Why do I have to pay taxes?  Such a small, interesting question that opens the door for a barrage of follow-up.  What are taxes? How are they used?

Do we need those things?  Are there better ways to pay for them?  If you know the answers to these questions, then you might have a bright future in politics. However, the simplest answer to why I have to pay income taxes is that Congress says so. If you don’t, there are severe financial penalties. But before you send in a payment to the IRS, let’s take a moment to think about what income taxes are.

The idea of a tax is that a governmental body places a demand on something.  The demand is most often in the form of money, and something is either something that can be touched or something that has happened.

The individual income tax is a tax on something that has happened, specifically how much wealth is accumulated over the course of one year.  If something happened that left you in a better financial position than when you started, then you might owe tax on that event.

Can you believe there was a time in our country when there was no income tax? The federal government was smaller back then. Washington was able to function off tariffs from international trade and different types of corporate and inheritance taxes.  The first income tax was enacted during the Civil War and was for 3% of income over $800 and only lasted for 10 years before expiring.  Not until 1913, with the passage of the 16th amendment, did we have the beginning of the income tax we know today.  On the first Form 1040 income tax return, the minimum exemption was $3,000, and the maximum tax rate was 7% for income over $500,000 ($13,085,000 in 2020 dollars).  Only 3% of the population had taxable income that year.  Today, the highest individual tax bracket for single filers is 37% for income over $510,300 (or $19,200 in 1913 dollars).  US history’s highest individual tax rate was in 1952 and 1953 when the top tax rate was 92%!

At over 2,600 pages long today, the Internal Revenue Code is just the tip of the iceberg as there are over tens of thousands of pages of court cases, treasury regulations, revenue procedures, and revenue rulings.  The body of text of all of these documents compiled together continues to grow every day as the world accelerates faster than laws are written, new regulations are issued, or courts can apply the tax law to new situations.

With such a large body of tax law, taxes raise money for the government and mold the fabric of society. Governments use tax laws to address social issues and encourage industry in needed areas by allowing additional deductions, exemptions, credits, or exclusions to reduce the taxes people owe.  People are encouraged to give to charities that help take care of the less fortunate by deducting charitable donations.

Standard deductions and tax credits protect Lower-income levels for earned income. Different industries that are important to the country’s growth are given tax credits and deductions to fuel development. And families are encouraged to buy homes when they are allowed to exclude part of the profit from selling their home and deduct the interest on their mortgage.  Even when we don’t pay taxes, taxes have an impact on our daily lives.

So why do we have to pay income taxes? Simply put, because we must.  How much do you owe? Now that is an entirely different matter.

At Abacus CPAs, our focus is you! We believe that our employees and clients deserve to interact in an environment that fosters growthtrust, and confidence. Our team focuses on tax, accounting, audit, and business consulting to partner with you and your business.  Abacus professionals provide leadership by relentlessly pursuing the best guidance possible so those we serve can make smarter decisions.

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