History of the Income Tax in the United States

Discussion in 'Wall St. News' started by nitro, Nov 6, 2008.

  1. nitro


    Source: Tax Foundation.

    The nation had few taxes in its early history. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. The high cost of the War of 1812 brought about the nation's first sales taxes on gold, silverware, jewelry, and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods to provide sufficient funds for running the government.

    In 1862, in order to support the Civil War effort, Congress enacted the nation's first income tax law. It was a forerunner of our modern income tax in that it was based on the principles of graduated, or progressive, taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%. Those with incomes of more than $10,000 paid taxes at a higher rate. Additional sales and excise taxes were added, and an “inheritance” tax also made its debut. In 1866, internal revenue collections reached their highest point in the nation's 90-year history—more than $310 million, an amount not reached again until 1911.

    The Act of 1862 established the office of Commissioner of Internal Revenue. The Commissioner was given the power to assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and income and through prosecution. The powers and authority remain very much the same today.

    In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. It had a short-lived revival in 1894 and 1895. In the latter year, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

    In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. With the advent of World War II, employment increased, as did tax collections—to $7.3 billion. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.

    In 1981, Congress enacted the largest tax cut in U.S. history, approximately $750 billion over six years. The tax reduction, however, was partially offset by two tax acts, in 1982 and 1984, that attempted to raise approximately $265 billion.

    On Oct. 22, 1986, President Reagan signed into law the Tax Reform Act of 1986, one of the most far-reaching reforms of the United States tax system since the adoption of the income tax. The top tax rate on individual income was lowered from 50% to 28%, the lowest it had been since 1916. Tax preferences were eliminated to make up most of the revenue. In an attempt to remain revenue neutral, the act called for a $120 billion increase in business taxation and a corresponding decrease in individual taxation over a five-year period.

    Following what seemed to be a yearly tradition of new tax acts that began in 1986, the Revenue Reconciliation Act of 1990 was signed into law on Nov. 5, 1990. As with the '87, '88, and '89 acts, the 1990 act, while providing a number of substantive provisions, was small in comparison with the 1986 act. The emphasis of the 1990 act was increased taxes on the wealthy.

    On Aug. 10, 1993, President Clinton signed the Revenue Reconciliation Act of 1993 into law. The act's purpose was to reduce by approximately $496 billion the federal deficit that would otherwise accumulate in fiscal years 1994 through 1998. In 1997, Clinton signed another tax act. The act, which cut taxes by $152 billion, included a cut in capital-gains tax for individuals, a $500 per child tax credit, and tax incentives for education.

    President George W. Bush signed a series of tax cuts into law. The largest was the Economic Growth and Tax Relief Reconciliation Act of 2001. It was estimated to save taxpayers $1.3 trillion over ten years, making it the third largest tax cut since World War II. The Bush tax cut created a new lowest rate, 10% for the first several thousand dollars earned. It also established a slow schedule of incremental tax cuts that would eventually double the child tax credit from $500 to $1,000, adjust brackets so that middle-income couples owed the same tax as comparable singles, cut the top four tax rates (28% to 25%; 31% to 28%; 36% to 33%; and 39.6% to 35%).

    The Jobs and Growth Tax Relief and Reconciliation Act of 2003 accelerated the tax rate cuts that had been enacted in 2001, and temporarily reduced the tax rate on capital gains and dividends to 15%. In 2004, the U.S. was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization. Along with that tax hike, Congress passed a cornucopia of tax breaks, which for individuals included an option to deduct the payment of whichever state taxes were higher, sales or income taxes.

    Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.


  2. nitro


    Note that a progressive tax has existed in this country almost from the very beginning. This is nothing new.

  3. nitro


    Here is my expectations from the Obama team:

    1) Let the Bush tax cuts expire.
    2) Raise capital gains tax to something like 25% to 28%.
    3) Raise taxes on people that make $300k+ [move it up a little bit from $250k].
    4) Cut taxes on the others.

    In spirit, very close to what Clinton did, and was advised to do by Rubin [read his memoirs].

  4. We shall see.

    The Bush tax cuts combined reasonable measures, such as cutting the estate tax, with some unproductive ones. The dividend rate cut was economically rational but probably not a great idea, politically or financially.

    Raising cap gains rates is economically counterproductive and basically an exercise in vindictiveness. Ditto raising marginal rates.

    There is a "fairness" issue out there however, and it concerns executive compensation. Plenty of people, myself among them, are outraged over the level of CEO compensation. It represents an enormous failure of corporate governance. The SEC should have dealt with it but didn't. Perhaps Obama's SEC appointees can get a handle on it, but I'm not very optimistic. There are too many conflicts of interest.

    Please, no lectures on how desperately important it is to incentivize these incredible leaders. If Joe Sixpack can get his sorry ass out of bed in the mroning to work on the factory floor, the friggin' CEO should be able to do the same. Leadership by example is the most effective. Also, can we dispense with the argument about how "that's the market" and you have to offer these packages to get the "right" CEO. Would Home Depot really have been that much worse off if they didn't snag Bob $200 mill Nardelli? Would Fannie Mae have done worse if Obama pal Franklin Raines didn't take down 90 mill?

    I don't have a problem with imposing a punitive rate, and by that I mean something really high, on executive compensation above some arbitrary figure. It wouldn't bother me all that much if it applied to entertainers and pro athletes as well. Myabe a 50% marginal rate on ordinary income in excess of $10 mill a year and a 75% rate on over $20mill.

    As long as we are going to enshrine class envy and hate the rich as national policies, I see no reason we all can't play along. This is my proposal.
  5. yea, and by almost, i guess you mean about 100 years later... and then only for about 6 years before people came to their senses and smashed it again, even voting it unconstitutional. did you even read the article you posted?
  6. Thank you for posting this.

    Regarding tax rates that used to make people upset, the Boston Tea Party was a revolt over a tax rate of 2%. Today we pay 50% of our income to various taxes. And we just take it. Ron Paul was right.

    I take exception to your summary of 1913, however. The IRS was given no new power to tax employees. It is only through case law, that is, decision patterns of judges, that the IRS has any power to tax employees. Even today, there is no law that requires employees to pay income tax.
  7. I agree that a guy like Kenneth Griffin, who bagged a cool billion in 2006-07 is ridiculous when he told Congress that if he didn't get carried interest tax treatment (15% tax rate on his earnings as opposed to straight income) that he wouldn't work as hard.

    However, taxes at rates so high as to be confiscatory, anything beyond 40% in my opinion, are destructive and counterproductive. If someone earns 20 million, then he should not forfeit a majority of his earnings to the Treasury. Punitive taxation promotes tax evasion strategies, many illegal, many openly illegal. People cheat. Reasonable taxation encourages compliance.
  8. BSAM


    Think of the millions who, for so many years, have gone thru the agony of dealing with the IRS every year.

    It's all unnecessary.

  9. Who are you (or the government) to decide what is a fair salary and what is not? You don't like what a CEO makes, don't buy his stock or his product.

    In addition, you know very well that the progressive income tax system is incompatible with the Constitution, as originally written, and with the intentions of the founders. Why would you propose measures to further increase the size of the government?
  10. True. But those with the power to jail you say it is. Lots of tax protesters in jail. They're right, but they're not free.
    #10     Nov 6, 2008