Last week marked the passing of one of many Americans’ least favorite days—April 15th. Whether you wrote a check or expect a refund, dealing with federal income taxes is no picnic. While the need for government services and, thus, tax revenue to Uncle Sam is beyond question, the taxes should be carefully crafted to minimize the damage to the economy. Surveys indicate that many Americans feel the amount of tax they pay is reasonable, but virtually all find fault with the complexity of the process.
The roots of the income tax go all the way back to the Civil War, when President Lincoln and Congress created the tax to pay war expenses. That law was repealed 10 years later, but incomes were a source of funds for government coffers too tempting for politicians to resist, and the income tax was later revived. Since the original enactment, the tax code has become complicated by layers upon layers of revisions and additional regulations. Most of these quirks came about with the very best of intentions, but in the aggregate, they lead to a system that even Internal Revenue Service hotlines often can’t sort out.
Requesting delays or just waiting until the April 15th midnight deadline may have a variety of causes, but many people complain about the complexity of the forms and indeed, the entire system. There seem to be new wrinkles in the tax code every year, and just keeping up with them is a major job. Millions of people are not sure how to calculate what they owe; others need more time to compile their information or squeeze in some of the new deductions allowed by the law—from sales taxes to Tsunami relief contributions, as well as myriad others.
Attempts have been made over the past several years to make it easier for people to file their taxes. Included are new software programs that check your math and prompt you on possible deductions, as well as e-file, direct deposit, and e-payment programs. And, of course, nowadays it seems there is an abundance of tax-savvy accountants ready to assist. Proposals for other, more sweeping overhauls surface periodically (such as replacing the income tax with a levy on consumption or value added), but have yet to gain sufficient support to stand much of a chance of becoming law. Some of these proposals have clear advantages for the economy, and we can hope they will eventually be seriously considered. In the meantime, we’re stuck with making the best of it.
E-filing has proven particularly helpful. Last year, some 42.5 million Americans filed electronically (either by phone or Internet), up 75% over a year prior. About 4.6 million of those were Texans, which is almost 30% of all state residents. This year, the electronic systems continued to gain popularity, with e-filed returns up some 8% as April 15th approached. Internet-based resources maintained by the IRS provide key forms and a wealth of information on how to file them. But no matter how great the tools are, they must function for the same highly confusing process.
The total gross collection from Texas last year was $152.69 billion, which represented 7.56% of the US aggregate. The IRS returned over $22.03 billion of that amount to the citizens of our state. Recently released data compiled from 2002 returns shed light on how this burden is divvied up. The income tax is designed to be progressive, meaning that those with greater incomes pay a larger proportion.
Specifically, the top 25% of taxpayers (those with adjusted gross incomes in excess of $56,401) paid 84% of all taxes, while earning only 64% of income. The bottom 50% (with adjusted gross incomes of less than $28,654) earned about 14% of income and paid a little more than 3% of tax.
Millions of American families were dropped from the tax rolls entirely thanks to recent tax cuts. For many, withholding throughout the year was sufficient to lead to a tax refund. For others, April 15th (which also happens to be my mom’s birthday) was a red letter day indeed.