By Chris Buchheit on May 26, 2010

With the 16th Amendment solidifying the federal government’s ability to withhold taxation revenues, the income tax was here to stay. It was re-issued in 1894 as a one percent tax on incomes greater than $3,000, and a six percent surtax on incomes greater than $500,000. From this year forward, the top bracket income tax bracket has never been that low again:

In 1918, the top rate was 77% in order to pay for World War One. The government decreased the rate to 58% in 1922, and then to 24% in 1929. Surprisingly, the rate reached 63% during the Great Depression, and then was increased to 94% during World War Two. According to Wiki (be nice), President Franklin Roosevelt tried to increase the top bracket’s rate to 100% (on all incomes above $25,000) while Congress attempted to enact “payroll withholding.” The rates never left 90% too far until President Kennedy lowered it to 70%. The government lowered the rate again to 50% in 1982 and then to 28% in 1988 during the Reagan Administration. During the Clinton years, the rates hovered around 39% until they were lowered by the Bush administration to 35%, but that rate is set to expire in 2011.

At the present, according to the IRS, the top 0.1% of taxpayers pays 17.4% of federal income taxes, and the top 5% of taxpayers pays 57.1%.

Even though the federal income tax now represents the largest contributor to the monetary resources of the federal government instead of tariffs, taxation is more often than not used as a political tool to accomplish certain tools other than accrue fiscal resources. For example, the tax law can be rewritten to encourage consumers into purchasing certain goods or services, or to disincentivize people from engaging in certain economic activities.

Generally speaking, the American tax system is “progressive”, meaning that those with higher incomes respectively are required by the system to pay a higher percentage than those with a lower income. The system divides certain income levels into “brackets” that then determine at what rate that wage-earner pays his taxes.

However, why have a progressive tax system? What exactly is a progressive tax system? More on this in my next blog!

By Chris Buchheit on May 26, 2010

Due to the fiscal situation in the country, I’ve decided to start a new series of blogs. I’ve had one related to China’s financial situation and I’ve written another series based on the trade off between the economy and the environment. This blog series, however, will focus on taxation: different tax systems, how taxes affect society, proposed reforms to the tax system, and perhaps most importantly, the history of taxation in the US.

The series will kick off the last item in that list – the history of American taxation. In this blog, I hope to educate my readers about how our tax system has evolved over our relatively short history and put our current tax system in perspective.

Any elementary school kid could (hopefully) tell you that the history of the American Revolution arguably began with “taxation without representation.” The British Parliament unfairly levied taxes on the 13 Colonies without giving them a say in governance. This system of taxation ultimately led to the Boston Tea Party, and you know the rest.

But what happened once the Americans won their independence in 1789? How did the new American government, so against the idea of unfair taxation, get funds to pay for public goods?

A surprising fact is that the United States of America government did not levy an income tax until 1861 in order to pay for the American Civil War. Until that time, tariffs were the government’s greatest source of income. America first employed a comparatively modest flat income tax – three percent on incomes greater than $800 and five percent on those greater than $10,000. However, the income tax was repealed in 1872, but reenacted in 1894.

Even though the federal government wished to levy this kind of income tax, the Constitution required it to apportion the funds to the states based on the census. In order for the federal government to collect funds, it ultimately changed the Constitution by ratifying the 16th Amendment. When the income tax of 1894 – two percent on incomes greater than $4,000 – was considered by some to be “undemocratic,” it was challenged and brought before the Supreme Court, who ruled that taxation on property must be apportioned to the States, but that taxation on income was not.

However, the passing of the amendment overruled this Supreme Court decision, which essentially allowed Congress to levy income taxes “from any source” without apportioning it to the States. This subject of an income tax became a hot button topic, and ultimately was the issue most politicians campaigned on for several years.

This was just the beginning for the American income tax.

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Continued: History of American Taxation (1894 - 2010): America’s Income Tax 2

By Chris Buchheit on May 6, 2010

Greece could be a lesson for all of us in America.

The Greek financial system has several key differences from the American financial system. It follows the European model of entitlements. In Greece, people retire a decade earlier than in the United States, peoples’ pensions are much higher, and public sector pay is also much higher. Many industries that are privatized in America have been made public in Greece.

One thing we can all learn is that nothing in this world is free.

People tout cheaper health insurance under this administration’s plan, for example, but actual medical care is still getting more expensive. How do we make up for the difference? We borrow the money. In short, entitlement programs, for the most part, are unsustainable. The government essentially subsidizes goods and services with taxpayer money. Where’s the logic? How can we expect to pay less for a service that is expensive?

Greece’s debt to GDP ratio on the onset of its financial meltdown was 115%. Ours is not as bad, but still quite up there. It is currently hovering around 80%, according to zfacts.com (http://zfacts.com/p/318.html).

This administration, and the last administration, did not seem to understand the value of a dollar, and spent trillions of dollars that we simply do not have. It’s ridiculous to think that this kind of spending methodology is sustainable.

America needs to wake up and realize that we need to work for our goods and services. We are not entitled to anything financial from the government.

Unless we want to end up like Greece and default on all of our debts, our government needs to adopt more sustainable, responsible spending practices on Capitol Hill instead of paying for pork projects to keep their constituents happy.

We saw today, at about three o’clock, how our market reacts to the situation in Greece, which is comparably a tiny economy. Imagine if America defaulted on its debts. To put it in perspective, scares from the protests in Greece made the market drop over 900 points within minutes. Greece is the world’s 27th largest economy. If America were in Greece’s situation, the consequences for the world economy would be dire.

It’s time to wake up America, and learn the lessons that the Greeks are unfortunately learning as I am writing this. Nothing in this world is free, and we are not entitled to have it for anything other than what it is worth.

By Chris Buchheit on May 6, 2010

In one of the week’s biggest “no kidding?” moments, Federal Reserve Chairman Ben Bernanke said that, “Banks should make loans to creditworthy borrowers.”

Well, duh.

Credit is based on risk. Mortgages and loans, for example, are only supposed to be given to people who seem responsible enough to pay back that money; then the banks make money off of the interest. It only makes sense for banks to loan money to those with good enough credit.

I have nothing against the Fed’s Ben Bernanke. In fact, I think he is doing a wonderful job. However, you would think that non-faulty loan lending would be second nature after the recent financial meltdown. As I described in an earlier blog, lending subprime mortgages led to the current financial mess we are in right now.

On the other hand, if banks lend money to those who are more liable, they inherently get more business. This will ultimately lead banks to a better foundation during this financial recovery. Such actions would free up credit, which is currently hurting small businesses who rely on a solid credit flow.

However, at what cost would such lending occur? Could lax standards lead to another recession? Surely.

So in my opinion, banks should make loans, but by no means should they walk the tight rope. The economy, particularly the stock market, is incredibly sensitive at the moment. This sensitivity of the stock market is shown by its volatility, and its tendency to fall at the slightest hint of bad news.

In short, banks cannot afford to make the same mistakes they have made in this decade. As I described in an earlier blog post, faulty mortgage lending practices led to risky assets. When those assets did not pay back, the housing market began to crumble. At the end of the day, neither the banks nor the housing industry had any money. This led to an insane credit crunch that caused small businesses to scale back its employees. At the end of this fantastic roller coaster, we ended up in an economic recession.

As always, there are several pros and cons to walking the tightrope, to be sure. However, given the volatility of the market (as seen today in the stock market), it might be wiser to walk on the thicker side of that tightrope.

By Chris Buchheit on May 6, 2010

Do you feel like monopolizing on software development? There’s an app for that. Or is there?

Despite recent financial success with the world’s most digitally useless book, the iPad, Apple might be facing antitrust violations.

I thought the iPad was stupid long before the Apple-loyalists lined up for it. It didn’t even have 3G for crying out loud! It’s basically a bigger iPhone minus the phone and, until very recently, internet capabilities. And don’t get me started on its processing power, or lack thereof. Sorry, I love my Dell. Maybe too much.

But I digress.

Federal regulators call Apple’s programming methods into question, because allegedly new iPad apps can only be created with Apple’s premade tools. These allegations of monopolizing are still being formulated and investigated, but it seems as though requiring all app programmers qualifies as an antitrust violation.

The allegations all hinge on whether or not Apple is “hurting competition” according to an AP story. The new Apple policy which began in April “prevents developers from using outside tools such as Adobe Systems Inc.'s Flash format, which is used in many Web videos, games and interactive graphics, to design apps for Apple's popular devices.”

However, all these allegations might amount to nothing, because antitrust regulators regularly investigate such occurrences. On the other hand, such a policy would have a negative impact on other development tools such as Adobe. Due to the popularity of the iPhone and, unfortunately, the iPad, programmers might be more willing to abandon Flash and use Apple’s tools.

Neither party, according to the AP story, wanted to comment on the situation, but Adobe has said previously that, “Apple was trying to protect a business model that locks developers and consumers into its tools and services.”

Even if the iPad is about as functional and useful as an internet-free tablet, it is still selling remarkably well. However, it remains to be seen how such allegations of anti-trust violations will affect those sales if at all. At the very least, if the allegations are pushed through, it will force Apple to open up app programming to other tools.