Tuesday, April 17, 2007

The Tax Man Cometh

The idea of taxing citizens on their income has been around ever since the government ran up a big bill fighting with the British in the War of 1812. However, Congress could not muster up the votes to get a tax law passed until 1862 when the specter of insolvency from Civil War debt scared enough lawmakers into action.

That first tax was 3%, but it was reeled back to 2% before the end of the century. Of course, it was not long and the country was back at war and Congress revised the income tax and raised the rate. The U.S. has remained “at war” in some fashion or another ever since and it seems the income tax has become equally entrenched.

Advocates of fiscal responsibility, such as economists Dean Baker and Heather Boushey at the
Center for Economic Policy and Research, argue that the federal government should use its tax and spending authority with great discretion. Fiscal authority should be used to fight short-term economic problems. They have a friend in the U.S. Senate. Senator Russ Feingold is an outspoken advocated of balancing the federal budget and eliminating wasteful government spending. It is not surprising that Feingold is leading the debate on continued funding for the Iraq war.

In an article “Original Intent and the Income Tax” appearing in February 1996 issue of The Freeman, Raymond Keating draws a solid line between taxation and government spending. He calculated that in the 81 years after enactment of the present federal income tax, government spending increased 13,592% after adjusting for inflation.

Spending at these rates the federal government has racked up a pretty substantial deficit - $8.9 trillion as of today according to the U.S. National Debt Clock. Even with relatively ample tax rates, the U.S. has had to issue bonds a plenty and is walking the inflation tight rope as a consequence. Nonetheless, Fed Chairman Ben Bernanke recently declared inflation in abeyance for the time being. This news could not come at a better time, since the tax man cometh and nothing erodes personal purchasing power like checks written to the IRS.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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