It’s Time to Cancel the Income Tax
Last month, Princeton University announced it will rename the Woodrow Wilson School of Public and International Affairs, saying “[Wilson] not only acquiesced in but added to the persistent practice of racism in this country, a practice that continues to do harm today. Wilson’s segregationist policies make him an especially inappropriate namesake for a public policy school.” Support for segregating the public service and combat units during World War I were policies that dealt serious harm to American citizens and deservedly taint his legacy.
While not comparable to the racial repercussions wreaked by segregation, we should cancel Wilson’s terrible tax policies while we’re at it.
Ratified by Congress with instrumental lobbying from then-candidate Woodrow Wilson, the 16th Amendment allowed for a permanent federal income tax for the first time in American history. During the first year of his administration, President Wilson shepherded the Revenue Act of 1913 through Congress and established a 1% tax rate on annual personal income over $3,000 and a 7% rate on income over $500,000. At the time, the federal income tax applied to less than 4% of Americans.
Today, the top rate is 37% and over 66% of Americans owe income taxes to the federal government after accounting for exemptions and deductions. At its inception, the personal income tax only accounted for 9% of all federal revenues. Now, personal income tax taxes account for 50% of all federal revenues. In 1929 (the earliest measurable date), federal taxes made up only 3.7% of our national GDP. Since then, federal taxes have grown to account for over 16% of GDP. Quick arithmetic using these figures finds that 8% of all national economic activity is taxed away from income earners into the coffers of the federal government.
Governments cannot tax 8% of the economy without serious economic consequences. At the state level, income taxes have driven residents from high-income-tax states to low-income-tax states. The ALEC-Laffer Rich States, Poor States report finds the nine states without an income tax have seen twice the rate of domestic population growth and nearly 40% more new jobs than the nine states with the highest income tax rates.
Fundamentally, income taxes are a tax on capital, meaning they take from earners what they would ordinarily invest in themselves, their families and their businesses. Without this investment, employment growth is slower, take home pay decreases and employees work fewer hours.
Measuring the economic effects from tax cuts is a good way to estimate the economic activity that would have happened if not for the tax burden on the economy. The Tax Foundation estimates the Kennedy personal income tax cuts of 1962 and 1964 grew the US economy by over 2.6%. Similarly, the Reagan personal income tax cuts of 1981 and 1986 would have grown the US economy by an estimated 8.2% in the long term had certain provisions not been rolled back by Congress at a later date. These explosions in US economic growth following income tax cuts indicate the damaging effect income taxes have on the economy, on businesses and on families.
Princeton University has officially recognized the tarnished legacy of President Wilson. A disturbing record of support for segregation and institutional racism helped cement the influence of Jim Crow laws on federal policy and destroyed opportunity for black Americans. The legacy of the income tax, while not of the same magnitude or arising from the same motivation as segregation, is also one of wasted opportunities. Like its founder, it deserves to be shown the door.
Skip Estes is legislative manager at the American Legislative Exchange Council and writes on a variety of nationwide tax and budget issues. Follow him @Skip_Estes.