U.S. Income Tax a Short History
In the beginning, the United States Federal Government had no taxes.
That doesn’t mean that there were no taxes in the US but the Articles of Confederation gave the power to tax to the states and not to the central government.
It became clear that this wasn’t going to work so the Founding Fathers added to the U.S. Constitution the ability for the federal government to...
…lay and collect taxes, duties, imposts, and excises, to pay the Debts and provide for the common Defense and general Welfare of the United States.”
Even with the power, the federal government left most taxes to the states and only used excise taxes to pay for the Revolutionary War.
Federal income taxes first appeared in the Revenue Act of 1861. Congress used the tax to help pay for the Civil War. The new income tax was 3% on all incomes higher than $800 a year. Despite having the ability to collect income taxes, Congress saw problems with the tax and didn’t collect anything that year.
After the Civil War, Congress reduced income tax rate since the income wasn’t needed. In 1872, the income tax was abolished and for 22 years the US had no federal income tax.
A flat rate federal income tax made a short appearance in 1894. However the Supreme Court ruled it unconstitutional in 1895. The Constitution only allowed a direct tax at that time if it was apportioned according to the population of the state. Since the income tax treated all qualified taxpayers equally, it was unconstitutional.
Which was why, in 1909, Congress passed the 16th amendment and sent it to the states for ratification. On February 25, 1913, Secretary of State Philander Knox announced that the amendment had been ratified by the required 36 states. Congress then passed the Revenue Act of 1913 in October and brought back the federal income tax.
This Revenue Act introduced Form 1040 and taxpayers at that time began paying income tax. The rates began at 1% and maxed out at 7% for taxpayers with income over $500,000. There was a little concern about the word “lawful” in the Act. The bill taxed “lawful income.” But this loophole was closed when “lawful” was removed from the act. This leading the way for Treasury officials to use the tax code to catch Al Capone and other criminals.
Privacy was a concern with the new income tax since it gave the Federal government access to the financial information of individuals and businesses. To protect the public as much as it could, Congress passed a law in 1916 requiring that tax return information be kept confidential.
The tax code is ever changing. Bills are passed almost every session increasing or lowering rates, adding or decreasing special credits and deductions. The trend since 1969 has been the additional of a social service aspect to the tax code. In 1969, Congress initiated the Alternative Minimum Tax to compensate for many high income taxpayers taking advantage of tax breaks. In 1975, the Earned Income Tax Credit was introduced. The credit to help low income families has grown and has been joined by the Child Tax Credit, a 1st Time Homebuyer’s Credit, several education credits and in 2014 a credit/reconciliation for health insurance coverage.