Every year, Americans are concerned about the federal personal income tax burden. However, most have scant knowledge of the income tax system. Each congressional and/or presidential election campaign cycle includes rhetoric of tax reforms affecting taxpayers. Most election campaign speeches are about lowering the income tax burden on middle- and lower-income taxpayers and making the tax system fair and simple. However, the performance of presidents and Congress in implementing tax reforms, lowering the tax burden of low and middle income classes, and making it fair is uneven, unfair and complex.

Historically, the Civil War necessitated the income tax law by Congress in 1861 and later made it a progressive tax. After the Civil War, varied failed attempts were made to revive the tax until 1913, when the 16th Amendment of the Constitution was passed. Only 1% of the population paid income tax at a rate of 1% of “net income” due to various exemptions and deductions (www.archives.gov). The tradition of exemptions and deductions still continues. The standard deduction, itemized deductions like medical expenses, tax exemptions such as Roth IRA and Roth 401(k) pension plans, tax deferred accounts which are contributions to traditional individual retirement account and 401(k) plans, and tax credits like Earned Income Tax Credit (which exclude some income from taxes) all reduce taxable income and make the tax system more complex. Since 2017, the IRS adjusts income thresholds, deductions and credits by the Chained Consumer Price Index.

Progressive tax (introduced by Woodrow Wilson to finance World War I) implies that taxes paid increase with income tax brackets. Each tax bracket has a marginal tax rate. For example, a single filer who will earn an annual income of $62,850 in 2023 and only uses the standard deduction of $13,850 will have a taxable income of $49,000 with the marginal tax rate of 22%. However, taxes paid will not necessarily be based on that rate. If this filer dares to compute tax to the IRS, he or she has to go through three different tax brackets to compute them. But, in general, this filer will be part of 74.4 million filers to use a tax professional with an average fee of $220 (www.investopedia.com). My calculation shows this filer’s tax will be $6,087.50 with the average tax rate of 12.4%. It is ironic that complexity forces a significant number of taxpayers to spend in order to pay taxes.

Uncertainty and complexity in personal income taxes has arisen under many different presidential administrations and congressional compositions. The most tax-raising presidents were Abraham Lincoln, Woodrow Wilson, Harry Truman, Dwight Eisenhower and George H.W. Bush. Tax lowering presidents were John Kennedy, Ronald Reagan, Bill Clinton and George W. Bush (www.gobankingrates.com). However, in many instances, even with the same marginal tax rates, changes in deductions, exemptions and tax credits have changed taxpayers’ burden and increased complexity. The study by Steve Warmhoff and Mathew Gardner (Institute of Taxation and Economic Policy, July 11, 2018) presents reductions in tax shares of different income groups, associated with tax laws during George W. Bush, Barack Obama and Donald Trump presidencies (2001-2018), as opposed to the tax law that prevailed in 2000. The tax cut shares for the poorest 20%, second 20%, middle 20%, fourth 20% and rich 20% were 3%, 7%, 9%, 16% and 65% (top 1% of the rich had 22% share), respectively. As opposed to the Obama years, Bush and Trump tax cuts benefited the richest 20% much more than the poorest 20% in the income distribution. This record does not reflect fairness in tax laws, which all presidents talk about in their election campaigns. This record also distorts income inequality.

Uncertainty in the tax system affects decisions for work, current and future consumption, savings, investments, productivity growth, pension plans, federal revenue stream and budget deficits, thus causing efficiency loss in gross domestic product. GOP candidates always push for lowering tax rates based upon the claim that it would encourage more work, investments, growth and business formation. However, the evidence of tax cuts’ effect on the economy is mixed at best. A National Bureau of Research study (July 2022) found that federal personal income tax cuts showed only short-term stimulus to GDP, productivity and hours worked and no long-term stimulus effects.

Presidential administrations and Congress must work on reducing uncertainty and complexity in the federal income tax system and build simplicity for most taxpayers and fairness, especially to middle- and lower-income groups, and encourage long-term planning among all individuals, businesses and in the national budgeting process. That will generate more robust economic growth in the economy. Comedian Will Rogers (1879-1935) once commented, “The difference between death and taxes is death doesn’t get worse every time Congress meets.”

Vijay Mathur is former chair and professor in the Economics Department and now emeritus professor at Cleveland State University, Cleveland, Ohio. He resides in Ogden.

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