Taxes, Income, and Freedom

It’s April. Do you know where your income taxes are?

Photo: Steve Buissine. Source: Pixabay

Around the country people are reviewing their income from last year and calculating their taxes. Tax day is an extraordinary event: a couple years ago 140 million Americans told the government that they earned $9.7 trillion and paid $1.4 trillion in taxes. The lion’s share of those taxes came from the highest earners: the top 50% of taxpayers paid 97% of the taxes collected, and the infamous top 1% paid 40% of all the income taxes collected.

And the 1% pays a higher effective tax rate: 27%, versus an average rate of 14% for all taxpayers. This is how our system is designed to work. Folks who have higher incomes are supposed to contribute more, because they have benefitted more, economically from the institutions the government provides: defense, police, courts, roads, sewers, and schools.

Source: Tax Foundation

April is also significant because it usually is the month for tax freedom day – the dayit is estimated that our tax burden is complete. Last year, nationwide, it fell on April 24th, although it varies by state: in New Hampshire it was April 22nd; in New York it was May 11th. Last year we spent almost $5 trillion on federal, state, and local taxes – about 25% of our $19 trillion economy.

Most people don’t get too upset about their taxes – if they think their money isn’t wasted. Police, roads, courts, fire, sewers and schools enjoy widespread support; corporate bailouts and special provisions, not so much. The US has a voluntary tax-reporting system, where we make detailed disclosures every year about some of our most personal financial information. And we have a very high level of compliance. In Italy, by contrast, the former Prime Minister is serving time for tax-evasion while he was in office.

The Revolutionary War was fought, in part, to promote the notion of no taxation without representation. But as many have observed, taxation with representation isn’t always so hot, either.

Douglas R. Tengdin, CFA

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