Another year of tax season agony has begun, and it’s time to make my annual observations about taxation in America.

Following are some random facts (in no particular order) about our income tax laws, who pays, who doesn’t, and the impacts our system of taxation has on the nation’s productivity:

When the 16th Amendment to the Constitution established the federal income tax in 1913, the intent was to tax only the very rich. Rates began at 1% and increased to 7% for taxpayers with income in excess of $500,000. Less than 1% of the population paid any income tax at all, compared with almost 50% of taxpayers paying as much as 35% of their taxable income today.

The federal tax code grew from 14 pages in 1913 to over 9,000 pages today, and it now requires some 66,000 pages to document all the IRS regulations and other source material.

The Tax Foundation’s 2007 survey reported that 83 percent of Americans felt the income tax code was too complex. While the average American paid 32.4 percent of their income on taxes, they believed the total of federal, state and local taxes should not exceed 14.7 percent.

It’s almost impossible to accurately comply with the federal tax law, no matter how honest and well-intentioned taxpayers may be. In 1998 there were 34 million civil penalties assessed by the IRS.

Today, the top 5% of wage earners pay a little over 54% of total individual income taxes, while the top 10% pay about 60%, and the top 50% pay approximately 97%. Translation: Just half of all taxpayers pay almost 100% (96.54%) of all income taxes, while almost 50% pay no income taxes at all.

The Internal Revenue Service (IRS) has approximately 94,000 employees (FTEs or full-time equivalents) and a total 2010 budget of $12.4 billion.

Estimates of unreported commercial activity in the U.S. amount to between $2.0 and $2.25 trillion dollars a year, and the IRS Oversight Board report for fiscal 2007 notes that the tax gap, “the difference between what is owed and what is collected…is estimated at $600 billion of lost revenue annually.” 

Question: If it’s an underground economy, how does anyone know how much income is not reported?

The Tax Foundation reported that businesses and individuals now waste over 6.6 billion hours on federal tax compliance activities each year, at an estimated cost to taxpayers of $368.4 billion in 2010. 

That amounts to a 22.8% surcharge on the total amount collected through the tax system and is equivalent to over three million people working full time, just to deal with tax compliance.

In 1913, when the sixteenth amendment was passed, the federal tax code was comprised of 1,337 words. Today, according to the Tax Lawyers Blog, it now requires over seven million words to document.

When the General Electric Co. filed the corporation’s tax return electronically, it took 24,000 pages to document. The Associated Press (June 1, 2006) noted, “If GE had sent paper forms, the return would have staked up eight feet high…”

In 1993, the General Accounting Office (GAO) audited the IRS for the first time in its history and found widespread evidence of financial malfeasance and gross negligence, including the fact that the agency was not able to account for 64% of its congressional appropriation.

The Alternative Minimum Tax (AMT) “was created in 1969 to target 21 – yes, 21 – millionaires who had managed to avoid paying any taxes at all.” (Wall Street Journal, April 14, 2007). “… more than three million taxpayers (were)…hit by the Alternative Minimum Tax on the(ir) 2006 income. The next year (2007) that number could have increased to 23 million except that Congress passed a so-called “patch” to prevent it.

The federal income tax, currently as high as 35% of taxable income, is increased by as much as 11% in state and local income taxes, plus another 6.20% and 1.45% in social security and Medicare taxes, which makes the total tax burden for some taxpayers almost 54%, not including excise, sales and property taxes, along with a host
of other taxes, assessments and fees to numerous to mention. 

Medieval serfs were required to give only one-third of their production to the lord of the manor, and they were considered slaves.

© 2010 Harris R. Sherline, All Rights Reserved

Read more of Harris Sherline’s commentaries on his blog at www.opinionfest.com