With the dreaded quarterly tax payments due last week for most small business owners and independent contractors, the health care debate was temporarily relegated to being background noise, but not for long. It is easy to see that taxes (sometimes known as fees) and health services are as firmly connected to each other as crude oil and Mideast crises and I believe that financial and physical health go together as well.
These quarterly tax payments, one of which unhappily coincides with the April 15th filing deadline, always prompt many thoughts for me, and they aren’t the relaxing kind. Ben Franklin had a famous 1789 quote on the subject: “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”.
It would surprise many of today’s entrepreneurs to know that just 100 years ago their predecessors were operating and building enterprises without several onerous burdens, and the absence of a heavy tax burden was among them. Before sharing some of my thoughts, let’s visit some landmarks in the history of income taxes in America.
In our early history, the country had very few taxes. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. The costs associated with of the War of 1812 gave us the nation's first sales taxes on gold, silverware, jewelry, and watches. In 1817, Congress voted to eliminate all internal taxes, relying on tariffs on imported goods to provide fuel for the engines of government.
In 1862, to support the Civil War effort, Congress enacted America’s first income tax law. It was a forerunner of what we deal with today in that it was based on the principles of graduated taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 (about $213,000 in 2008 dollars) per year was taxed at the rate of 3%. If your income was more than $10,000 you paid taxes at a higher rate. Legislators also decided to throw in some sales and excise taxes, and an “inheritance” tax also made its debut. The agency we all love to hate, The Internal Revenue Service, was born in 1862. In 1866, internal revenue collections reached their highest point in the nation's 90-year history—more than $310 million, an amount not reached again until 1911.
Shortly after in 1868, what we now call sin taxes, were enacted when Congress again focused its taxation efforts on tobacco and distilled spirits, eliminating the income tax in 1872. Income taxes had a short-lived revival in 1894 and 1895. I don’t know who was on the Supreme Court in 1895, but I take my hat off to that group of justices because they decided that the income tax was unconstitutional since it was not apportioned among the states in conformity with the Constitution! In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.
Around the turn of the 20th Century, the foundational businesses for the great America that was emerging flourished in an atmosphere that rewarded enterprise and risk taking with minimal drag on the balance sheet from taxes. John D. Rockefeller founded Standard Oil, which not only made him the richest man in America; it enabled him to redefine philanthropy in America. It was in this period that Madame C.J. Walker, daughter of slaves, transformed herself into a hair products mogul and the richest black woman in the country.
Here are some of my thoughts, not in any order of relevance or importance. Because of vastly expanded government at all levels and about eighty years of piling up entitlement programs, we have a tax and spend model that cannot be sustained without sapping the country’s spirit and horribly debasing the American dollar. Politicians will simply have to develop the spinal strength necessary for making unpopular choices by taking away some people’s candy.
Usurious taxes and fees will cause the numbers of small business owners operating in the shadowy underground economy to soar. My first business landlord taught me that money always moves away from heavy tax burdens. Most of us have had at least a brush with the all cash world of commerce. In my very first business (a submarine sandwich shop), my older and experienced partner routinely pulled a few dollars from the cash register each day to create a rainy day fund.
We are at an inflection point in our country involving both the business climate and medical care delivery. An overweight and ill workforce can’t be at the top rank of innovators and productivity on the world stage. Politicians will go on about the need for new revenue sources while paying only lip service to the needs of creating a healthy atmosphere for business development, which is important support for everything else. The great and effective British Prime Minister, Margaret Thatcher, uttered many memorable quotes including, “you can’t tax your way to prosperity.” Elected officials who are cowering these days because the tax tap is running dry and true leadership is needed on the health care issue should heed Thatcher’s advice.
Look at a day when you are supremely satisfied at the end. It’s not a day when you lounge around doing nothing; it's when you've had everything to do and you've done it.
--Margaret Thatcher
Source: Tax Foundation
Let me know your thoughts by e-mail: nelson@makingittv.com
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