During the legislative debate before enactment of the 16th Amendment, Republican President William Taft and congressional supporters argued that only the rich would ever pay federal income taxes. In fact, in 1913, only one-half of 1 percent of income earners were affected. Those earning $250,000 a year in today’s dollars paid 1 percent, and those earning $6 million in today’s dollars paid 7 percent. The 16th Amendment never would have been enacted had Americans not been duped into believing that only the rich would pay income taxes. It was simply a lie to exploit American gullibility and envy.

I believe it was either last year, or possibly in the spring of this year, when conservatives got their panties in know over how 49% of all taxpayers paid no income taxes (though, funnily enough, all taxpayers still paid their FICA and other payroll taxes). The theory was that there would arise a class of professional voters, who would simply elect officials to pay take money from the rich and give it to the more-deserving poor, of which said professional voters just so happened to be a part.

The reality appears to be a bit different, at least historically speaking. When the income tax was first enacted, it only applied to the rich, who comprised 0.5% of the population. Thus, the percentage of the population paying the income tax increased 100-fold over 98 years to 51%. If the theory of professional voters were true, the percentage of taxpayers should have at least remained stable (or even decreased) while the tax rates should have remained stable or increased. Reality, as it were, is markedly different.

In spite of all the attempts at class warfare in the last one hundred or so years, the poor still get screwed over by the rich. This is probably because there is a strong correlation between a general form of stupidity and poverty,* as well as a strong correlation between wealth and general intelligence. In essence, the wealthy are generally intelligent enough to figure out how to make things work to their advantage (hence their wealth). If one is cunning enough to convince people to buy something they don’t need, it seems plausible that one could also sell someone a political policy that works to their disadvantage.

The historical norm has been that poor people pay quite a bit in taxes, and the wealthy are often the beneficiaries of those taxes (think of the feudal system as a general model of this). The idea that those who are intelligent enough to become quite wealthy won’t also be intelligent enough to protect their wealth is, quite frankly, absurd, and the idea that somehow the poor will manage to “reappropriate” wealth from the rich is even more absurd.

* Two quick notes: a lack of education generally correlates to stupidity, which in turn correlates to lower income (as evidence by the myriad statistics showing that high school dropouts earn less than those with a high school diploma, bachelor’s degree, etc.) Also, shorter time horizons also correlate to stupidity as well.

I think most people like the idea of a simpler tax code. No argument there. But I’ve never met a person who would volunteer to pay higher taxes in exchange for simplicity.

The flat tax idea is a brilliant bit of psychological class warfare. At least I hope that’s what it is. I’d hate to think the people in the highest tax brackets, i.e. my peeps, are as dumb as the people they hope to screw with promises of unicorns and flat taxes.

The flat tax diversion is a deliciously cynical way to maintain the status quo while appearing to be in favor of change. The diversion works because the middle class has been duped by the media into thinking high income people pay a lower tax rate than the general public, so maybe a flat tax will set things right. That’s the power of anecdotes. If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn’t.

Another brilliant aspect of the flat tax argument is that it’s simple to explain, and our brains are wired to perceive simple solutions as better than complicated ones. In reality, the simplest solution is usually the one that comes from someone who is either trying to screw you or who isn’t capable of understanding the full situation.

The flat tax diversion is weasel-clever because it shines a light on the absurd “fairness” argument coming from the folks who want to raise taxes on the rich. Fairness is an illusion our parents taught us as kids to make us stop fighting with our siblings over the appropriate division of candy. Fairness isn’t an objective quality of the real world. The reality is that the rich willingly pay higher taxes for the same reason that the British monarchy willingly converted from a dictator model to a symbolic role: If you want to avoid being beheaded, sometimes you need to be flexible.

Personally, I’m quite comfortable paying taxes at the highest rate. It’s like paying protection money to the Mafia, and I mean that in the best possible way. High taxes reduce the odds that jealous mobs will kill me for succeeding in my chosen field. Oh, and my taxes are also helping fund national defense, education, social program, and other good stuff. That’s a win-win. But please don’t insult me with arguments of fairness. Save the fairy tales for your kids.

I know some of you will leave comments about your own fairy tales of Laffer Curve economics, in which lower tax rates stimulate the economy and fill the treasury with free money. And then someone will point out that economic growth in the Unites States has often coincided with higher tax rates. Can we agree that the Laffer Curve has been debunked everywhere but on Fox News?

While I’m not one who has studied the Laffer curve with any degree of depth, I always thought the it existed to show a) that tax revenue is $0 and rates of 0% and 100% and that b) the rate optimal for maximizing revenue was somewhere between 0% and 100%. That’s all I use it for.

And I’m not sure how federal tax revenue equates to economic growth, except by definition per the widely used Samuelsonian macroeconomic metrics like GDP. Also, lower tax rates don’t stimulate the economy per se; they simply don’t disincentivize certain market behaviors.

According to the IRS, you are able to postpone the date that your form 1040EZ, 1040A, or 1040 is due from April 18, 2011 to October 17, 2011 by filing form 4868.  An even easier way to delay the due date is to use tax preparation software to file for an IRS extension, since it will, e-file your federal extension form, make a payment of tax due, print a PDF copy of the extension you e-filed, allow you to see when your extension has been accepted by the IRS,  and access the forms you need to file a state extension by mail if necessary.

If you do need to delay your income tax filing and you owe taxes, be sure to pay a reasonable estimate of your taxes owed, or you can face stiff penalties.

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We all understand that no entity can survive for long if it gives away its resources while asking nothing in return. And this leads me to my point: In the United States, 51% of adults pay zero federal income tax, and yet they have the right to vote. That’s the very definition of a system that can’t last.

I’m not sure where the tipping point is. So far, the power of the non-tax-paying majority has been blunted by the influence of political parties and the misdirection of the media. If the majority ever figures out that they can legally confiscate the wealth of the minority, tax rates will double overnight. My best guess is that the United States will go into a death spiral at about the point that 55% of adults pay no federal income taxes. We’ll probably get to that point as baby boomers continue to retire in large numbers.

CHOICE OF STATE INCOME TAX STRATEGIES

As a free agent, LeBron had options. He could go wherever he thought he could win a title, get the most money in endorsements, where he could enjoy the best Cuban food and beach lifestyle, and maybe all three. After being courted by half a dozen teams, he had some really nice offers and some potentially lucrative deals. The biggest players were Cleveland, the New Jersey Nets, New York Knicks, maybe even the Bulls or the Clippers and of course Miami. LeBron finally picked Miami. Miami could arguably offer a lot, but I wouldn’t doubt that his state income tax attorney whispered a few sweet words into his ear about income tax strategies, like “$2-5 million a year,” that may have influenced his Decision.

HOW STATE INCOME TAXES ARE CALCULATED

States all calculate their state income tax slightly differently but in general, the state where you have your tax domicile will collect income tax on all of your income. If you earn income while in some other state, you may have to pay income tax to that state for the amount earned there. So for NBA players like LeBron, he pays state income tax on his salary for 41 home games to his home state, and state income tax to the various states where he plays 41 away games. His endorsement income is probably taxed by his state of domicile.

So what does LeBron make? On average, about $32 million a year in endorsements. This might go up if he wins a championship or might go down if he is caught with his pants down like some other athletes, but we will assume it stays the same. His contract with Miami was for about $110 million for 5 years. Of course there are bonuses, different options, buy outs etc., but we will assume a simple average of $22 million each year in salary, 1/2 of which will be played on his home court.

So, if you are keeping score at home, that is about $44 million a year that will be taxable in LeBron’s state of domicile.

COMPARISON OF STATE INCOME TAX STRATEGIES

What would LeBron’s income tax strategies have cost him if he picked one of the other teams?

Cavaliers – (Ohio) 6% state income tax rate – $2.6 million per year in state income taxes.

Bulls – (Illinois) 3% of Federal AGI – $1.65 million per year in state income taxes.

Knicks – (New York) 7% state income tax rate – over $3 million per year in state income taxes.

Clippers – (California) 10.5% state income tax rate – $4.6 million per year in state income taxes.

Nets – (New Jersey) 11% state income tax rate – over $4.8 million per year in state income taxes.

So what is his state income tax bill in Florida as a Miami Heat? Z-E-R-O. That means that by simply playing for a team based in a state with no income tax he will be saving anywhere from $1.65-$4.8 million per year! SCORE! Over the course of his 5 year contract he could be saving anywhere from $10 – $22 million without considering compounding interest.

This is of course assuming that LeBron properly changes his tax domicile to Florida. Ohio will not be a gracious loser of more than $2 million a year in tax revenues. You can bet that they will pressure King James to make sure his state income tax attorney crossed the t’s and dotted the lower case j’s to be domiciled in Florida rather than Ohio. In fact, in the clip above from the Decision, LeBron said one little thing that might cost him over $2 million a year. So much for clutch play. I don’t want to tip off the state of Ohio so I will let you discuss what that was with your income tax attorney.

OTHERS EMPLOYING STATE INCOME TAX STRATEGIES

LeBron isn’t the only person to change domicile to save a ton in taxes. Tiger Woods moved his tax domicile from California to Florida very early in his career. He is estimated to have earned about $1 billion over the course of his career so far, a savings of about $100 million. He might want to use that $100 million to buy a giant “I’m sorry” diamond for his wife, or maybe an “I’m sorry” island. Lots of wealthy New Jersey-ans have also “vanished” from New Jersey.

HOW CAN REGULAR FOLKS USE THESE STATE INCOME TAX STRATEGIES?

So what if these guys are saving millions of dollars a year. Most people don’t even make as much as those guys are saving, so why bother? You may not make $54 million a year, or even $4 million a year but it is likely that you are making closer to the NBA league minimum of $475,000 a year. If you earn that much being domiciled in Ohio you might be spending about $28,500 a year in state income tax, in New York $33,250, in California, even in a lower tax bracket of 9.55%, you would owe about $45,000, and in New Jersey $52,250. Still not worth your trouble to think about where you are domiciled?

CONCLUSION

Like LeBron James and others you can likely better play the game of state income tax strategies. Your tax domicile can mean thousands of dollars more in your pocket each year. But states hate losing milk when their cows escape from the pen. Talk to your state income tax attorney to make sure you correctly and legally change your domicile.

Boman’s issues page is divided into three categories: Peace, Liberty, and Prosperity. This triumvirate of topics will be familiar to fans of Ron Paul, the most famous popularizer of Austrian economics of all time, and that’s because Scotty Boman was a grassroots leader of the Ron Paul campaign in Michigan. In fact, Boman voted for Paul not only in 2008 but also in 1988 when Paul was the Libertarian Party’s nominee for president.

Since this is an economics blog, I’m concerned here with the candidate’s views on “Prosperity.” On the downside, Scotty doesn’t paint a very rosy picture when discussing the Federal Reserve System, the income tax, and Social Security. This is a common knock against Austrians, who are often said to be even more pessimistic than Communists! But hey, we see the direction the U.S. is headed, and we refuse to put on the rose-colored glasses. Sorry!

Boman points out that the U.S. dollar has lost 95% of its value since the 1913 debut of the income tax and Federal Reserve System. Of the income tax, he says he supports “repealing it and replacing it with nothing” and makes a mostly moralistic argument against taxation in general. While I agree, the view has little to do with economics. Boman’s views on the Fed are more suitable for discussion here.

Boman says the Federal Reserve System has been “absolutely ruinous” to our country. He points out the ridiculousness – so eagerly regurgitated by the financial media – that the Fed exists to “combat inflation” when, in reality, only the Fed can cause inflation in the first place!

“They do this by expanding the money supply. Each time the Fed creates new money, it diminishes the value of your dollar-based financial holdings. It thus imposes a hidden tax – the ‘inflation tax’ – and redistributes wealth from the poor and working class to the rich and politically connected.”

This is a hardcore Austrian view in line with the “principled populism” of Dr. Murray Rothbard.

As for a solution, Boman supports the revolutionary idea of free market competing currencies. This would take the power of determining “what is money” out of the hands of the government and put it into the hands of the people. The core of this philosophy rests on the Austrian “Theory on the Origin of Money,” which states that money arose naturally as the most commonly accepted means of exchange during the course of prehistoric barter. Gold and silver became “money” for a variety of reasons but basically because they were widely accepted and easily transportable. Once you see that the government doesn’t need to declare anything money, that the free market can do that, then the Federal Reserve System’s theft is demystified. You can see the Man Behind the Curtain and find out that the Emperor has no clothes. It’s not a pretty sight.

Of Social Security, Boman’s solution isn’t nearly as well defined. He basically throws his hands up in the air and admits there is no good solution, or at least, he doesn’t have one. This is refreshing from a politician. But he does offer one reform: make Social Security voluntary and allow young people to opt out. I know I would.

Author’s note: Since writing this article, I have become involved with the Boman08 campaign.