I filed my taxes today, and it was a distinctly different experience than any other year I’ve filed. Due to the fact that the vast majority of my previous income was “self-employed”, no taxes were withheld throughout the year, and I had to pay the extra 7.5% self-employment (social security) tax in addition to the usual. This meant that every year around tax time I owed a lot of money. This year however, I’m getting a rather large refund! Tack on my $600 stimulus check, and it almost feels like I’m getting a gift from Uncle Sam. Of course, that’s not really the case. I was really giving out an interest free loan…but that doesn’t change the way I FEEL about it!
It got me thinking, so I decided to do a bit of research and came across the “History of the US Tax System”, published by the US Treasury. Tax withholding at the source (the employer) was first enacted during the Civil War, along with a two-tiered income tax and standard deductions, and various other taxes to support the growing war costs. It was soon repealed though, in 1872.
Tax withholding returned during World War II, along with huge increases in taxation levels: federal receipts increased from $8.7B (7.6% of GDP) in 1941 to $45.2B (20.4% of GDP) in 1945. From the US Treasury’s summary:
Another important feature of the income tax that changed was the return to income tax withholding as had been done during the Civil War. This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.
That seems to hit it right on. Collecting is easy, and I’m feeling right now like I got a tax time bonus! It is worth noting that tax levels (as a percent of GDP) never returned to Pre World War II levels. They dipped briefly to 14.4%, but soon were back up to the postwar (1945 to present) average of 17.9%. This graph from heritage.org shows 1945 to present tax rates.
It is just another example of how the right presentation can effect people’s perceptions. We really don’t always consider things rationally. But, whatever. When do I get my check???