What F. Scott Fitzgerald’s tax returns reveal about his life and times (2009) | Hacker News Reader

What F. Scott Fitzgerald’s tax returns reveal about his life and times (2009)

theamericanscholar.org

69 pointsdanso35 comments

Before World War II, the government did not know what anyone made. Only the wealthy and upper-middle class filed returns—less than 10 percent of the population. The system was based on what the irs called “self-assessment,” which meant that the taxpayer told the government what he or she earned the prior year and then sent a check on March 15. Some information returns were sent to the government, but the government had no capacity to match the return to the taxpayer and the returns piled up in warehouses. Not until 1962 did the government’s computer system begin to efficiently match the information returns to the taxpayer. During the 1920s and 1930s, the tax system relied almost entirely on the honesty of taxpayers.

It's amazing to think that there was once a time in US history when the government could sustain itself through the honesty and goodwill of the richest 10% of its citizens.

I wonder what would happen if we returned to the goodwill tax model. If we had a simple tax code with self-reported earnings where we spent far less on hunting down and punishing cheaters and freeloaders, and instead left it as a matter of conscience for those who had amassed their wealth and raised their families through the good grace and fortune of living in the US.

Do you think our collective social fabric would be strong enough to fund an effective government? Or are we too far down the path of the self-centered, get mine at all costs, cheat the system if possible mindset?

The top 10% of earners paid 68% of federal income taxes, so in terms of dollars we could probably get rid of federal income taxes for the bottom 90% without too much trouble.

Of course, the bottom 90% pays most of the FICA taxes. But it's kind of illusory to say that's different from what the system was like in the 1920's and 1930's. The first Social Security check wasn't cut until 1940, and Medicare didn't exist until the 1960's. Prior to that the bottom 90% paid for old age and disabled care directly by supporting their elderly parents or disabled family members directly instead of indirectly funding social security and medicare. A lot of the "growth" in government tax burden is those programs moving what was previously a household economy onto the government ledger.

And note that the article talks about federal tax receipts, not state taxes. Direct state tax burden isn't all that different from what it was in the 1930's: http://taxfoundation.org/sites/taxfoundation.org/files/docs/.... And I assure you state property tax collectors were not on the honor system even back then.

It's really interesting to look at where the money goes. Total federal + state spending was about 10% of GDP in 1930. It's now almost 35% of GDP. That's almost entirely attributable to two things: defense spending (3-5% of GDP) and transfer payments (20% of GDP): http://fortune.com/2012/08/27/wheres-all-that-government-spe.... In other words, almost all of the increase is government programs to move money around in the economy.

Voluntary compliance is still the guiding principle of income tax collection. Basically 80/20. The optimal strategy is to target a portion of non-compliant taxpayers to keep public perception of tax collection intact.

Keep in mind that government expenditure and revenue sources were very different in those days.

There are certain states whose employees are exempt from FICA. This makes for some interesting double-dipping case studies cf. http://www.governing.com/columns/public-money/FICA-free-lunc...

This is somewhat misleading: It's not exempt statewide for all employees in those locales, only for certain employees like teachers and firefighters who are paying into alternate pension systems.

The headline number is 6MM people aren't paying in, but the combined population of those states is almost 112MM and the total population is 319MM. It's a substantial number, I suppose, but not like 30% of the workforce.

The IRS is currently being under-funded to a degree that that we are not spending much on hunting down tax-evaders http://www.washingtonpost.com/blogs/federal-eye/wp/2015/06/1...

> The system was based on what the irs called “self-assessment,”

That's how it currently works in Japan, essentially.

Same in Australia. They audit you if something looks off (and there are big fines if you intentionally mislead the tax office), but generally they just accept your assessment as true and correct.

https://www.ato.gov.au/General/How-we-check-compliance/Self-...

Yup, Canada too.

In the UK the PAYE (pay as you earn) system means most employed people don't even have to file returns, but for those making fancy income or who are self-employed, the form is literally called the self-assessment form to file your tax owings.

Income tax was not the major source of federal revenue back then though, most of the revenue came from duties, good taxes, and so on.

Or is government too far down the path of ineffective sidetracks?

There's two sides to the equation. Both have probably gone too far.

It's amazing to think that there was once a time in US history when the government could sustain itself through the honesty and goodwill of the richest 10% of its citizens

Honesty and goodwill? I'm guessing there was rampant under reporting of income back then.

And yet the US government still managed to get by, and the US grew rapidly to become the richest and most powerful country on the planet.

It's interesting how this article conflicts the narrative (and indeed, Fitzgerald's own narrative) about his life. The narrative was that they lived fabulously until the simultaneous stresses of the the stock market crash and Zelda's mental breakdown in 1929. Turns out that at least from an income perspective, he was doing quite well up until the moment he died. But Zelda's healthcare costs ruined him anyway, and he cognitively backed himself in a corner in terms of making adjustments.

It reminds me of a quote from another famous author, one Charles Dickens:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

He gave that line to Mr. Micawber and of course was intimately acquainted with poverty, but by the time Dickens wrote that he was as rich as a 19th century rock star. Indeed he made piles of money by touring—writers used to moonlight as performing artists. Once movies came out, that dried up, so they wrote screenplays instead, like Fitzgerald.

Ending with (non-adjusted)$35,000 in the bank is hardly "ruined".

Remarkable to think that in those days one could become so wealthy off short stories, of all things. Business models keep changing, in literature as elsewhere.

To me, the most fascinating thing about this story is the starkly different picture it paints of wealth in America. We're currently debating how much of a middle class there even IS anymore, and they're talking about how upper-middle class families had servants.

There's a lot going into the difference, for sure, but its quite a different world.

That's the wrong takeaway from that point. It's a good thing that upper middle class people today can't afford to have lower class people do domestic services for them. It's an indication that lower class people can make a lot more money doing non-domestic work.

Although the task rabbit economy is pushing us back in that (wrong) direction.

It's actually an indication that lower class people can consume quite a bit regardless of whether they work. It's hardly clear that this is a good thing.

http://www.bls.gov/cex/2011/Standard/income.pdf

It's hardly clear how task rabbit is pushing is in that "wrong" direction - it's not as if task rabbit has somehow eliminated other good options (such as not working and receiving wealth transfers, or perhaps those unsustainably overpaid factory jobs politicians like to talk about).

TaskRabbit is pushing things in the wrong direction because people should work together for institutions, not work for other people as personal servants. That's not how you build an equal society.

You'll notice I wasn't passing judgement, merely noting the WOW factor. As I said, there's a lot going into that difference but it is quite stark nonetheless.

The same developments are happening as we speak in places like South America. The Economist runs enlightening articles about this. (A collection available via https://www.google.com.au/search?q=economist+domestic+servan...)

> It's a good thing that upper middle class people today can't afford to have lower class people do domestic services for them. It's an indication that lower class people can make a lot more money doing non-domestic work.

Not necessarily. Many lower-class people are unemployed.

It may also be an indication that lower-class people are getting lower in, well, class. Many, many rich people would be happy to employ in-home servants for some reasonable wage (say, more than minimum) but the days when you could get servants who knew how to dress, speak, et cetera properly around upper-class people are long gone. Culture has bifurcated, the lower class have no idea how to behave around polite society, and more problematically don't think it's worth trying.

It's much better to be a butler (or even a footman) than a janitor at McDonald's, but the average McDonald's janitor isn't someone you'd want inside your house.

What I don't understand is how in the US in the 1920s the tax rate was in the single digits while deficit was negative (!) and debt was low [1], while today tax rates are at 40%, deficit is about 17% (!) of budget and debt is over 100% GDP. What on earth went wrong?

[1] http://www.usgovernmentspending.com/debt_deficit_brief.php

Keep in mind that the article compares Fitzgerald's effective rate (5.5%) to the equivalent marginal bracket (40%) today. If you are in a higher tax bracket you don't pay that rate on all of your income. I'm not too familiar with US federal and state taxes and other deductions, but I would bet the effective rate for someone in the 40% bracket is closer to 30% (similarly to Canada and the UK).

"What on earth went wrong?"

Immediately thereafter? The Great Depression.

Well that one wouldn't have lasted until today, would it?

The govt. began to care for people that had previously been cared for by family members or religious groups. This includes the very poor, the elderly, the disabled, etc. That makes the bulk of it.

In exchange for votes from such people. Before, many of those people were disenfranchised.

Family system used to take care of elderly and the disabled, which ultimately meant housewives were supposed to do that, unless you could afford a caretaker (which was socially frowned upon in middle class).

Then women got voting power and family system broke down, replaced by social structure. In a way today's capitalist Europe is closer to what Marx suggested than USSR.

Enormous military spending makes up the bulk that is not (at least theoretically) paid for by the SS trust fund.

Military spending is only 3-5% of GDP while total government spending has gone up from 10% of GDP to over 35%. The vast majority of the increase is not military spending.

Sorry, my comment was too oblique.

My points were two.

First, a whole lot of things have happened since, to the point that the environment we're operating in now is quite substantially different.

Second, the shallow numbers may mislead in trying to determine what's better - maybe something went right. Higher spending is only bad if we're not getting value for it.

Mostly, it boils down to "you're not going to get very far analyzing it at this level."

We can make a list of things that happened around those years...

Women's suffrage in the USA was in 1920, wasn't it? :-p

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