This year could be the last year before the Bush tax cuts expire and the tax rates increase.   If these cuts expire, single people and married people alike will have higher taxes.   A single person with taxable income making $100,000 will have a tax bill of $23,805 and an average tax rate of 23.8% come 2013 when these changes go into effect.

Giving the federal government 23.8% of your income, or over 30% when combined with FICA may seem like a lot, so let’s go back in time to compare:

Take a look at a decade (the 1970’s) when Stairway to Heaven was blasting on the radio and Don Vito Corleone was the most popular Halloween costume.   Adjusting for inflation, $100,000 today equals about $41,800 in 1972.   In 1972, the tax bill for a single person making $41,800 would have been $8,261 or 20%.   We’ve all heard about the exorbitant tax rates of the past so this is a little surprising that the tax, adjusted for inflation, is actually lower.   In analyzing the tax rates, adjusted for inflation, tax rates for single people don’t top out at 40% until $118,095 in income.   Then rates start to skyrocket.   At $171,774 the tax rate jumps to 50%, at $236,189 to 60%, and above $536,793 to 70%!

High taxes of the past were brought to my attention by the television series  Mad Men, about an advertising agency company based in the 1960’s. There is an opening scene where the Head of Television is talking about getting a raise.   He ends up saying he never wants to make more than $36,000 because then your just working for “them”.   “Them”  is the IRS and back in 1961 if you made between $36,000-$40,000, you were paying 53% in taxes.   Adjusting for inflation that is equivalent to someone making a little over $270,000 in todays dollars.  If the Head of Television was talking about a raise today, that conversation never would have happened, as he would be paying 33% in taxes and max out at 35%.

In 2013 when the Bush cuts expire that maximum is still only 39.6%.  Can you imagine what the partners of the agency were paying in 1961?  The maximum tax bracket in 1961 was 91%.   For every dollar in income above $200,000 (in 1961 dollars) they would only be taking home 9 cents!   So if taxes go up in 2013,  just remember that taxes could be worse.

Did you ever wonder how many people do not actually pay their taxes under our “voluntary compliance” system here in the United States? Well, it turns out that the latest IRS estimates show about 15% of the total tax liability owed for 2006 was actually collected.
This rate is virtually unchanged from the 2001 compliance rate and amounts to $450 billion for 2006. This represents a $105 billion increase over the2001 estimated tax gap of $345 billion. Enforcement efforts and late payments reduce the net tax gap to $385 billion for 2006 which is still $95 billion greater than the $290 billion net tax gap in 2001. While these numbers are staggering, the growth in the tax gap somewhat mirrors the growth in total tax liabilities. Furthermore, the increased estimate may well result from better data and improved estimation methods.

This “tax gap” results from three different types of non-compliance: failure to file, underreporting taxable income, and underpayment of amount of tax due. Underreporting of income continues to be the largest contributing factor to the 2006 gross tax gap accounting for $376 billion of the $450 billion total. Tax non-filing and underpayment of tax accounts for $28 billion and $46 billion, respectively.
As you might imagine, non-compliance is lowest where there is third-party information reporting and/or withholding, such as wages and salaries. Conversely, amounts not subject to information reporting had a 56% net misreporting rate in 2006.

Just think how much progress we could make towards reducing our horrendous deficit if this gap were closed!

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