DENNIS MYERS Against the Grain Advertisement

Today being income tax day, I thought I would offer some information on the income tax as it was supposed to be.

It started out as a very popular tax -- indeed, it came into being because the public demanded it. But the founders had written a Constitution that prohibited an income tax, so an amendment was needed. ... This is where the first problem started. The public was demanding a graduated or progressive income tax, one that taxed those at the top more heavily than those at the bottom.

Congress approved an amendment making an income tax legal, all right, but did not include the provision about it being graduated, instead using this wording: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The states approved it that way (Nevada ratified it on February 3, 1913) and it went into effect.

The first income tax was exactly what the public wanted -- a progressive income tax. Individuals earning less than $3,000 a year were exempt -- they didn't even have to file a return. The same went for married couples earning $4,000 a year. To give an idea of what this meant, $3,000 in 1913 dollars is equivalent to $62,197.47 in 2007 dollars and $4,000 is equivalent to $82,929.95. And under the 1913 rules, if someone made more than that amount, they were taxed ONLY on the amount above that threshold.

Think of it -- the working poor and most of the middle class completely exempt from the income tax. So has the exempt portion of the population kept pace with inflation?

Hardly. When I had my taxes done this year I asked my accountant what the minimum threshold is for being exempt from the income tax. It's less than $8,000. That amount in 2007 dollars is equivalent to $385.87 in 1913.

In 1913, the entire U.S. income tax was paid by the top 2 percent. The world war caused Congress and the Woodrow Wilson administration to raise rates and widen the applicability of the tax, and after the war these changes were not repealed. That erosion of progressivity set a pattern. Over the years, indexing, exemptions, loopholes and all other kinds of games have undercut the graduated character of the income tax, and it has nearly always been done in the name of tax reform and often by getting low income people to WANT changes that actually benefited the rich. More often than not, they were enacted by Democrats. Members of the Democrats' supposed prime constituency, the working poor, don't make many campaign contributions.

Pulitzer Prize winning tax journalists Donald Barlett and James Steele give an example of how it's done -- in the income tax code there is an interest exemption for a broker/dealer whose corporate parent was incorporated in Nevada on Jan. 27, 1972. Only one corporation in the world fits that description -- Cantor, Fitzgerald and Co.

Every once in a while someone will point out how heavy the top tax rate is, as a way of showing how burdened with taxes the rich are. But setting aside for a moment the fact that (thanks to all those exemptions and loopholes) no one pays the top tax rate, even that top rate is not what it once was.

During my childhood the top tax rate was 91 percent (1951 to 1963). It started declining in 1964 (to 77 percent) as a result of the Kennedy tax cut and has continued declining ever since. Since 1991 it has always been somewhere in the 30s. Bill Gates and Warren Buffet have gotten their tax relief. Guess where Congress made up the loss?

Nor does the income tax have to be so complicated. Barlett and Steele point out that the first income tax code was 17 pages long. "All that complexity is good for the tax industry," they wrote. "It's bad for you, because you have to pay for it. And it's destructive for society overall."