politicalcivility.com Blog

For those keeping track, today is TAX day.  Hopefully you’ve already filed and will avoid a) the bad weather and b) long lines at your local post office.  I think this brief history is very informative and demonstrates the shift away from the founders intent of how government should be funded.  The table at the end shows just how far we’ve gone.

A Brief History of the Income Tax in the U.S.

1634 – The Massachusetts Bay Colony enacted an income tax (no other mention of taxing personal income is mentioned for over 200 years). 

1861 – With the advent of the Civil War, both the Union and the Confederacy instituted income taxes to finance their war efforts.  This constituted the first time the U.S. federal government levied an income tax; the federal government’s then limited operations were previously financed almost entirely from tariffs on imported goods.  Technically, the personal income tax was unconstitutional (at the time), but no challenge was made in the judicial system.  After the war, the income tax was eliminated and the federal government reverted back to its previous sources of revenue.

1894 – The federal government introduced a new tax on individual income with the passage of the Wilson-Gorman Act.  This act required that any gains, profits, and income in excess of $4,000 be taxed at a rate of 2%.  In compliance to this act, the Farmers’ Loan and Trust Company of New York determined to remit payment to the U.S. Treasury on behalf of its shareholders subject to the tax.  Charles Pollock, an owner of ten shares in the company, sued Farmers’ Loan to not remit the payment.  Pollock lost at the lower court but won at the Supreme Court level.  The majority opinion of the court cited the constitutional guarantee that “No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”  A “direct” tax was a tax on property, while an “indirect” tax (not barred by the constitution) was a tax on an event like receiving a gift or rendering labor for a wage.  Tax on a security’s appreciation was considered an effective tax on a property, and thus a “direct” tax.  To make the tax constitutional, congress would have to apportion the tax burden among the states according to their proportional populations.  Since the Wilson-Gorman Act did not accomplish the requisite apportionment among the states, it was ruled unconstitutional.

1909 – The federal government levied an income tax on corporations, which was challenged but upheld by the Supreme Court.  The rationale was that a corporation is created by law; therefore, the authors of the law (governments) have the right to tax a corporation’s creation and operation (events that lead to “indirect” tax status).

1913 – The decision in Pollock vs. Farmer’s Loan and Trust Co. was unpopular and stirred debate for several years.  In fact, the presidential candidates competing in the election of 1912 largely debated on the grounds of whether or not an amendment overturning Pollock was needed.  The sixteenth amendment to the constitution was proposed.  It would sanction a federal income tax on both individuals and corporations with no requirement for apportionment.  Sponsors of the amendment presented it as a measure that would affect the “super rich” who were portrayed as having gained too much control over the nation’s wealth.  Public opinion fell on socioeconomic lines with support coming mainly from western and southern states and opposition coming from the northeastern states.  In the end, 42 of the then 48 states ratified the amendment.  Connecticut, Florida, Rhode Island, and Utah formally rejected the amendment, and Pennsylvania and Virginia never even bothered to consider it.

Shortly after the amendment was ratified, congress passed the Revenue Act of 1913, under which taxpayers became responsible to submit their first Form 1040 on March 1, 1914.  This act allowed filers to claim personal exemptions of $3,000 for individuals and $4,000 for those “married filing jointly” persons.  Given the size of the average income at that time, only 6 percent of Americans made enough money to exceed the exemptions and, therefore, assume a tax liability.  Tax rates varied from 2 to 6 percent (the highest rate was applied to taxable income in excess of $500,000).

1943 – Congress instituted the pay-as-you-go system, which remains in force today.  This system requires employers to withhold and remit payroll taxes and also requires persons earning non-wage income to make quarterly payments to the IRS for estimated tax liability.

1945 – WWII and FDR’s New Deal introduced large financial obligations and tax law was altered accordingly.  The portion of Americans subject to a tax liability grew from 6 percent in 1939 to 74 percent in 1945 (the sixteenth amendment’s reach beyond just the “super rich” would continue to the present day).  Also the progressive rate structure applied to taxable income increased during this period.  The lowest rate structure ever enjoyed by U.S. taxpayers occurred just after the passage of the sixteenth amendment (1913); 1 to 6 percent.  The rate structure from 1944 to 1945 is still the highest ever experienced in U.S. history; 23 to 94 percent!  The highest rate was applied to income exceeding $200,000.  (How much work incentive would you have if you knew that for every additional dollar you earned, 94 cents would go to Uncle Sam?)

Today – the table below shows the sources of federal government revenue for 2007: