A History of Taxes
By: Patricia T. Henssler, C.P.A.
The Henssler Financial Group Position Paper

Six months ago I thought I would write an article about Social Security taxes — thinking I would be writing about numbers. Then I wondered about how social security started, and during my research I became fascinated with the history. Thus I ended up with two articles — "Social Security — The Tax" about the history and "Social Security Benefits and Potential Tax on Benefits."

During my research, I discovered that about half the articles were fact and half, while fact-filled, may have been opinion or editorial pieces. But, I think that is the problem with Income Taxes — when you start talking about them it is difficult to not show your political leanings. I found the subject fun and interesting (and you thought C.P.A.s were dull) — and maybe if they taught this stuff in high school civics classes — see, it is hard to not think politically.

While some may think taxes are a modern invention, they actually date back to earliest recorded history, although some of you may have parents or grandparents who did not have to file an income tax return. History suggests that governments tax incomes (1) when they reach a level of development where citizens have cash income and (2) when wars are being fought.

• The Egyptian Pharaohs imposed a tax on cooking oil — the cooking oil tax auditors would audit households to insure that appropriate amounts of cooking oil were consumed.
• Athenians imposed a monthly poll tax on foreigners of one drachma for men and a half drachma for women.
• Caesar Augustus instituted an inheritance tax to provide retirement funds for the military (the English and Dutch referred to Augustus in developing their own inheritance taxes.)
• When Rome fell, the Saxon kings imposed taxes on land and property.

Our forefathers founded America, in large part, to avoid taxes. Remember the Boston Tea Party? In fact, America was one of the world's first tax havens, where wealthy Europeans could shift some of their wealth to avoid taxes in their homelands.

A Little U.S. Tax History

• 1781 - The Articles of Confederation - The Articles of Confederation reflect the American fear of a strong central government. They leave the government of the U.S. with no power to tax. For its revenue, it relies primarily on donations from the states.
• 1789 - The Constitution - The constitution gives the federal government the authority to tax stating that Congress has the power to "... lay and collect taxes, duties, imposts and excises, pay the debts and provide for the common defense and general welfare of the United States." To pay for the debts of the Revolutionary War and to operate the government, Congress imposed tariffs (import taxes) and excise taxes on goods such as whiskey, rum, tobacco, snuff and refined sugar.
  • The Constitution states that "… direct taxes must be apportioned among the several States included within the Union, according to their respective numbers …"
• 1794 - The Whiskey Rebellion - The Whiskey Rebellion relates to the excise tax on whiskey and the disagreement between those who thought it was right and those who thought it was unfair. The farmers in Pennsylvania, Maryland and Virginia were hurt most by the tax, as their most valuable crop was corn, which was made into whiskey. Others believed the taxes were a necessary source of revenue for a strong government to run the country, no matter what was being taxed.
• 1798 - Congress levied its first direct tax. It was in the amount of $2 million and was apportioned among the states on the basis of the current census. The purpose of the tax was to extinguish part of the debt incurred by the Revolutionary War.
  • The tax was entirely constitutional. Congress had stated the purpose and the amount. It had been debated and passed. Most important, once collected, the tax would expire.
• The Tax Act of 1862 - It is clear that the War Between the States will be long and expensive. President Lincoln signed the Tax Act. The rates were 3% on income above $600 and 5% on income above $10,000. The rent or rental value of your home could be deducted. While the people "cheerfully accepted the tax," compliance was not high. Only 276,661 people actually filed tax returns in 1870 (the high) when the country's population was approximately 38 million. The Tax Act of 1864 changed the rate to a flat 5% with an exemption of $1,000. From 1870 to 1872 the rate was a flat 2.5% and exemption was raised to $2,000. In 1872 the income tax was abolished.
• 1894 and 1895 - A federal law creates a personal income tax in 1894 with a flat rate of 2%. In 1895 the Supreme Court ruled the income tax law unconstitutional, because taxes were not apportioned according to the population of each state.
• 1909 - The 16th Amendment that authorizes Congress to collect taxes on income is proposed.
• 1913 - Wyoming casts the 37th vote, ratifying the 16th Amendment. Congress then passes an income tax law that is based on one's ability to pay. Less than 1% of the population is required to pay the tax. Form 1040 is introduced as the standard tax reporting form.
• 1932 - The nation is in the greatest depression of its history. The government is spending more money than is being collected. The Act raises the tax rates and lowers exemption levels.
• Revenue Act of 1936 - reduces taxes as too much money was being collected.
• 1936 - The Social Security Act of 1936 (see article "Social Security-The Tax)
• 1939 - The revenue statues are codified - one out of 32 citizens pays 4% rate.
• 1943 - The pay-as-you-go system begins requiring employers to withhold taxes.
• The Tax Reform Act of 1986 was probably the most important change in income tax legislation since the 1940s. The Act sharply reduced the number and level of tax rates. It also greatly increased the tax base by restricting deductions and exclusions. The act established two basic rates of 15% and 28% replacing 14 different rates ranging from 11% - 50%.
• 1990 - Congress established a third income tax rate of 31%.
• 1993 - Congress added rates of 36% and 39.6%.
• 1996 - Four bills make over 700 changes, including MSAs and SIMPLE accounts.
• 1997 - Taxpayer Relief Act brings more than 800 changes including the child tax credit, Roth IRAs, capital gains reduction, breaks for higher education.
• 2001 - The Economic Growth & Tax Relief Reconciliation Act of 2001 creates 441 changes including lowering income tax rates.
• 2004 - Working Families Tax Relief Act of 2004 extends several expiring tax provisions for both individuals and businesses.
• 2006 - The Pension Protection Act of 2006 is the most sweeping pension legislation in over 30 years. It includes a number of significant tax incentives to enhance and protect retirement savings for millions of Americans. For more information read the article "Pension Protection Act of 2006" in Henssler University.