A Brief Overview of the American Tax System
We all pay them and we all dread them—but how many of us really understand why we have to pay taxes?
Article 1 Section 8 of the United States Constitution states, “The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States.”
What falls under the definition of “general welfare” has been hotly debated. Republicans and Democrats often disagree as to why we pay taxes, and what taxes should be used for. Even the constitutionality of taxes has been in dispute.
The IRS counters this on their website, stating, “There have always been individuals who argue taxes are illegal. They use false, misleading, or unorthodox tax advice to gain followers. The courts have repeatedly rejected their arguments as frivolous and routinely impose penalties for raising such frivolous arguments."
"Why do we pay taxes?”—A Timeline.
- Originally the US government relied upon internal taxes on certain items (similar to the VAT in Europe). The cost of the War of 1812 required a federal sales tax on certain luxury items. But all internal taxes were dropped in 1817 in favor of tariffs on imports to support the federal government.
- The first federal income tax came about in 1862 in order to fund the Civil War. Along with it came the inheritance tax. And although all citizens have to file their federal taxes—not all states require them.
- The inheritance tax was later removed (1872) and a few years later the Supreme Court declared income tax unconstitutional. However, in 1913 the 13th amendment was passed, making the income taxes both permanent and legal.
- Since then rates have gone up and down several times since 1913. The highest raters ever were in 1945 at 94% That’s 94 cents of every dollar! (The lowest rate that same year was 23%.)
"Why do we pay taxes?”—A Philosophy.
There are some who would argue that Filing Form 1040 violates the Fifth Amendment which states:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
To which the IRS responds, “The courts have consistently held that disclosure of the type of routine financial information required on a tax return does not incriminate an individual or violate the right to privacy. Also, courts have consistently found that the First and Thirteenth Amendments do not provide rights to refuse to comply with federal tax laws."
Originally the Federal Government was created with the idea of serving the singular purpose of protecting the rights of the people. With a complex international community that has to consider such things like nuclear warfare, cyber attacks, terrorism, viruses and other such threats—you'd be be hard pressed to find many that would find disagreement with the necessity of taxes to this end. However, the real dispute occurs when government uses taxes to pay for things that ride the line (or fall outside) of protecting our rights. Healthcare, social services, education to name a few—all end up on the debate ticket come election season.
The dividing point to many of these questions comes down to one thing—philosophy. Do you believe that government should account for more than is seen as “essential” to protect our rights? And if you don’t, what do you believe falls under the definition of “essential” or “constitutional rights”?
Whoever said philosophy has no effect on the real world, is sorely mistaken. Adam Smith (who is thought to be one of the forefathers of the American Tax System) studied social philosophy at the University of Glasgow and Oxford. His infamous book “The Wealth of Nations” is the work that introduced the concept of the “Invisible Hand”. The Invisible Hand is a philosophical concept that the whole (nation) unintentionally benefits from the self-interest of the individual (the citizen). This and his other famous dictum “The Four Maxims” have *big suprise*—also been hotly debated topics in regards to intent.
Equity: The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Certainty: The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
Convenience: Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.
Economy: Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasure of the state.
“Why do we pay taxes?”—Schools of thought.
When it comes to the ethics of taxation there are three main approaches that underly American ideology and help us understand why we pay taxes". They are as follows:
Utilitarianism, which tells us to aim for the greatest total happiness across the population. In the economic sphere, we can interpret ‘happiness’ as the satisfaction of our desires; and so utilitarianism as aiming for maximum satisfaction of desires.
Deontology, which bases ethics on the idea of duty.
Virtue ethics, which focus on the virtues we should have, and on what constitutes a virtuous life. A broad conception of the virtues must be used here, encompassing not only virtues such as honesty, but also virtues such as using one’s talents and leading a fulfilled life.
As the world becomes increasingly dangerous, the need for funds to “protect” the rights of the constitution will become increasingly complex. Simply put, there will be few who argue against the necessity of modern taxation. However, there are a plethora of verticals for which our income is used that do not clearly fall under the definition of "necessary".
This point of cataclysmic divide boils down to a matter of perspective. It’s this very ambiguity that politicians use to their advantage when it comes time to head to the voting booth. The answer to “why we pay taxes” is rather simple—in order to survive as a nation. But the answer to “What should ethically be funded with tax money?” and “How much should we pay?” are entirely different questions that boil down to philosophy, perspective, and an understanding of the US constitution.