Happy 100th Birthday to the Income Tax!

October 4, 2013 — Leave a comment

The Treasury Department will likely collect around $4.9 trillion from income and payroll taxes in 2014. That’s a huge jump from the $5.4 billion collected in 1920 and the $43 billion in 1945.

Income Tax 100th BirthdayYou probably circle April 15, the yearly filing day, to remember about taxes. It’s funny though because most people probably do not circle today, October 4: the actual birthday for the federal income tax. Today also happens to be its 100th birthday!

The 100th birthday celebration comes with a little caveat. Historians will often argue about the true origin of this particular tax, since taxes go back to the very creation of our country.

From 1791-1802, the government’s main tax revenue came from taxing liquor, sugar, property, and tobacco. To pay off the costs of the War of 1812, Congress created a tax on gold, silverware, jewelry, and watches. However in 1817, Congress removed all taxes and solely relied on imported goods’ tariffs for revenue.

Many historians will point to 1862 as the original birthday of the income tax. In order to fund the Civil War, Congress enacted the first income tax, and at this time, “anyone making between $300 to $10,000 a year paid a rate of 3 percent.” With the creation of this income tax, the Internal Revenue Service was also born.

However, In February 1913, the country adopted the 16th Amendment, and this gave Congress the legal right to enforce an income tax. On the evening of October 3 of the same year, President Woodrow Wilson signed the Revenue Act of 1913, which allowed for the collection of a federal income tax. This collection was to begin the next day: October 4.

Today, most people do not have a friendly view on taxes but Ajay Mehrotra, a history professor at Indiana University, points out that this was not always the case.

“Taxes in the post-World War II era were very high at a 70 to 80 percent rate in some cases, and people were more or less willing to pay them. But our overall prosperity started to decline in the 1960s and ’70s, and people wanted to start paying less in taxes,” he said.

Professor Mehrotra notes that people are not as supportive of the government as they used to be because the economy has significantly transformed, and there has been a loss of faith in the public sector over the years due to Watergate and the Vietnam War to name a few instances.

Courtesy of TurboTax, here is an infographic with a more detailed history of taxes and in particular, the federal income tax.

The tax system has changed considerably since its inception, but we will highlight some of the most important changes. In 1943, the withholding tax on wages was introduced for the first time. 1981 marked the year that Congress passed the largest tax cut in American history, $750 billion in cuts over six years.

Considered the biggest tax reform since the creation of the 16th amendment, the Tax Reform Act of 1986 allowed for the top tax rate on individual income to be lowered from 50 percent to 28 percent.

Furthermore, President George W. Bush signed several tax cuts in 2001: the third-largest tax cut since World War II.

To bring us up-to-date, President Obama’s tax bill for 2013 maintained some of the Bush tax cuts, but it raised the levels for higher incomes, which President Bush had reduced during his presidency.

The current president has also restored the full amount of the payroll tax (6.3 percent), and to help fund the Affordable Care Act, he has raised the rates on capital gains. Similarly, he has created a 3.8 percent surtax for single people who have incomes of $200,000 or more.

Leading up to the government shutdown, many have called for continued reform to the tax system. Some suggest that we create a flat tax or end some tax deductions. The thinking behind these two measures is that it would reduce the complexity and burden of the current system with a fair tax.

“We need taxation for progressive spending, but one thing that would be helpful is if we stopped trying to run every social policy through the IRS,” Professor Ahotra added.

A constant theme through the evolution of the tax system is that everyone has a special interest they want to protect, and this will be the primary reason tax reform will not be easy.

Related articles

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.

No Comments

Be the first to start the conversation!

Add your $0.02

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s