Tax Day Tangle
By Molly Michelmore
Assistant Professor of History
(This piece appeared originally on the University of Pennsylvania Press Log)
At this time of year, we’re all painfully aware that the federal tax code is a complicated mess. At more than 5200 pages, the Internal Revenue Code (IRC) is far too complex for the average person to understand. Few people file without some assistance. The IRS estimates that more than 60 percent of filers hire someone to help them do their taxes. Another 32 percent use some kind of tax preparation software.
Paying your taxes was not always as complicated as it is today. The first federal income tax was imposed during the Civil War, but the modern income tax is of a more recent vintage. Although the states ratified the 16th Amendment in 1913, the income tax as we know it today did not take shape until the Second World War.
For three decades after the 16th Amendment’s ratification, very few Americans owed anything in federal income taxes. The change came in 1942, when President Franklin Roosevelt, looking for a way to pay for WWII without having to borrow too much, worked with Congress to transform the federal income tax from a class tax paid by only a small and wealthy minority to a mass tax shouldered by members of the middle and working classes, as well as the rich.
This law brought millions of Americans into the federal tax system for the first time. To ensure compliance, the Treasury Department introduced a new, simplified tax form for lower-income taxpayers. Paying your taxes was so easy that even Donald Duck could do it. In the first of two government-sponsored tax films featuring Walt Disney’s favorite waterfowl, Americans learned that all you need to do your taxes was a “tax blank, your pen, some ink and a blotter.”
The tax code grew more complicated after WWII. Cold War-era hostility toward anything that even hinted at statism helped to turn American opinion against public spending programs – or at least against certain kinds of public spending. In the late 1940s, a series of local “welfare crises” in places like New York City, Detroit and Baltimore focused public attention on “waste, fraud and abuse” in public assistance programs. These crises both reflected and reinforced public anxiety about direct and visible government spending. As one welfare investigating committee concluded in the late 1940s, the “public treasury” should not be a “dependable substitute for frugality, prudence and self denial.” Most Americans surely would have agreed.
While Americans expressed considerable concern about public spending, by the early 1950s they had also come to expect and even demand that the government defend their economic security and facilitate their upward mobility.To reconcile these demands with widespread antipathy to government spending, lawmakers turned to the tax code. By writing certain exceptions into the tax law – exceptions that applied lower rates to some kinds of income, exempted other income from taxation, or allowed taxpayers to deduct some expenses from their taxable income – lawmakers found they could reduce the tax liabilities of individuals or businesses.
These exceptions are known as tax expenditures, or tax spending.
The term tax expenditure many be unfamiliar to many Americans. But most of us have heard about “loopholes” – a pejorative term for tax spending that benefits the rich or corporations. In the 1970s, a group of progressive activists – many of them veterans of sixties social movements – attempted to foment a popular tax revolt among the middle and working classes by calling attention to how corporations and the rich exploited and manipulated the tax code.
But while these groups were right to call attention to the problem of “tax millionaires” – wealthy individuals who escaped most federal income tax – they ignored the fact that many ordinary taxpayers benefit substantially from tax spending. The most well-known tax expenditure is probably the deduction homeowners can take for interest paid on a home mortgage. By subtracting that interest from their taxable income, homeowners can reduce their taxes significantly. This amounts to a kind of government subsidy to homeowners – the functional equivalent of getting a check from the federal government to offset your housing costs. But few of the millions of Americans that claim this deduction would think of themselves as receiving any kind of public assistance.
Tax spending has become increasingly important over the last few decades. As more and more Americans seem to agree with Ronald Reagan’s conclusion that the government is not a “solution to our problems” but rather the source of them, lawmakers have become especially adept at manipulating the IRC to underwrite social priorities. In 2010, the U.S. government spent $1025 billion through the tax code; that same year, Medicare and Medicaid, by far the most expensive part of the American social welfare state, cost only $729 billion. Much of this tax spending promotes social welfare objectives. According to one study, federal tax spending to promote homeownership and health and retirement security totaled $291 billion in 2010.
The tax code is complicated because people have a vested interest in keeping it complicated. And it’s not just tax lawyers or big business. It’s workers who benefit from the exclusion of employer contribution to health plans, or parents who take the child care tax deduction, or retirees living on money invested 401(k) plan. And unless we figure out some other way to help these workers, parents, and retirees, the tax code is only going to grow longer, and even more complicated.
Molly C. Michelmore is Assistant Professor of History at Washington and Lee University and the author of “Tax and Spend: The Welfare State, Tax Politics, and the Limits of American Liberalism.”