A history of taxes in the United States, part 2: Post World War I and later

As we inch closer to April 15, we can’t help but have taxes on the mind. While some are looking forward to a refund check, many others lament the day they have to turn over their hard earned money to the government. But we all have to pay taxes, even if we don’t think our system is particularly fair. But was our tax system always like this? In part one of this blog, we looked at a timeline of taxes in the early history of the United States. Today we’ll outline the modern history of taxation, starting with the end of World War I. Maybe after reading this you’ll have a new perspective and appreciation for the amount you have to pay!

Post World War I

Right after World War I, the U.S. economy experienced a huge surge, and the government saw record levels of tax revenue come into its coffers. In 1918, the last year of the war, government tax receipts reached $3.6 billion. But by 1920, those receipts reached $6.6 billion, despite the fact that taxes rates had been lowered after the war.

Sales Tax

Sales taxes were first introduced in the United States, starting with West Virginia in 1921. By 1933, 11 more states added sales tax, and 18 more by 1940. As of 2010, Alaska, Delaware, Montana, New Hampshire and Oregon were the only states without sales tax.

The Great Depression

The salad days of a booming economy were ended with the historic stock market crash of 1929. In the ensuing months and years, government tax receipts fell accordingly, to a paltry $1.9 billion by 1932.

That same year, President Herbert Hoover signed the Revenue Act to try and lift the country from the brink of collapse, and generating more tax revenue was a big part of that. Between Hoover and President Franklin Roosevelt’s New Deal, taxes were increased across the board to make up for a heavy deficit to fund government programs. In 1936 the top tax rate was 76%!

Social Security

In 1935, President Franklin Roosevelt signed the Social Security Act, which set up the system of social security, among other things. Social security taxes were first collected in January of 1937, and the first benefits were paid out in 1940.

World War II

By 1940 the U.S. was preparing war once again and supporting its allies, and taxes were ramped up accordingly. Income tax rates were 23% for citizens who made $500 or more, and those rates climbed all the way up to 94% for the richest Americans. By 1945, 43 million Americans paid taxes every year and the government collected $45 billion, up from only $9 billion in 1941.

Post War

After the war ended, the Revenue Act of 1945 scaled taxes back by $6 billion, but the government couldn’t bring them lower because of the big payouts into social security and other expanded programs.

The Pricey ‘50s

Even as the war ended and the country saw great prosperity, the withholding system of pay-as-you-go and high tax rates continued. The highest tax rates were still over 80% and a lot of wartime tax codes were never repealed.

Inflation in the 60’s and 70s

The U.S. saw incredible inflation during the decades of the 1960s and 70s, with the deficit growing as Medicare was added to the burdensome social security system. Even President Nixon was forced to pay more than $400,000 in back taxes!

Reaganomics takes on taxes

President Reagan brought the Economic Recovery Tax Act to life in 1981, lowering every individual tax bracket by 25% The Act also changed the method companies used for accounting for their taxes. By 1985, more than 400,000 Americans were millionaires because of the tax cuts under Reaganomics.

But President Reagan wasn’t done, signing the Tax Reform Act in 1986, which lowered the tax rate among the richest payers from 50% to 28%, which was the lowest it had been since 1916.

The Clinton Era

Democratic President Bill Clinton in office signaled the end of tax reductions during the 1980s. Starting in 1993 taxes generally were increased, and in 1997 the negative income tax was introduced, which awarded tax credits for some people.

Bushanomics?

A Republican in the executive office once again meant more tax cuts. Starting in 2001 with the Economic Growth and Tax Relief Reconciliation Act, Bush’s cuts reversed Clinton’s increases, except for continuing growth in tax credits. The new tax act was expected to save taxpayers $1.3 trillion over the next decade, making it one of the largest tax cuts since World War II.

How are we now?

By 2009, tax rates had risen significantly once again, with a top marginal rate of 35%. The Tax Foundation calculated that U.S. citizens had to work all the way through April 11 every year just to pay their taxes.  That day became known as Tax Freedom Day, conspicuously right before the IRS filing deadline, April 15.

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 16^th) 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 16^th Amendment.

In 1913, the 16^th 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.