Thursday, January 15, 2015

A history of taxes in the United States, part 1.

We often complain about taxes, but we all agree they’re necessary. Most of us think someone else should be paying more in taxes, yet we all try to pay as little as possible. And Benjamin Franklin put it best when he said: “In this world, nothing can be said to be certain, except death and taxes.”

The current obligation to pay the IRS come April 15 (or on the 16th) is all-too familiar, but questions remain: how did taxes start in the this country; have the tax codes always been the same; and are we paying more or less than most U.S. citizens in throughout our history? We’ll answer these questions and more with the history of taxation in the U.S.

Taxes and the Revolutionary War.
Of course it was unfair taxation without representation that led to the American Revolution in 1773 and the birth of the United States. To raise money, the newly forming government collected tariffs and duties on liquor, tobaccos, sugar, legal documents, and other goods and services.

Oldest U.S. tax.
As our new country formed, the leaders were very careful not to start imposing too many taxes for fear of mirroring the British system they just rebelled against. In fact, direct taxation was Constitutionally prevented. But they did institute an estate tax in 1797, but was repealed and reinstituted over the years as the young nation tried to raise funds for wartime.

Whiskey Rebellion.
In 1791, Alexander Hamilton proposed a tax on all alcohol. Needless to say this was massively unpopular, and lead to the Whiskey Rebellion in Pennsylvania.

First property tax.
With the war against France in 1790, the new U.S. government raised money by implementing the first property tax.

Early taxes.
From 1791 to 1802, the government limited taxation as much as possible. Of course that’s hard to do when you need to run a nation, so they imposed internal taxes on distilled spirits, carriages, refined sugar, tobacco, snuff, property sold at auctions, corporate bonds, and slaves.

War of 1812.
Previous methods of levying and collecting taxes through property to fund wars were inefficient, so to fund the War of 1812, the government looked for higher duties and excise taxes, instead. Those included taxing gold, silverware, jewelry, and watches, among other items and services.

The Civil War.
The internal war that ripped our country in half was also disastrous economically, basically a war of economic attrition. Both sides incurred massive amounts of debt and scrambled to raise funds for the war effort without seeing their currency become worthless through super inflation. Congress passed the Revenue Act of 1861, a tax levied against those who made more than $800 yearly income. That tax was not rescinded until 1872.

The Revenue Act also created the office of Commissioner of Internal Revenue and beloved Internal Revenue Service. They were given the right to assess, levy, and collect taxes, as well as enforce tax laws through property seizure and prosecution. This was the predecessor to our modern tax system, as it was based on the principles of graduated or progressive taxation and withholding income.

During the Civil War, if someone made $600 to $10,000 a year they paid taxes at a 3% rate. In 1866, the IRS collected $310 million, the most in its young history and a tax mark that wouldn’t be reached again until 1911.

Taxes were unconstitutional?
Interestingly enough, the Constitution still forbade any direct taxation of its citizens that wasn’t levied in proportion to each state’s population. But the Wilson-Gorman Tariff Act in 1894 did just that with a flat tax. The Supreme Court found it unconstitutional in 1895.

The 16th Amendment.
In 1913, the 16th Amendment removed the “proportional to state’s population” clause from the Constitution (or managed to override it). That allowed renewed tax initiatives like an income tax on people who made more than $3,000 a year, although this was less than 1% of the population.

In a fascinating twist, the term “lawful income” in the Amendment was changed to just “income” in 1916, because of course criminals weren’t off the hook from paying taxes. This opened the door for Al Capone and others organized crime figures to later be convicted on tax evasion charges.

World War I.
Among three Revenue Acts to pay for the Great War in Europe, a federal income tax was implemented in 1913. The income tax progressed as income rose: 1% up to $20,000 income, 2% from 20k-50k, 3% from 50k-75k, 4% from 75k-100k, 5% on 100k-250k, and 6% on 250k-500k, and 7% for those who made $500,000 or more.

There was no filing status yet, so everyone paid the same based on income, no matter if they were single, married filing jointly, heads of household, etc. At this time, 5% of Americans were paying taxes, which was the highest in their history. World War I’s Revenue Acts also introduced new estate taxes and taxation of excessive business profits, the first backlash against the robber baron corporations that were starting to form.

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