writers of the Constitution. Federalist Papers 30-36 were devoted to this subject. The subject of taxation deserved this much treatment, for as Hamilton observed early in Federalist #30 that,
Money is, with property, considered as the vital principle of the body politic; as that which sustains its life and motion and enables it to perform its most essential functions.24
Not only did they recognize it as a necessity, they also recognized its dangers. Madison noted that,
the apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice.25
Hamilton wrote on this subject that,
The ability of a country to pay taxes must always be proportioned in a great degree to the quantity of money in circulation and to the celerity with which it circulates.26
Then in a later Federalist paper Hamilton added,
There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of the political economy so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or to sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome.27
The concern was not just that taxation would become too burdensome on the economy, but that the burden would not be fairly distributed. “Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.”28 The tax the Founding Fathers designed was an attempt to strike a balance between the needs of the government for revenue, and the dangers inherent in taxation.
A major change to this balance occurred during the early part of the 20th century, with the passage of the 16th amendment to the U.S. Constitution, which allowed for the progressive income tax system. The problem was further compounded when the collection of taxes was made much easier in 1943 with the establishment of the current income tax withholding system. The combination of these two changes has allowed government to tax at ever-growing rates while greatly reducing the opposition of those paying the taxes. The resulting effect on government’s ability to tax has been dramatic.
How Much Do We Even Pay?
The Federal Government’s budgeted spending for fiscal year 2008 was $2.9 trillion. This is such a large sum that for most people it is completely incomprehensible. It is just a number with no real meaning, other than that it is really, really big. When this is combined with increases due to inflation and growth in the population, it is hard to get an understanding of just how much government has grown.
To make matters even worse, the current tax code is extremely complex. So many things are taxed in so many ways, and there are so many exceptions, deductions, and credits that it is virtually impossible for anyone to know how much they actually pay in taxes even to the federal government, much less state, county, and city. Then there are the hidden taxes, taxes passed on to you in the cost of the goods and services you purchase such that it is virtually impossible to find out exactly what you pay in taxes even if you wanted to.
As a result of all of this complexity and confusion there is a real disconnect between what government spends and what we actually pay in taxes. For example, if the 2008 budget had been $2.8 or $3.0 trillion would you know what impact that would have had on your taxes? Would it have any at all? And yet that is a difference of $100 billion dollars.
In an attempt to try and get some sort of handle on this, every year for the last 30 years, an organization called the Tax Foundation has waded through state and local government economic reports to come up with its own summary on government spending and just how much it costs us. In order to put all this confusion into some sort of perspective, they have come up with a way of measuring this, which they call Tax Freedom Day.
Tax Freedom Day is calculated by taking government figures on income and taxes to determine what percentage of income on average that is taken by government to pay for all the programs it funds, and thus get one overall “effective tax rate.” This is then used to determine “Tax Freedom Day,” the day in the year on which you theoretically have earned enough money to pay all your taxes for that year, and thus the point at which you are free to start working for yourself, instead of for the government. Given the vast complexities of the tax system, this is not a good measure of any one person’s individual taxes, but it does give a good idea of the relationship between the taxes people pay and the spending that government does.
More importantly for the discussion here, it very clearly shows the overall trend in taxes from year to year, and from decade to decade; and the trend is both very clear and very worrisome. For the early part of the nation’s history, as the Tax Foundation Report notes,
The United States has traditionally been a low tax nation. From the founding of the country until the early part of the twentieth century, the United States was in part defined by its mistrust of government power and its correspondingly low taxes.29
As such, it would appear that the checks and balances the Founding Fathers put in place to control the dangers of taxation worked pretty effectively.
At the beginning of the 20th century, Tax Freedom Day was January 22th, which meant that you had to work the first 22 days of the year to pay your taxes, after that, everything you earned in the other 343 days was left over for your own expenses, housing, food, vacations, whatever you wanted. This was an overall effective tax rate of 5.9 percent between federal, state and local taxes.
As can be seen in Figure 2.1, Tax Freedom Day declined slightly until 1918, when it jumps sharply, which coincides with our entrance into World War I. Given the increased government expense during a war this is not too surprising. After the war, however, while Tax Freedom Day did drop from its wartime high of 53 days, it only dropped to 35 days in 1923 and again in 1925. This new “low” was about 60 percent higher than the pre-war level. Following this post-war low, Tax Freedom Day started a steady increase.
The next big jump occurred during the 1930s with the Great Depression, when Tax Freedom Day exceeded its World War I highs jumping to the 50s and then even to the low 60s reaching a new high of 66 days in 1940. In this light the reason for the depression lasting so long becomes much clearer. At the very time the economy was struggling, government greatly increased the tax burden, making it impossible for the economy to recover.
Then came the start of World War II. At this point levels of taxation were already at historic highs, three times their pre-World War I levels, but the demands of the war meant it had no place to go but even higher still. By 1943, a new high was set with Tax Freedom Day occurring on April 4, 94 days into the year for an effective tax rate of 25.7 percent. This marked a whopping 327 percent increase over the tax burden at the start of century.
Given the demands of World War II, this is somewhat understandable. But following the war, while there was some drop, it was not very much. By 1949, Tax Freedom Day had been cut back to only 81 days, over double its pre-depression value, and four times the lows of the early part of the century. By the following year it was back into the 90s where it spent the rest of the decade normally exceeding even its World War II highs.
In 1960, Tax Freedom Day exceeded 100 days for the first time in American history. Following Kennedy’s tax cuts it dropped back down
