January 11,2023

After looking at the picture above I got to wondering how many tax forms the average person must file to complete a tax return. I did some research and did not come up with a firm answer. However, I know that when I was in business I would have to file between 15 and 25 forms each year (and this included the basic 1040 form you see above). In my research I did find that generally speaking, as of 2021, there are over 800 forms available from IRS. That is a lot of forms and tells me that our system of taxation as it stands today is awfully cumbersome; which is why most people don’t have a clue as to how to file a tax return and how to avoid paying more than they should pay.

Perhaps this is why it is so costly to even file a tax return. In terms of time it can take a person from several hours to several days to file that return. If you audited you can add even more time to this. Time, in and of itself for working people especially, is money. In addition to time is the actual money that it costs the tax payer. Depending on the complexity of the forms required it could cost somewhere between $100 and several thousand dollars to file a tax return. This is, of course, if you don’t use “DIY” programs on the computer like Turbo-tax or other such programs. Of course, using these programs, if you don’t know what you are doing could open you up for an audit.

Most people I know are looking for ways to reduce their individual taxes.

Two ways to reduce taxes — Tax Avoidance & Tax Evasion:

Tax avoidance and tax evasion are two different actions that relate to paying taxes, but they have distinct legal meanings and consequences.

Tax avoidance refers to legal strategies and actions that are taken to minimize or reduce one’s tax liability. This can include taking advantage of deductions, credits, and other tax benefits that are allowed by the tax code, as well as structuring one’s finances in a way that minimizes taxes.

Tax evasion, on the other hand, refers to illegal activities that are used to avoid paying taxes. This can include failing to report income, claiming false deductions or credits, and not paying taxes that are owed.

Some believe that, while tax avoidance is legal, not all tax avoidance is ethical or morally right. Because it can also lead to concentration of wealth, and inequality in society. I don’t necessarily see it this way … but many do.

In summary, tax avoidance is legal, tax evasion is illegal. Both lead to reduction of tax liability, however the methods are different. Tax avoidance will get you a reward with lower taxes and tax evasion will get you a penalty with either a high fine, years of imprisonment, or both.

U. S. Government Revenue:

By now you may be wondering, how much tax revenue does the Government receive each year, in taxes, on average? I know I was so, I did more research and this is what I found.

The amount of tax revenue that the government receives each year can vary greatly depending on the economic conditions and the specific tax policies in place. Generally speaking, during economic expansions when job growth is strong, tax revenues tend to rise as more people are employed and paying taxes, while during recessions tax revenues tend to fall as employment and income fall.

In the United States, the federal government collects around $1.6 to $1.8 trillion dollars in tax revenue annually, with the majority of it coming from individual income taxes and payroll taxes. This is usually about 8-9% of the GDP. State and local governments also collect additional taxes, but the total amount varies widely depending on the state, and the specific tax laws in place. Sales taxes, property taxes, and other taxes are some of the common forms of taxes that state and local governments collect.

It’s important to note that these numbers are approximate and may vary from year to year, depending on the economic conditions and government policies. And it is also important to remember that whatever amount our government collects, as you learned from part 3 of this article, they always seem to spend more than the amount collected.

So, the next question may be Who pays what? In other words, how much is paid by individuals and how much is paid by businesses. My research was able to uncover the following facts:

In the United States, the federal government collects the majority of its tax revenue from individuals. Individual income taxes are the single largest source of federal revenue, accounting for around 45% to 50% of total federal tax revenue. The payroll taxes, which are taxes paid by both employees and employers on wages and self-employment income, also add up to around a third (33.33%) of the federal tax revenue. If we add these two together we come up with between 78% and 83% if the tax us being paid by individuals and their employers.

Corporations and businesses also pay additional income taxes, but their share of total tax revenue is typically smaller than that of individuals. Corporate income taxes make up about 10% to 15% of total federal tax revenue, and taxes on other business activities, such as excise taxes on certain goods and services, make up a small percentage. However, the percentage of corporate income taxes can vary from year to year depending on the economic conditions, the tax laws and policies, and the tax compliance of corporations.

Now before you start to complain about the rich corporations not paying as much as the poor individuals … remember that whatever they do have to pay is passed down to the consumer in increased cost of goods and services. In other words, corporations really do not “come out of pocket” for tax cost like you and I do. Sometimes I wonder if it would not be better to lower the corporate tax rate to 0%, especially if it would lower the overall cost of goods and services they sell to us.

It’s worth noting that the tax laws and policies can influence the distribution of the tax burden among different groups and can change over time. The government may also have different tax rates and tax breaks for different types of income and businesses, which can also affect the distribution of the tax burden. Keep in mind, that these numbers are approximate and may vary depending on the source and the year you are looking at.

Before finding out who pays the most in taxes … the rich or the poor … let me first explain this.

The Pareto Principle:

What is the Pareto principle?

The Pareto principle, also known as the 80/20 rule, is an economic principle that suggests that 80% of the effects come from 20% of the causes. In other words, it states that a small number of causes will lead to a large number of effects. The principle is named after the Italian economist Vilfredo Pareto, who observed in the late 19th century that 80% of the land in Italy was owned by 20% of the population.

The Pareto principle has since been applied in many different fields, including business, finance, and management, to describe a wide range of phenomena, such as:

• 80% of a company’s sales come from 20% of its products.
• 80% of a person’s satisfaction comes from 20% of their efforts
• 80% of a project’s benefit comes from 20% of the work

When I worked as a financial advisor (for more than 42 years) it was common knowledge (especially with management) that the top 20% of the advisors generated approximately 80% of the companies revenue and the bottom 80% was responsible for only 20% of the companies revenue. Why else would the company tend to pay more attention to the top 20% than they did someone who was in the bottom 80%? Was it fair and equitable? I say NO … but life is not necessarily meant to be fair and equitable, is it?

It’s important to note that the 80/20 rule is a rough approximation and the actual ratio may not always be exactly 80/20. It can be also observed in other ratios such as 70/30, 60/40, etc. The Pareto principle can be used as a tool to help identify the most important items, causes, or contributors in a given situation, so that resources can be focused on those areas where they will have the greatest impact.

So, who pays the most taxes under our current tax system?

In my research I found, and this should not surprise you now that you understand the Pareto Principle that, according to data from the Congressional Budget Office (CBO), the top 20% of wage earners in the United States, based on income, pay a large share of federal income taxes. As of 2021, the top 20% of wage earners in the U.S., which is those households earning more than $148,000 per year, paid around 84% of all federal income taxes. It’s also worth noting that the top 1% of wage earners, which are those households earning more than $645,000 per year, paid around 38% of all federal income taxes. This information is subject to change, as it depends on the Federal Tax law, Bracket, and deductions on the specific tax year.

In addition, according to more data from the Congressional Budget Office, in 2019, the top 10% of households (those with income above $151,000) earned 45% of all income and paid 70% of all federal income taxes. While, the bottom 90% of households (those with income below $151,000) earned 55% of all income and paid 30% of all federal income taxes. Is this fair and equitable? Again the answer is NO!

What would be more fair and equitable?

Before answering that question let’s once again look at how dependent the government is on tax revenue.

As stated above, in the United States, the federal government collects around $1.6 to $1.8 trillion dollars in tax revenue annually, with the majority of it coming from individual income taxes and payroll taxes. This is usually about 8-9% of the GDP.

So the next question is How Much is GDP (Gross Domestic Product)?

I do not have the exact numbers for 2022 yet, but the latest estimate is somewhere in the neighborhood of $25.035 Trillion Dollars. As of 2021, the GDP of the United States is around $22 trillion. GDP is an important measure of the size and health of a country’s economy, and it represents the total value of all goods and services produced within a country during a given period of time, usually a year.

The United States has one of the largest economies in the world, and it is one of the most important drivers of global economic growth. However, like any other economies, it is subject to fluctuations and it is influenced by various internal and external factors such as political and monetary policies, natural disasters, war, and more.

It’s important to note that the value of GDP can vary depending on the method of calculation and the source of the data. Different organizations and agencies, such as the Bureau of Economic Analysis (BEA) in the United States, may use slightly different methods to calculate GDP, which can lead to slightly different estimates.

Now let’s answer the question: How much money does consumers in America spend annually?

I’m not sure of the exact amount that consumers in America spend annually, but consumer spending is a significant component of the overall economy. In the United States, consumer spending accounts for around 70% of the country’s gross domestic product (GDP).

In 2019, consumer spending in the US was around $14 trillion, but keep in mind that this number can change year to year depending on various factors such as economic conditions and consumer confidence.

If consumer spending is 70% of GDP this means that in 2019 GDP was around $20 trillion dollars. That seems reasonable since GDP seems to increase a little in most years …

• $20 Trillion in 2019,
• $22 Trillion in 2021, and
• an estimated $25 Trillion in 2022.

Assuming consumers spend 70% of GDP this means that they should spend about $17.5 Trillion Dollars in 2022.

Why not use a consumption or sales tax?

With this much spending going on … why don’t we abolish or reduce the size of the IRS and abolish the Federal Income Tax for a Consumption or Sales Tax?

However, instead of reducing the size of the IRS, the Biden Administration has a plan to hire 87,000 more IRS Agents over the next several years. The senate recently approved $80 Billion dollars for the IRS with $45 billion of this being for “enforcement.” You can read an article from the American Bar Association with their take (I don’t necessarily agree with it) on these hires as well as an article from CNBC on the cost of these hires by clicking on the links underlined.

I have been doing some research on why we don’t use a Federal Consumption Tax (Sales Tax) for Federal Income the way some of the states use a Sales Tax (in addition to an income tax) to generate some of their revenue.

There are several reasons, or arguments, as to why the federal government in the United States does not use a federal sales tax system to collect taxes.

One reason is that the United States has a long history of relying on income taxes to fund government operations. The current federal income tax system has been in place since the passage of the 16th Amendment in 1913, and it has become an established part of the country’s tax system.

So, this argument is basically, “Well we’ve never done it that way before.” Just because a system is 110 years old is no reason not to consider changing it when it needs to be changed.

Another reason, is that a federal sales tax would be difficult to administer in practice. A sales tax would require the federal government to track and collect taxes on all sales transactions across the country, which could be a significant administrative burden. A sales tax also tends to be regressive, which means it takes a larger share of income from low-income taxpayers than from high-income taxpayers.

I don’t put a lot of faith in this argument either for three reasons:

• The burden to track and collect a sales tax would be reduced since the IRS would have to depend on only 30.7 million small businesses and 12,000 large businesses that employ 500 or more people in the United States rather than 150 million individual tax payers tax returns (not to mention corporate returns). I don’t care how you slice and dice it … 30.712 million is a lot less than 150 million.
• This would also help the IRS actually collect a greater amount of dollars at a reasonable tax for each consumer since those consumers that have illegal income from prostitution, off the books gambling, cash only businesses, etc. currently pay little to no income tax. In addition, those people dependent on government “entitlements” (not considering social security, civil service or VA benefits as an entitlements) who also spend that money would pay a tax and they currently pay no income tax.
• Finally, while a sales tax could be somewhat regressive, it will also be more fair. If you spend a lot of your income you pay a lot in taxes. If you don’t spend as much and save and invest some of your income you spend less in taxes. It’s just a more fair and equitable system all the way around. In addition by saving and investing to reduce your tax burden we reduce the burden the government has when we grow older.

Another reason is that many states already have their own sales taxes. Federal sales tax would be added to state sales taxes and would make the overall rate even higher which can be seen as burden on consumers, it can also make it difficult for businesses in high-tax states to compete with those in low-tax states.

This argument also makes no sense to me. So what if states have their own sales taxes? Many of them also have income taxes. And if it makes it more difficult for businesses in high tax states to compete with businesses in low tax states … then they should do as many are doing today now … move to a state that has less taxation until those with high taxation can learn to manage their income better and potentially reduce their taxes.

Finally, in the United States, taxes are typically levied at the state and local levels as well as the federal level. The federal government relies on income taxes as its primary source of revenue, while states and localities rely more heavily on sales taxes and property taxes to fund their operations.

Again, I say so what? Just because states rely heavily on sales tax and property tax is no reason for the Federal Government not to rely on a Sales Tax.

It’s worth noting that while the U.S Federal government does not use sales tax as a primary method of taxation, there are some federal excises taxes on certain goods and services, such as gasoline, tobacco, alcohol and certain luxury items.

If our Federal Government can levy a tax on gasoline, tobacco and liquor — there is no reason on God’s green earth why they can’t, and they should, levy a sales tax on all consumables and abolish and out of date, full of fault, tax system.

Of course if we abolished the current tax system we’d probably also lose about 50% of the countries lawyers and CPAs … and that may not be a bad thing either.

Federal Government Income and Expenses:

Earlier I told you that a major source of government income came from Income Taxes … about $1.6 to $1.8 trillion dollars.

However, this is only part of the total income. The primary sources of federal government revenue are individual income taxes and payroll taxes (such as Social Security and Medicare taxes), which together account for the majority of the revenue collected by the federal government. Other sources of federal revenue, though, include corporate income taxes, excise taxes (taxes on certain goods and services), and tariffs (taxes on imported goods). In addition, some other sources of revenue that the federal government can have, such as sale of public land, taxes on goods or services (such as Alcohol, tobacco, etc.) and payments for using public services such as national parks and forests.

In my opinion we don’t charge near enough in the area of tariffs to countries that export their good and services to us. Yet, they seem to charge us a lot when we export our goods and services to them. In addition we have a trade imbalance between most countries and ourselves. For example the trade imbalance between the U. S. and China Can be seen as follows:

• The trade imbalance between the United States and China refers to the difference in value between the goods and services that the two countries export to each other. In recent years, China has exported more goods to the United States than it has imported, resulting in a large trade imbalance in favor of China. In 2020, China’s trade surplus with the United States was $419.2 billion, where U.S imported $567.1 billion and exported $147.9 billion

According to USAfacts.org, in 2021 the Federal government brought in $4.08 trillion from all sources, and spent $6.85 trillion. That is the same as an individual earning $50,000 in 2021 and spending $83,946 during the same 12 months.

Based on the fact that the American Consumer is spending 70% of GDP (that’s estimated to be $17.5 trillion of spending in 2022) the government could recoup $1.8 trillion in income tax revenue with a simple 10.29% Federal Sales Tax and do away with the Federal Income Tax all together.

For the 2022 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. What makes more sense to you? All seven of these silly progressive brackets or one simple fair bracket of about 11% maximum. Heck even if they put it at 15% … that would bring in a lot more than they are getting now. 15% of $17.5 trillion dollars would be $2.63 trillion dollars in tax revenue as compared to $1.8 trillion.

Summary:

Now you have four things that I believe could go a long way in reducing some of the problems we face in the American government today:

1. Stop the Paid Lobbyist from wasting time and resources in Washington D. C.
2. Create Term Limits for members of Congress
3. Reduce excess non-essential spending of Taxpayer money in government, and
4. Change the tax system to a consumption tax rather than an income tax.

What is going to happen now? It’s hard to say. I did hear on the news yesterday that there are two bills in the House of Representatives put out by the new Republican majority.

One has to do with term limits and the other has to do with stopping the Biden Administration from following through on hiring 87,000 new IRS agents. I’ve also heard that a bill is coming forth to abolish the IRS and current tax system with a consumption tax to replace it.

All we can do now is Hope and Pray and continue writing to our senators and representatives urging them to make the tough changes necessary.

Until next time, I remain, Very Truly Yours,

Jerry Nix | Freewavemaker, LLC