From 2% to 40%: The Rise of American Tax State Expansion

Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.”

What Franklin couldn’t have imagined was an America where the tax collector reaches into your pocket before you wake up, follows you to the gas station, the grocery store, the DMV, and even into your home while you sleep.

The revolution that birthed this nation was fought over far less.

The 2% That Started a War

Here’s something most Americans don’t know: the colonists who dumped tea into Boston Harbor were among the lowest-taxed citizens in the British Empire.

Tax rates in the American colonies averaged around 1–2% of income. The British motherland? Closer to 20%. The colonists weren’t rebelling against crushing taxation — they were rebelling against the principle of taxation without representation.

The Stamp Act of 1765 added a tax on legal documents and newspapers. The Townshend Acts of 1767 taxed 72 items including tea. These weren’t punitive — they were modest attempts by Britain to recoup costs from the French and Indian War.

And yet, Patrick Henry stood in the Virginia House of Burgesses and declared it tyranny.

James Madison later wrote: “A just security to property is not afforded by that government, under which unequal taxes oppress one species of property and reward another.”

The founders viewed property rights as sacred. Taxation was a necessary evil to be minimized, not a tool for social engineering or wealth redistribution. They created a nation with no income tax, no property tax at the federal level, and tariffs as the primary revenue source.

That America no longer exists.

From Zero to Everywhere: The Evolution of American Taxation

For the first 124 years of American history, there was no permanent federal income tax.

Let that sink in.

The Revenue Act of 1862 introduced the first federal income tax to fund the Civil War — and it was repealed a decade later. When Congress tried again in 1894, the Supreme Court struck it down as unconstitutional.

Then came 1913.

The 16th Amendment changed everything. It granted Congress the power “to lay and collect taxes on incomes, from whatever source derived.” The initial rate was 1% on incomes above $3,000 (about $93,000 today), with a top rate of 7% on incomes exceeding $500,000.

Politicians promised it would only ever affect the wealthy.

Sound familiar?

Within 30 years, the top marginal rate hit 94%. Today, the federal government collects over $2.1 trillion annually in individual income taxes alone. Add payroll taxes, corporate taxes, estate taxes, and excise taxes, and you′re looking at federal revenues approaching $5 trillion.

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Fun Fact: The Federal Government still spends over $8 trillion annually borrowing the rest.

But federal taxes are just the beginning.

The Tax Avalanche: What Americans Actually Pay

Most people know their income tax rate. Few understand their total tax burden. Let me walk you through what a typical American family earning $100,000 actually pays — directly and indirectly — to various levels of government.

Federal income tax: Approximately $8,000–12,000 depending on deductions and filing status. That’s your headline number — the one everyone focuses on.

Payroll taxes: Another 7.65% ($7,650) comes out for Social Security and Medicare. Your employer pays a matching amount, which economists universally agree comes out of wages you would otherwise receive. That’s effectively 15.3% for “insurance” programs with questionable long-term solvency.

State income tax: Varies wildly. California takes up to 13.3%. Texas takes zero. A Californian earning $100,000 pays roughly $6,000 in state income tax. A Texan pays nothing.

Property tax: The national average is around 1.1% of home value, but this masks enormous variation. The median U.S. home price is approximately $420,000. That′s $4,600 annually. In New Jersey, effective rates exceed 2.2% — over $9,000 on that same home. In Texas, where there′s no income tax, property taxes run 1.6−2.5%, so a $420,000 home costs $7,000–$10,000 annually in property taxes alone.

Sales tax: Average around 6–7% nationally, reaching 10%+ in some jurisdictions. On $60,000 of annual taxable spending, that′s $3,600–$6,000.

Vehicle taxes and fees: Registration, title fees, personal property tax on vehicles, emissions testing. Depending on your state and vehicle, $500–$2,000 annually.

Gas taxes: Federal (18.4 cents/gallon) plus state (averaging 31 cents/gallon). Drive 15,000 miles at 25 mpg and you’re paying roughly $300 in fuel taxes alone.

Utility surcharges: Your electric, gas, and water bills include various taxes and surcharges — typically 10–15% of the bill. That’s another $300–$500 annually for the average household.

Telecommunications taxes: Phone and internet bills carry federal, state, and local taxes often exceeding 15% of the base rate.

Sin taxes: Alcohol, tobacco, gambling — all heavily taxed.

Hotel and rental car taxes: Travel anywhere and watch taxes add 15–25% to your bill.

Tolls: Depending on your commute and location, hundreds to thousands annually.

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Add it all up for a family earning $100,000, and you′re looking at somewhere between $30,000 and $45,000 in direct taxation, that’s 30–45% of gross income before you’ve bought a single thing.

But we’re not done.

The Invisible Tax: Corporate Pass-Through

Corporations don’t pay taxes. People do.

This isn’t ideology — it’s economics. Multiple studies confirm that 30–65% of corporate taxes are passed through to consumers in higher prices. The remainder comes from reduced wages and lower returns to shareholders (which includes your 401(k) and pension).

When politicians propose raising corporate taxes, they’re proposing a hidden consumption tax on everyone who buys products from those companies.

The same applies to tariffs, which are simply taxes on imports paid by American consumers and businesses.

Every product you buy has embedded taxation throughout its supply chain — from raw materials extraction to manufacturing to transportation to retail. These invisible taxes are impossible to calculate precisely, but they’re very real.

My estimate? Another 5–10% of your purchasing power vanishes into this hidden tax ecosystem.

California vs. Texas: A Tale of Two Tax Philosophies

The contrast between America’s two largest states illustrates the tax trap perfectly. A family earning $150,000 with a $500,000 home:

In California:

• State income tax: ~$9,500

• Property tax: ~$5,500 (1.1% average)

• Sales tax: ~$4,500 (7.25%+ on spending)

• Vehicle fees: ~$500

• Gas tax: ~$400 (highest in nation at 68 cents/gallon)

• State/local total: ~$20,400

In Texas:

• State income tax: $0

• Property tax: ~$10,000–12,500 (2–2.5%)

• Sales tax: ~$4,000 (6.25% state + local)

• Vehicle fees: ~$300

• Gas tax: ~$200 (20 cents/gallon)

• State/local total: ~$15,000–$17,000

Texas wins, right? Barely.

The dirty secret is that even in “low tax” Texas, a family earning $150,000 still surrenders over $15,000 to state and local governments — on top of $25,000+ to the federal government.

Pair this with Federal Taxes and that’s $40,000 minimum. Before groceries. Before gas. Before anything.

Author’s Note: This does not include any consideration for the proposed California wealth tax, which drastically changes this math. In addition, factor in onerous regulations and the business environments and the gap widens considerably in Texas’ favor.

The Property Tax Crisis

Here’s what’s making the American Dream impossible: property taxes are outpacing inflation and wage growth.

According to recent data, property taxes rose an average of 10.4% nationally between 2021 and 2023 alone. In eleven states, the increase exceeded 15%. Meanwhile, wage growth averaged 4–5% annually during that period.

This isn’t a one-time adjustment. Property tax increases have consistently outpaced inflation for decades.

The result? Homeownership increasingly means being “house poor.” You scrape together a down payment, qualify for a mortgage, and then discover that property taxes alone cost $500–1,000 per month — forever. Unlike a mortgage, property taxes never get paid off. They only go up.

For retirees on fixed incomes, rising property taxes can force them from homes they’ve owned for decades. The uncomfortable fact is that you never truly own your property but rather you rent it from the government.

Jefferson wrote: “The true foundation of republican government is the equal right of every citizen in his person and property.”

How equal is that right when the government can price you out of your own home?

When the System Bleeds: Fraud, Waste, and Abuse

If taxation is the price of civilization, Americans deserve to know what they’re buying.

Consider Minnesota.

The Feeding Our Future scandal has become a symbol of government dysfunction. Over $250 million in federal COVID-era nutrition funds were stolen through fraudulent claims — fake meal counts, phantom feeding sites, falsified invoices. Seventy-five people have been charged. Over fifty have pleaded guilty or been convicted.

But Feeding Our Future is just one small piece of Minnesota’s fraud epidemic.

Housing stabilization programs meant to cost $2.6 million annually ballooned to over $100 million — with much of it siphoned off by fake providers submitting false Medicaid claims. Autism services saw similar schemes. The state’s daycare system faces ongoing investigation.

Total estimated fraud across Minnesota’s social programs? Over $9 billion.

That’s not a typo. Nine billion dollars — from a single state.

Defendants spent the money on luxury cars, property, and travel. Millions were wired overseas to China and Kenya and Somalia. The FBI director called it “just the tip of a very large iceberg.”

Meanwhile, Governor Tim Walz, who oversaw these programs, dropped his 2026 reelection bid as scrutiny intensified.

This is what happens when government grows beyond accountability. Money flows in but oversight doesn’t scale. Unfortunately, the fraud isn’t the exception, it’s the predictable result of a system too large to monitor.

And taxpayers foot the bill twice: once for the programs, and again for the stolen funds that provided zero public benefit.

The Wealth Tax Mirage

With federal debt exceeding $36 trillion and annual deficits approaching $2 trillion, politicians increasingly eye a new revenue source: wealth taxes.

Europe has experimented with this approach for decades. The results aren’t encouraging.

Most European nations have abandoned wealth taxes. France repealed its wealth tax in 2017 after watching capital and entrepreneurs flee to friendlier jurisdictions. Today, only Norway, Spain, and Switzerland maintain variations of net wealth taxation — and all face ongoing debates about their effectiveness.

The Netherlands just passed it and California is charging ahead.

The proposed 2026 Billionaire Tax Act would impose a one-time 5% tax on Californians with net worth exceeding $1 billion.

The tax bases calculations on voting control rather than economic ownership. This means founders who control companies but own small equity stakes face absurd effective rates. According to Tax Foundation analysis, DoorDash’s Tony Xu would face an effective rate of 173% — paying $1.73 in tax for every dollar of actual wealth.

The proposal also taxes unrealized gains — wealth that exists only on paper and could evaporate in a market downturn.

The predictable result? Billionaires, like Mark Zuckerberg, leave California taking their companies, jobs, and charitable giving with them. Those who remain will be forced to liquidate holdings to pay taxes, potentially cratering stock prices that affect millions of ordinary retirement accounts.

Wealth taxes fail because wealth is mobile. Tax it too aggressively, and it simply moves.

But here’s the deeper issue: wealth taxes are proposed as solutions to spending problems. California isn’t broke because billionaires pay too little. It’s broke because it spends too much.

The Unsustainable Trajectory

Let’s talk about the elephant in the room.

Federal spending has completely disconnected from federal revenue. The U.S. government collects approximately $5 trillion annually ands pends nearly $7 trillion. The difference — roughly $2 trillion per year — gets added to the national debt.

Interest payments on that debt now exceed $1 trillion annually. More than defense. More than Medicare. And rising.

This isn’t sustainable.

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Yet the political response is always the same: find someone else to tax. The wealthy. Corporations. Billionaires. Anyone but the actual source of the problem; spending that grows faster than any possible revenue base.

IRS data shows the top 1% already pays 40% of all federal income taxes while earning 22% of income. The top 10% pays 72%. The bottom 50% pays just 3%.

The American tax system is already highly progressive. The problem isn’t who pays — it’s how much gets spent.

Benjamin Franklin warned: “When the people find that they can vote themselves money, that will herald the end of the republic.”

We’re not there yet. But we can see it from here.

What Would the Founders Say?

I think often about what the men who risked everything for independence would make of modern America.

They rebelled against a 2% tax burden and created a nation with no income tax, no payroll tax, and no property tax at the federal level. They believed property rights were natural rights, endowed by the Creator, not granted by government.

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Today, an American earning $100,000 surrenders 40% or more to various levels of government. Property ownership comes with permanent rent to the state. Every transaction, every gallon of gas, every hotel stay, every phone call carries a tax.

The average American works from January until mid-May just to pay taxes — longer than medieval serfs worked for their lords.

Madison wrote that government’s purpose was to protect property “of every sort.” Instead, government has become the greatest threat to property accumulation for middle-class Americans.

The founders weren’t anti-tax. They understood that government requires funding. But they were deeply suspicious of government’s tendency to grow, to reach, to consume.

Jefferson captured it perfectly: “The natural progress of things is for liberty to yield and government to gain ground.”

Two hundred and fifty years later, he was sure right.

The Path Forward

I’m not naive enough to propose abolishing all taxes. Modern society requires infrastructure, defense, courts, and basic services.

But I am suggesting we’ve lost the plot.

The tax burden on American families has grown relentlessly for a century. Every new program requires new revenue. Every crisis becomes a permanent expansion. Every “temporary” tax becomes permanent.

Meanwhile, the political class responds to every shortfall by finding new people to tax rather than questioning what government should actually do.

The middle class gets squeezed from every direction. Income taxes claim their earnings. Property taxes price them out of homes. Sales taxes take a cut of everything they buy. And let’s not forget, inflation, the stealth tax that continually erodes their savings.

And when fraud consumes billions? When programs fail? When waste becomes endemic?

The solution is always more taxes.

It’s worth asking whether the founders would recognize the system we live with today. Not because taxes exist, but because Americans have accepted a level of taxation and government control they would likely have found unimaginable.

They fought a revolution over less. They created the freest, most prosperous nation in history by limiting government’s reach.

Maybe it’s time we remember that.

Thank you for reading.

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Disclaimer: This content is for informational and educational purposes only and should not be considered financial, investment, or trading advice. The views expressed are based on publicly available information and personal opinion at the time of writing. Markets and conditions may change. Always perform your own research, verify data independently, and consult with a licensed financial advisor or investment professional before making investment decisions. The author may hold positions in the securities or assets discussed.