Ode to Taxes

Income taxes for 2025 are due this week. It’s not particularly fun to write a check to the Internal Revenue Service, but the gears of this nation depend on that money to keep turning.

Throughout the course of last year – and capped off on April 15 – Americans and businesses based in America will have sent more than $5 trillion in taxes to the U.S. federal government, about half of that is from income taxes from individuals.

The system is stupefying in its complexity. The actual statutes that Congress has passed over the years related to taxes run 2,600 pages and more than 1 million words. As a point of comparison, the King James Bible contains around 788,000 words.

The tax code is a behemoth.

But income taxes weren’t always so convoluted.

In fact, the first income tax levied was straightforward. The law was enacted in 1862 to help pay for the Civil War and assessed a 3% tax on incomes between $600 and $10,000 and a 5% tax on incomes of more than $10,000.

This tax – and its simplicity – was only temporary. The measure was repealed 10 years later, and in 1895 the Supreme Court even ruled that the United States did not have the Constitutional authority to tax incomes of its residents.

At that time, much of the federal government was funded through tariffs.

It took Congress 18 years to devise a solution to the Supreme Court’s 1895 ruling. That solution was called the Sixteenth Amendment, and it was ratified in 1913. The Sixteenth Amendment, if you don’t recall your U.S. Constitutional history, granted Congress the specific power to “lay and collect taxes on incomes.” And thus, the first Form 1040 was designed to collect information on Americans’ incomes and determine the income tax owed each year.

Congress hasn’t looked back since.

Over the years, a progressive income tax structure was put in place, meaning higher earners pay more of the total taxes than lower earners. Based on 2024 data, the top 1% of earners paid around 24% of total income taxes collected, while the lowest 20% of earners paid around 1.5% of total income taxes.

The tax code is constantly changing based on the whims of Congress. Today, the highest income tax levied is 37% of income over $640,600 for a single person. That’s child’s play compared to historical rates. In 1944, the top rate was 94% for incomes over $200,000, which would be closer to $2.5 million in today’s dollars. Think about that. For anyone in that bracket – and I’m sure hardly anyone was, or they found ways around it – for every dollar they earned, $0.94 was given to the government and $0.06 could be retained. Crazy.

But it’s not just income taxes. We now have a system of taxation that includes payroll taxes, capital gains taxes, and investment income taxes.

What I find wildest about our tax system is that for all its complexity and rigidity and thoroughness, it’s truthfully an honor system. While you must file a return if you have income, that doesn’t mean everyone reports income accurately.

Please don’t take this as tax advice, but only half a percent of tax returns were audited in 2020. So the odds of getting caught lying on your tax return are quite low. Of course, back taxes, penalties, and potentially jail time aren’t fun alternatives if you are caught.

Fortunately, there are legal ways to reduce your taxes. Here’s your annual reminder to increase your 401(k) savings rate and to contribute to your HSAs and IRAs.

Cutting a check to the IRS may not be fun, but at least we are fortunate to live in a land that gives us more freedoms and protections than most places on this Earth.

That’s worth paying for.