clinton years the middle classes were paying more, often paying more than twice what they’ve been paying lately.
Whenever it’s pointed out how very little that middle and lower income earners pay the feds in income taxes, progressives begin caterwauling about all the other taxes these folks pay. And it’s true; most Americans pay more in payroll, sales, property, and other taxes than they do in federal individual income taxes. But just because they’re paying a ton of money in other taxes, doesn’t mean that they should get cuts in a tax that many of them aren’t paying. If the middle and lower classes are “overtaxed,” then cut the taxes that they actually pay, not the taxes they barely pay. For instance, rather than again cutting the middle class’s individual income taxes, end Obamacare’s individual mandate instead. Indeed, Congress ought to sell the repeal of Obamacare to the folks as a tax cut.
On Feb. 1 in “H&R Block Is Enlisting IBM’s Watson To Help With Your Taxes,” Fortune’s technology writer Jonathan Vanian reports that H&R Block, the world’s largest tax preparation business, will begin using A.I., i.e. Artificial Intelligence, at their brick-and-mortar outlets:
The deal puts IBM’s Watson data analytics service in front of the millions of people who visit one of H&R Block’s 10,000 U.S. offices during tax season. The Watson data sifting technology is one of IBM’s key businesses including cloud computing and cybersecurity that it hopes will revive the company after several years of declining sales.
With our taxes getting so complicated that we need Artificial Intelligence to prepare them, one wonders what the relation is between the tax preparation industry and the government. Could Congress be in cahoots with H&R Block?
The addition of Watson to H&R Block’s tax preparation team was touted during Super Bowl 51 (video of the TV ad). “Get Your Taxes Won” is the ad’s slogan. (Are we to assume that taxes are a contest that can be lost?) The production values of the video are rather good, but the product it is selling isn’t something anyone should have to buy. Real Americans should be repelled by the message, because taxes shouldn’t be complex, they shouldn’t be a chore, folks shouldn’t need to use a super computer to lower their tax bills to something that is acceptable.
In 2015, candidate Trump said that he wanted to “put H&R Block right out of business” by simplifying our taxes. In an interesting short video, Block’s CEO responded to Trump’s threat, and to charges that the company benefits from the tax code’s complexity, reminding us that “there are five different definitions of a child in the tax code.” A columnist at Block’s hometown newspaper wrote that putting Block out of business “would wipe out 80,000 jobs.” Right, but the only reason those people have their jobs is because Congress has made our income taxes too damn complicated. If Congress really wants to give Americans another tax cut, then they should simplify income taxes so we don’t need to pay someone to prepare our tax returns.
We know that Democrats have no compunction about making our lives more complicated in order to affect their social agenda, but what about the GOP? Obamacare complicated our taxes with its tax credit subsidies, and now we learn that the replacement for Obamacare might just have that same feature.
What sheep we Americans have become if we think that our personal income tax system is necessary, natural, and normal. It’s disturbing that a supposedly free people would meekly accept such a tax system. It needs to be radically simplified, which would serve as a “tax cut” for the middle class and all Americans.
Jon N. Hall is a programmer/analyst from Kansas City.