They say that the only two certainties are taxes and death. You know you are still alive when you file the annual return with the Internal Revenue Service.
An encouraging thought at my age. Couple years ago, a friend put me on to TurboTax. Used to be I would spread cancelled checks, receipts, tax forms and yellow legal pads all over the dining room table and ensconce myself in a chair for a fortnight to determine how much I owed to Uncle Sam.
Turbo Tax condenses all of that into a tidy session in front of the computer.
All of which leaves me time enough to contemplate the meaning of taxation and how it fits into our beloved system of constitutional governance.
The United States of America is the only nation on the planet which boasts – or tolerates – dual sovereignty and dual citizenship. We are citizens of states and citizens of a nation. Both entities are sovereign.
Sovereignty is a rather simple concept. It means complete power over a place including, of course, the power to tax. Taxation, at the bottom, is nothing more nor less that stealing. The government takes money from the people, if need be, at the point of a gun or under penalty of incarceration.
Since we Americans are subject to two sovereignties – state and national – the question arises whether both governments have full and absolute power to tax us.
It’s a question many of us ask – rhetorically at least – every year: is there any limit to taxation? Is there such a thing as a maximum tax, or a limit beyond which government cannot reach the property of the citizens?
It seems to me that in a republic, the answer to that question is ‘yes.’ There is a limit to taxation. It is not spelled out in the constitution, nor can it be defined in mathematical terms. It is rather, a function of politics. Taxation is limited by the consent, or tolerance of the governed.
At the far end, excessive taxation results in civil disobedience, revolt and ultimately revolution. In the normal course, however, the sovereign authority of the people is expressed at the ballot box.
From which I think it fair to conclude that, in light of continuing deficit spending and increased borrowing by the national government, the income tax rates currently in place represent the maximum tax rates which will be tolerated by the citizenry.
Which is to say that 39.6% is theoretically as big a bite as government can take.
How then, are we to factor in the state income tax? If we just add the state tax to the federal tax, obviously the effective rate is higher than 39.6%.
Of course, under our current law, state income taxes are deducible from the income which is taxed by the federal government, so the federal tax is reduced by the federal tax on the amount of the state tax.
This is a delicious mathematical puzzle to roll around in your head. If you suppose that both the federal and the state governments impose a 100% tax, you wouldn’t have to pay 200% of your income to the governments. The state tax would preempt the federal tax, and you would pay only state tax.
Currently, the highest state income tax rate is California’s 13.3%. You have to wonder what would happen if the several states were to boost their income tax rates so as to be comparable to those imposed by the national government.
Unfortunately, because Uncle Sam has preempted the income tax arena, the states are left to pander to the politicians in Washington in the hopes of getting some of their taxpayers’ money back.
Frankly, I believe, and most folks agree, that money spent closest to home is most wisely distributed. Certainly the national government has to be adequately supported to maintain our national defense and our prestige around the world, but the vast bulk of social programs and discretionary spending should be at the state level.
Which is why I insist that state taxes should be a credit against federal taxes, and not just a deduction against taxable income.