Before World War II, the government did not know what anyone made. Only the wealthy and upper-middle class filed returns—less than 10 percent of the population. The system was based on what the irs called “self-assessment,” which meant that the taxpayer told the government what he or she earned the prior year and then sent a check on March 15. Some information returns were sent to the government, but the government had no capacity to match the return to the taxpayer and the returns piled up in warehouses. Not until 1962 did the government’s computer system begin to efficiently match the information returns to the taxpayer. During the 1920s and 1930s, the tax system relied almost entirely on the honesty of taxpayers.
It's amazing to think that there was once a time in US history when the government could sustain itself through the honesty and goodwill of the richest 10% of its citizens.
I wonder what would happen if we returned to the goodwill tax model. If we had a simple tax code with self-reported earnings where we spent far less on hunting down and punishing cheaters and freeloaders, and instead left it as a matter of conscience for those who had amassed their wealth and raised their families through the good grace and fortune of living in the US.
Do you think our collective social fabric would be strong enough to fund an effective government? Or are we too far down the path of the self-centered, get mine at all costs, cheat the system if possible mindset?
The top 10% of earners paid 68% of federal income taxes, so in terms of dollars we could probably get rid of federal income taxes for the bottom 90% without too much trouble.
Of course, the bottom 90% pays most of the FICA taxes. But it's kind of illusory to say that's different from what the system was like in the 1920's and 1930's. The first Social Security check wasn't cut until 1940, and Medicare didn't exist until the 1960's. Prior to that the bottom 90% paid for old age and disabled care directly by supporting their elderly parents or disabled family members directly instead of indirectly funding social security and medicare. A lot of the "growth" in government tax burden is those programs moving what was previously a household economy onto the government ledger.
And note that the article talks about federal tax receipts, not state taxes. Direct state tax burden isn't all that different from what it was in the 1930's: http://taxfoundation.org/sites/taxfoundation.org/files/docs/.... And I assure you state property tax collectors were not on the honor system even back then.
It's really interesting to look at where the money goes. Total federal + state spending was about 10% of GDP in 1930. It's now almost 35% of GDP. That's almost entirely attributable to two things: defense spending (3-5% of GDP) and transfer payments (20% of GDP): http://fortune.com/2012/08/27/wheres-all-that-government-spe.... In other words, almost all of the increase is government programs to move money around in the economy.
Voluntary compliance is still the guiding principle of income tax collection. Basically 80/20. The optimal strategy is to target a portion of non-compliant taxpayers to keep public perception of tax collection intact.
Keep in mind that government expenditure and revenue sources were very different in those days.
This is somewhat misleading: It's not exempt statewide for all employees in those locales, only for certain employees like teachers and firefighters who are paying into alternate pension systems.
The headline number is 6MM people aren't paying in, but the combined population of those states is almost 112MM and the total population is 319MM. It's a substantial number, I suppose, but not like 30% of the workforce.
Same in Australia. They audit you if something looks off (and there are big fines if you intentionally mislead the tax office), but generally they just accept your assessment as true and correct.
In the UK the PAYE (pay as you earn) system means most employed people don't even have to file returns, but for those making fancy income or who are self-employed, the form is literally called the self-assessment form to file your tax owings.
It's amazing to think that there was once a time in US history when the government could sustain itself through the honesty and goodwill of the richest 10% of its citizens
Honesty and goodwill? I'm guessing there was rampant under reporting of income back then.
It's amazing to think that there was once a time in US history when the government could sustain itself through the honesty and goodwill of the richest 10% of its citizens.
I wonder what would happen if we returned to the goodwill tax model. If we had a simple tax code with self-reported earnings where we spent far less on hunting down and punishing cheaters and freeloaders, and instead left it as a matter of conscience for those who had amassed their wealth and raised their families through the good grace and fortune of living in the US.
Do you think our collective social fabric would be strong enough to fund an effective government? Or are we too far down the path of the self-centered, get mine at all costs, cheat the system if possible mindset?