United States Tax History

“What at first was plunder assumed the softer name of revenue” - Thomas Paine

Taxes have changed significantly from the Colonial Period to today n Types of taxes collected, their relative proportions, and the magnitudes of the revenues collected are different today. n Some changes occurred due to specific events. Others were gradual and responded to changes in society and the role of government.

Colonial Period n Colonies taxed differently based on their needs. n No taxation without representation! n Articles of Confederation didn’t provide Federal Government with a way to raise money.

Constitution Ratified 1787 n Granted the Federal Government the authority to raise taxes n Declared there could be no income tax n From 1791 to 1802, Government collected taxes on alcohol, carriages, sugar, tobacco, auctioned-off property, corporate bonds and slaves n Whiskey Rebellion of 1794

n To take from one, because it is thought his own industry and that of his father has acquired too much, in order to spare to others who (or whose fathers) have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “to guarantee to everyone a free exercise of his industry and the fruits acquired by it”. - T. Jefferson A Quote … What’s It Mean?

War of 1812 n The War of 1812 incurred large debt. In order to pay it off, sales taxes were imposed on gold, silverware, jewelry and watches until n Congress issued Treasury notes n From , Government collected tariffs from imports brought into the country.

Civil War n In 1862, the Government needed money to support the Civil War, so it imposed the first income tax. The higher a person’s income, the higher the tax. New excise taxes were also passed. n The Income Tax began a debate on the Constitutionality of the tax. It was collected anyway, but declared unconstitutional in n Office of the Commissioner of Internal Revenue (later known as the IRS) was formed. n After the War, most taxes were repealed.

Sixteenth Amendment To the Constitution n In the late 1800s, there was an ongoing debate on alternative revenue sources. n The nation realized that high tariffs and excise taxes were not the best economic policies. n 16th Amendment passed in 1913 which allowed a new income tax law. Less than 1% paid income tax.

Implications of Income Tax n The relationship between government and citizens changed dramatically. Government now has the right and the “need to know” about an individual’s or businesses economic life. n In 1916, Congress requires information from tax returns to be kept confidential.

World War I and the 1920s n 1916 Revenue Act to pay for WWI raised tax rates and imposed taxes on estates and excess business profits. n In by 1918, the highest tax bracket was 77%, but only 5% of people paid income tax. n In the 1920s, Congress cut taxes five times and the economy was strengthened.

The Great Depression n The Depression caused the economy to contract, and government revenue fell with it. n With a budget deficit in 1931, Congress raised taxes in 1932 and The Government’s finances improved but the economy weakened.

World War II and Social Security n Social Security passed in This 2% tax provided unemployment compensation, and gave public aid to the aged, needy, and handicapped. n n By the end of WWII, taxpayers earning only $500 paid a 23% tax rate. Taxpayers earning over $1 million paid a 94% tax rate.

Developments after WWII n Tax cuts followed the war, but the Korean War and additional Social Security expenses raised taxes again by n In 1959, the IRS is the world’s largest accounting, collection, and forms processing organization. n Throughout the 1950s tax policy is seen as a tool for stabilizing economic activity. n Maximum tax rate in 1954 is 87%.

Economic Recovery Tax Act of 1981 n A high tax burden in the 1970s combined with other economic issues caused a sluggish economy. n The Reagan Tax Cut represented a fundamental shift in income tax policy. n Tax rates were reduced, and there was a shift away from income tax and toward incentives to invest. The top tax rate was reduced from 50% to 28%

Taxes in the 1980s and 1990s n The economic boom in the 1980s convinced many political leaders that lower income tax rates were essential to a strong economy. n Taxes were raised and lowered slightly in the 1980s and 1990s. n In 1997, a new tax benefit enabled families to take per child tax credits. The credit was refundable for many lower income families. n Tax deferred savings accounts were enacted.

The Bush Tax Cut n By 2001, taxes had produced a budget surplus. n Income tax rates were reduced, savings incentives were enhanced.

Obama Tax Policy n Some politicians think the Bush tax cuts contributed to the latest recession. n Government is currently debating whether or not to let the Bush tax cuts expire. n What do you think?