Friday, October 25, 2013

100 years of the 1040 form

Robin Einhorn for SF Gate writes: The first federal income tax return, the Form 1040 for 1913, was four pages - with lots of white space. Taxpayers figured their taxes on the first page after totaling their income on the second and their deductions on the third. The fourth page offered the instructions. Allthe instructions.


Why are our income taxes so complicated today? Is there any escaping the rigmarole of an income tax that is essentially a jobs program for accountants, lawyers and the programmers who now bring tax-filing skills to our home computers? It wasn't always this way.
The 1913 tax was intended to tax the rich, and only the rich, because the other federal taxes were regressive levies on consumption. The plan was a small income tax - 1 percent "normal tax" plus "surtax" rates up to 6 percent - to make it look as if the rich paid their share.
World War II transformed the federal income tax from a "class tax" into a "mass tax."
In 1936, 5.4 million Americans filed returns. In 1946, 52.6 million did. The war also introduced withholding from wages and salaries plus the idea of tax filing as claiming a refund.
One cause of income tax complexity was high rates. Rates shot up during World War I, the top rate rising from 7 percent in 1913 to 77 percent in 1917, though only for income over $1 million, the equivalent of $15 million today. After major cuts in the 1920s, the top rate jumped back in 1936 to 79 percent on income over $5 million ($80 million today). But this was largely symbolic; only 61 taxpayers had $1 million incomes and only one, John D. Rockefeller, had a $5 million income.
The top rate peaked during World War II; in 1944, about 1,800 taxpayers paid 94 percent on income over $200,000 ($2.6 million). Large cuts in 1964, 1981 and 1986, with further jiggling, produced our current 39.6 percent on income over $441,000.
High tax rates drove complexity as people in high brackets pressured Congress to cut their taxes through shelters and other loopholes. The result was inevitable: a bloated tax code and an army of accountants and lawyers to navigate it for elite clients. But this kind of complexity had little impact on ordinary taxpayers.
Until 1970, the instruction booklets remained at fewer than 20 pages, half of them devoted to tables that let filers look up rather than calculate their taxes. The Internal Revenue Service also simplified matters for working people. From 1948 to 1972, filers who chose the Short Form 1040A left the arithmetic to the IRS.
The other major source of complexity affects the working poor. Starting in 1974, but especially since the 1990s, Congress has embedded the nation's leading poverty program in the income tax. The Earned Income Tax Credit was originally intended to offset the Social Security payroll tax for low-income workers, but since 1992 it has been a much larger poverty program than traditional welfare (Aid to Families With Dependent Children and its successor, Temporary Assistance for Needy Families).
The Earned Income Tax Credit is also larger than food stamps - the Supplemental Nutrition Assistance Program now targeted by congressional Republicans. It has survived the cutbacks that have savaged these programs in part because it rewards work.
It is unavailable to people not in the labor force and rises with labor income up to a phase-out level. It works as a poverty program because it is "refundable," meaning that beneficiaries can get back more in tax refund than they paid in withholding during the year.
The Earned Income Tax Credit is also only available to people who file returns, including many who might not otherwise file since they don't owe any tax. Because its amount hinges on the composition of households, moreover, it imposes a maze of thorny questions - mainly about who counts as a "qualifying child" - on the people most likely to have trouble wading through them.
The result is huge growth of the tax preparation business in low-income neighborhoods, where residents can least afford it.
We might prefer mourning to celebration on the 100th birthday of the Form 1040, but the income tax is the only reason Americans can even pretend that the rich pay their share of the tax burden. Annoying paperwork is the price of this measure of social justice.

Tax Facts

Why is it form 1040? Because the Treasury Department already had 1,039 forms.
Why refunds? The legal obligation to file hinges on owing tax, but today most people over-withhold. About 80 percent of tax filers collect refunds, which actually means extending interest-free loans to the federal government during the year (you can stop doing this by changing your W4).
Tax help: For those who qualify for the Earned Income Tax Credit, there is a free alternative to hiring a tax preparer. The Volunteer Income Tax Assistance Program mobilizes IRS-trained volunteers to help low-income filers. In 2011, 88,000 volunteers filed 3.2 million tax returns at 12,000 sites across the country. For help or to volunteer in California, go to https://ftb.ca.gov/individuals/vita.

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