Put Money in Your Pocket Now

Income tax filing day came late in 2020 due to the coronavirus pandemic as the Internal Revenue Service moved the date to file tax returns from April 15 until July 15, 2020 in order to accommodate disruptions to public health, personal finances and the economy. As a footnote on the history on income taxes, it must be noted that income taxes did not exist in the United States until a year after the 1861 Civil War began. Prior to the Civil War, federal taxes were collected via tariffs (taxes on imported products) and excise taxes (taxes on the sale or use of specific products or transactions).  This of course limited the size of government and of government spending and the idea of income taxes, taxes on a person’s labor, were seen as a cruel remnant of European feudalism.  To tax one’s labor was to rob him of the fruit of his labor. Indeed it made him a serf.

With the advent of Civil War the government realized that tariffs and excise taxes would not provide enough revenue to both run the government and conduct the war so in 1862 Congress established a limited income tax on people who made more than $600 (approximately $90,000 in today’s terms). The measure was to be temporary. The tax was abolished in 1872 to be later reinstated in 1894 but it was then rightfully challenged in court.  The Supreme Court found the income tax to be unconstitutional in 1895 in the case of Pollock v. Farmers Loan Trust Co. The court held that income taxes were unconstitutional because any direct taxes on the population had to be apportioned by state population under the Constitution. The federal government was determined to get more tax money into its coffers so in 1913, the same year that the Federal Reserve Act was passed, the U.S. government pushed the 16th Amendment to the U.S. Constitution which reads that, “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 constitutional barrier to the income tax was thereby removed.

As a result, and to demonstrate the effect the income tax had on federal government revenue, government tax revenue went from $992 million in 1912 to $5 billion in 1920. Mandatory tax withholding introduced in 1943 soon increased revenues to $45 billion and in 2019 income tax revenues were $3.5 trillion. Note that this does not include corporate, capital gains, estate or other taxes.  This is merely income taxes.  So the government’s revenue has increased by 352,722% in 108 years of the income tax. At the same time it must be noted that the average income tax went from 1% of income to an average of 18.5% of income. The citizen now pays 53,414% more in taxes today than he did in 1913. Yet many in our government want even more.

The April 15 tax filing date has been in place since 1954.  It is then, with the exception of in the year 2020, that citizens report their earnings to the federal government to see whether the government will take more of their money or give them a part of their own money back as a “refund.” Needless to say many are elated to get a refund, often thinking of it as a free gift from the government.  It is not and the fact that people think that a bigger refund is better goes to show you how successfully the propaganda has been used to condition the minds of American citizens into thinking that a refund is a benefit or a windfall.  A bigger refund is in fact a financial loss and there are several reason for this.

First, you are losing money because the government got to keep your money just to give it back to you later at 0% interest. They got the benefit of your money and you did not. While they used it for whatever good or nefarious project they wanted to, you were deprived of it. You could have used the money at the time you earned it to invest in something that would make you more money whether a bank account at 1% or in something with a potentially higher return such as stocks, bonds, cryptocurrencies, precious metals or a business investment.  You could have made more money on your earnings and instead you get your money up to a year later when it has lost value.

Losing the value of your money to inflation is the second point. When you get your refund from the government it has lost on average 3% of its value to inflation. That’s money you could have used to stock up on extra supplies food, medicine or other purchases in the previous year when your dollar would purchase more than in the current year. Remember, the government does not give you interest in your refund when it gives you your hard earned money back.

Third, it is possible that if you overpaid on your federal income taxes and you itemized your deductions the year before, then you may have to pay state tax on your refund. This absurdity means you have been attacked on two different fronts – losing even more of your money.

Fourth, you could have used your money to pay down any debt that you have.  Here’s a primitive yet clarifying example. Let’s say you had a $20,000 care note at 5% interest and you are getting a $2,000 refund from your taxes. Your refund is really worth $1,940 due to inflation and your $20,000 debt now costs $21,000 because of the 5% interest.  That means you lost $1,160 as a result of filing your taxes in a way that resulted in a refund for you.  Your $2,000 refund is now in effect an $840 refund. You could have put that $2,000 to use immediately when it was earned without being ravaged by inflation and the interest payments on that car note.

So what do you do to rectify this?  You can go online and find tax calculators that will help you understand how to change your W-4 with your employer to get more of your money in your paycheck when earned and get a smaller refund – or no refund – after filing your taxes. I recommend trying out two or three calculators to see how similar the results are. You can go with a conservative adjustment to your W-4 if you are concerned about the impact on your tax burden the next year but many of these calculators are fairly accurate. Changing your W-4 will ensure you get the maximum benefit of your money when it is earned. You can also speak to your tax professional who will be happy to help you out and this is recommended. Remember, a bigger refund means you are losing the value and potential purchasing power of your money when earned. Don’t be a willing victim of the government’s and the media’s propaganda. After all, it’s your money.

Recent Posts