From Jerry Meek, a business and tax lawyer in Matthews:
There will be no champagne or toasts; no freshly cut flowers or sentimental cards. But next Sunday marks the 100th anniversary of the ratification of the 16th Amendment, which brought us the federal income tax.
The amendment was a reaction to an 1895 Supreme Court decision holding that a tax on income from property was a tax on the property itself. Since, according to the Court, property taxes are direct taxes that must be apportioned by population among the states, so too must there be apportionment of any tax on income from property. The 16th Amendment changed all that, giving Congress the power to tax income without apportionment among the several States, and without regard to any census or enumeration.
Anniversaries offer time for reflection. So what can we say about our century with the income tax?
• The individual income tax has become the primary tool for achieving progressivity in the tax code. A tax is progressive if the rate increases as the ability to pay increases. A tax is regressive if the rate decreases as the ability to pay increases.
• Over the lifetime of the income tax, weve seen extraordinary changes in the top tax rate. Although the recent fiscal cliff compromise raised the top rate to 39.6 percent, during 87 of the past 99 years the top rate has been at least that. Generally, the top rate has been highest during wartime reaching 77 percent in World War I, 94 percent in World War II, and 77 percent at the height of the Vietnam War. Of course, there are exceptions. After the 2003 invasion of Iraq, the top rate was reduced to 35 percent.
• Over the century, weve seen periodic expansion and contraction of the base the amount treated as taxable income as Congress expands and limits exemptions, exclusions and deductions. The 1913 income tax code had no deduction for charitable contributions, no deduction for home mortgage interest, and no exclusion for employer and employee paid retirement benefits. All of these are considered sacrosanct today. Occasionally, as in 1986, we see reforms that broaden the base and lower the rate.
• The income tax has become a favorite tool for lawmakers who want to spend money without appearing to spend money. Lets say you are in Congress and want to provide a subsidy for some sector of the economy but dont want to raise taxes to do it. Simply turn it into a tax deduction or a tax credit. It will cost the same, but youll be praised for cutting taxes. These so-called tax expenditures are now pervasive.
• The tax code has reached whole new levels of complexity. As a tax lawyer, I arguably have a vested interest in this complexity. But the code is not complex merely for the sake of complexity. Instead, the complexity results from attempts by Congress, the IRS and the courts to stem taxpayer abuses of unadorned, simpler provisions. History teaches us that much of the complexity is unavoidable.
In all of this, and despite the passage of time, there is a remarkable consistency to the basic structure of the income tax code. So much so that some of the courts earliest interpretations of the code are still considered law. We therefore have every reason to believe that the next century will look a lot like the last.
So, for all her virtues and flaws, perhaps she deserves a centennial toast.
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