Benjamin Franklin said, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” Tax Day is looming. Why do we pay income taxes and why are they due – usually – on April 15th?
Revenue for the government used to come in the form of two types of taxes, tariffs and excise taxes. Tariffs are taxes placed on imported goods and tariffs come in two varieties: revenue tariffs and protective tariffs. We still have tariffs. When Donald Trump was president, he famously called for raising tariffs in China. A revenue tariff is just what it sounds like, a tax to raise money to finance the functions of government. A protective tariff is to keep foreign goods from having an advantage, unfair or otherwise, in the American market. For example, there are two televisions; one is made in Japan and the other in the United States. The Japanese television costs $500 and the American one costs $600. Assuming the size, color, quality etc. are equal then the consumer would probably go for the lower priced Japanese model. A revenue tariff, in this example, would slap an additional $100 on the price of the Japanese television so that now both sets were the same price. The government gets a $100 and the playing field is now “leveled”, so consumers would then make their selection on some other criteria rather than price. A protective tariff, to take the same example, would place a $200 tariff (or more) on the Japanese television so that the American product would be cheaper, thus causing more American TVs to be sold than otherwise would have been.
An excise tax is a tax included in the price of a good. It is very much a “hidden” tax. South Dakota adds an additional $1.50 or so to the price of a pack of cigarettes which is in addition to the extra buck the Feds tack on to a pack, which is then included in the overall retail price. But wait there’s more, as they say on late night television. Once you pay the price of a pack of smokes then you also pay a sales tax. Part of the price amount a cigarette smoker pays sales taxes on includes the excise taxes, so they’re paying taxes on a tax. The idea behind excise taxes is to discourage “bad behavior” (like smoking and drinking) or at least to generate revenue off of those practices. In addition, excise taxes exist on things people can’t do without, like gasoline (the Feds tack on 18.4 cents on gasoline and 24.4 cents on diesel per gallon, and South Dakota adds 28 cents a gallon which is all on top of what a gallon of gas actually costs retail). South Dakota also places excise taxes on other things, like the 4% excise tax on the purchase of new vehicles.
For a long time, those two types of taxes (tariffs and excise taxes) generated plenty of revenue for the federal government. In fact, for some of our first nearly 100 years as a country, the problem was taxes were generating too much money. The government didn’t know what to do with all of that dough. Then came the Civil War.
Wars are expensive. It’s difficult to be budget conscious or penny pinching during a war. Armies have to be outfitted. Navies need ships. Personnel have to be paid. Then there is all of the resupply to worry about – uniforms and gear for new recruits, replacement weaponry and more ammunition, food and medicinal supplies etc. The Union needed additional funds to bring the Confederacy back into the fold and a new source of revenue was required. In 1861, the income tax was born. At first it was just 3% and on incomes only over $800 (equivalent to about $28,200 today). A private in the Union Army was paid just $13 a month and the average income in America for a laborer in 1861 was $250 to $400 a year, depending on occupation and skill. So, Americans weren’t worked up about an income tax because only the “rich” people were paying it.
By 1872, the income tax was repealed. The Civil War ended in 1865 but the income tax remained in effect for a while to pay off war debts and to provide the beginnings of what would eventually become known as veterans’ benefits. However, as everyone knows there is always another pet project, a “need” or “good” thing that those in government want to do and must have your money for. As a result, in 1894, the Congress buried a 2% income tax within a tariff bill, hoping to sneak it by folks. People were neither fooled nor amused. Interested parties took it to the Supreme Court where the Court decided the case of Pollock v. Farmer’s Loan and Trust. By a 5-4 vote the Supreme Court decided that the income tax was a “direct tax”. In the Constitution, direct taxes are to be apportioned (divvied out) to the States. Since the income tax was for the sole benefit of the federal government and not to be shared among the States, it was unconstitutional.
In 1909, the progressives in Congress were mounting another effort to institute an income tax. Conservatives, thinking the States would never ratify a constitutional amendment argued that only an amendment would pass constitutional muster with the Supreme Court. So, the 16th Amendment (the constitutional authorization for an income tax) was sent to the country and surprisingly ratified by ¾ of the states (including South Dakota). The first tax brackets ranged from 1% to 7%. The 7% bracket applied to those making $500,000 or more a year (about $11 million in today’s dollars). Tax rates fluctuated over the decades with a 90% top tax rate for most of the 1950’s. President Kennedy’s tax cut (passed after his assassination) reduced the top rate to 70%. The maximum rate today is 40.8%. That’s a top rate of 37% with an additional 3.8% tacked on to help finance the Affordable Care Act.
The tax bracket breakdown for 2024 is this for those filing as single:
10% $0 – 11,600
12% $11,600 – 47,150
22% $47,150 – 100,525
24% $100,525 – 191,950
32% $191,950 – 243,725
35% $243,725 – 690,350
37% $690,350 and above
The tax bracket breakdown for 2024 is this for those married filing jointly:
10% $0 – 23,200
12% $23,200 – 93,300
22% $94,300 – 201,050
24% $201,050 – 383,900
32% $383,900 – 487,450
35% $487,450 – 731,200
37% $731,200 and above
IRS Commissioner Danny Werfel estimates that tax cheats will cost the US Treasury $150 billion this year. The Congressional Budget Office released a report at the end of February 2024 that estimated that cuts in the IRS budget and personnel have added $24 billion to the deficit because of the IRS’ diminished ability to enforce tax compliance.
Tax returns used to be the sole responsibility of the taxpayer in the sense that there was no payroll withholding. Individual taxpayers had to keep track of how much they earned and then send in an estimated amount of tax, which most people chose to do quarterly. You can imagine how slap dash a system that was. In 1943, the Congress enacted the payroll tax system which is how most of us meet our income tax obligations these days.
The original Tax Day was March 1. The logic was the tax year ended on December 31st and that gave those who sent in their returns only on an annual basis some time to get their ducks in a row. In 1918, the date was moved to March 15th because taxpayers said they needed additional time to get things in order. This was the beginning of tax season and the mad rush for folks to see their CPA to get their taxes done. In 1954, the date was moved to April 15th to give the IRS additional time to process tax returns. That may have been the original rationale but held true only as long as most Americans were early filers. Procrastinators are the bane of the IRS, but why file early if you know you owe?
Tax Day this year is April 18th, that’s because Tax Day can’t fall on a holiday. What holiday is on April 15th you ask? Washington, D.C. takes off “Emancipation Day” which is April 16th and celebrated on that day or the closest weekday if the 16th falls on a weekend, so sometimes that’s why Tax Day is moved. Government offices are closed in Washington, D.C. on Emancipation Day, so no IRS employees would be working and if the IRS isn’t open on April 15th, it makes no sense for taxes to be due by that day. The IRS has a huge processing facility in Massachusetts and Massachusetts is one of six states that celebrates “Patriots’ Day”. Patriots’ Day commemorates the beginning of the American Revolution with the battles of Lexington and Concord. Patriot’s Day is celebrated on the third Monday in April, which this year is April 15th. Since everything is closed on Patriots’ Day in those six states, including the IRS processing facility, taxes aren’t due until April 18th this year.
The IRS has the power to seize your business, personal possessions and to freeze your assets. Pay your taxes. The few dollars you might save by slumming on your return isn’t worth the humiliation, financial forfeitures and federal prison time. Happy filing!