Some time 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 began, and during my research, I became fascinated with the history. Thus, I had two articles, “Social Security: ‘The Tax’,” which is about the history, and “Social Security Benefits and Potential Tax on Benefits.”
During my research, I discovered 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 not to show your political leanings. I found the subject fun and interesting (and you thought C.P.A.s were dull). Perhaps if they taught this stuff in high school civics classes, it would not be so difficult 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 when they reach a level of development where citizens have cash income and when wars are being fought.
- The Egyptian Pharaohs imposed a tax on cooking oil. The cooking oil tax auditors would audit households to ensure 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 reflected the American fear of a strong central government. It left the U.S. government with no power to tax. For revenue, the government relied primarily on donations from the states.
The Constitution gave the federal government 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 “… 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 related 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—The First Direct Tax:
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 census. The purpose of the tax was to extinguish part of the debt incurred by the Revolutionary War. The tax was entirely constitutional as Congress had stated the purpose and the amount. It had been debated and passed. More importantly, once collected, the tax expired.
1862—The Tax Act of 1862:
It was clear that the War Between the States would be long and expensive when President Lincoln signed the Tax Act of 1862. 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 created 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—16th Amendment Proposed:
The 16th Amendment proposed to authorize Congress to collect taxes on income is proposed.
1913—16th Amendment Ratified:
Wyoming cast the 37th vote, ratifying the 16th Amendment. Congress then passed an income tax law that was based on one’s ability to pay. Less than 1% of the population was required to pay the tax. Form 1040 was introduced as the standard tax reporting form.
1932—Revenue Act of 1932:
The nation was in the greatest depression of its history while the government was spending more money than what was being collected. The Act of 1932 raised the tax rates and lowered exemption levels.
1936—Revenue Act of 1936:
The 1936 act reduced taxes as too much money was being collected.
1936—The Social Security Act of 1936:
For more information, read Social Security: ‘The Tax’.
The revenue statues were codified—one out of 32 citizens paid 4% rate.
The pay-as-you-go system was established requiring employers to withhold taxes.
1986—The Tax Reform Act of 1986:
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%.
Congress established a third income tax rate of 31%.
Congress added rates of 36% and 39.6%.
Four bills made more than 700 changes, including MSAs and SIMPLE accounts.
1997—Taxpayer Relief Act:
The Act of 1997 brought more than 800 changes, including the child tax credit, Roth IRAs, capital gains reduction and breaks for higher education.
2001—The Economic Growth & Tax Relief Reconciliation Act of 2001:
The Act of 2001 created 441 changes, including lowering income tax rates.
2004—Working Families Tax Relief Act of 2004:
The 2004 act extended several expiring tax provisions for both individuals and businesses.
2006—Pension Protection Act of 2006:
This act was the most sweeping pension legislation in more than 30 years. It included 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.”
2007—Small Business Work Opportunity Act of 2007:
This act passed with one main purpose in mind—to help small businesses deal with the accompanying increase in the minimum wage to $7.25 an hour.
2008—Housing Assistance Tax Act of 2008:
In reaction to the continued slump in housing sales, this act was signed into law. It included tax incentives primarily geared toward home ownership and aimed to curtail the recent surge in home foreclosures.
2008—Emergency Economic Stabilization Act of 2008:
The 2008 act was a historic “market rescue” bill that included more than 100 tax provisions and more than $100 billion in tax breaks. These tax breaks affect both individuals and businesses.
2009—The American Reinvestment and Recovery Act of 2009:
Included in the act’s $300 billion in tax breaks are additional refundable credits. Prior to this act, there was only one refundable credit—the Earned Income Tax Credit. For more information, read the article “The American Recovery and Reinvestment Act of 2009.”
2010—Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010:
The act provides significant estate and gift tax relief; two-year sunset relief that protects key tax breaks for individuals; retroactive reinstatement and extension of tax breaks for individuals; retroactive reinstatement and extension of business tax breaks; economic stimulus incentives; energy related tax breaks, and disaster relief.
If you would like additional information regarding this topic or any other tax related issue, contact Henssler Financial at 770-429-9166 or [email protected].