History of US Income Taxes

I’ve been working on my income taxes, and my brain is too fried to come up with any better topic. As a former CPA, I’m always fascinated by how we finance roads, bridges, military, and the countless other expenses of government. (The federal government—our taxes— represents 30% of the gross national product, making it the biggest industry keeping the economy rolling) Fun fact: the earliest known tax was in Mesopotamia 4500 years ago and was paid in livestock.

As everyone knows, the original colonists started a revolution because they were tired of the king forcing taxes on them without any right to vote against them. Paying for foreign wars and an expensive monarchy and government they couldn’t participate in would have lit my fires too. But governments can’t run on hot air (pity, that, there’s plenty to go around!), so when the colonists formed their own government, they had to find ways to cover expenses. Excise taxes were almost always the answer—the same taxes they refused to pay the king. Think of them as early sales taxes except on specific products—usually luxuries (or sins, depending on your perspective) like tobacco, jewelry, and alcohol.

But then the Civil War came around and supporting soldiers cost more than all the tobacco and alcohol in the country. In 1861, Congress passed the first income tax law and transferred the excise taxes to the Bureau of Internal Revenue. After the war, the Bureau remained but income taxes were repealed. I don’t even want to imagine how they calculated income at the time!

In 1894, Congress started contemplating income taxes again. Maybe bookkeeping got better with the
advent of typewriters. But the Supreme Court trashed every version tried, until 1913 when the 16^th amendment was finally passed granting Congress the power to tax personal income. At that point, it was taxed when you got paid, as it is now, with taxes being withheld from paychecks. So the first 1040 came out in 1914, just in time to support another war, since custom duties had dropped drastically and military expenses soared.

By 1915, Congress was already complaining about the complexity of the form. History doesn’t just repeat itself, it never changes sometimes.

In 1916, they started the rate adjustment based on income. We threw in corporate taxes and estate taxes because let’s face it, war is expensive. Another Fun Fact: Between 1917-1920 income taxes provided as much as 58% of the government’s revenue, but 5.5 million tax returns showed no tax due. You may come to your own conclusion but I'm guessing the division between rich and poor was enormous. And during this entire era, the Revenue Bureau, as today, was woefully understaffed.

From there on out, the raging arguments about taxation were painfully similar to those today. No one wants to be taxed. Everyone wants to tax the other guy. But if you’re curious about how you’re being taxed compared to prior years, here’s a glorious table designed to cause the heart of every accountant to go pitter-patter: https://taxfoundation.org/historical-income-tax-rates-brackets/

Take a look at 1917 when the tax was 54% on $500,000! Yeah, that was a princely sum back then (except to all those corporate moguls and monopolists), but wow! And by 1947, the tax was 91% on anything over $200,000. Ouch. And better yet, those rates didn’t change until the mid-1960s, when $200k wasn’t all that much in comparison. So don’t tell me we’re paying high taxes now! The highest tax bracket in 2021 was a mere 37%.

There, does that make you feel any better when you sit down to write that big nasty check? No? I thought not. Sigh, I need to go back and look for more deductions. . .

And you may add to my income tax burden by ordering the first in my new Psychic Solutions Mystery series, INDIGO SOLUTION.

 

So, how are your taxes progressing?

Comments

[Constance]

Done! Our taxes were done and filed in February, after I nagged the investment firm for the last 1099! That said, our 1040 - now a 1040X - is pretty simple. I am not an accountant, but for some reason have always enjoyed completing complicated forms, not to mention organizing all the receipts and bills collected during the year. My husband thinks it’s an illness, and wants nothing to do with any of it. Isn’t he lucky to have me? ;) I volunteer at our local senior center to help others complete their tax forms (which are then reviewed by a volunteer CPA). Loved the Tax Foundation table, Patricia, and won’t complain about our tax rate any time soon, but I will still question the allocation of funds the government receives from us all!

[Christina Courtenay]

What a fascinating post, Pat! I had no idea income tax wasn't charged in the US until so late. But that 91% later on - ouch!

[Kareni]

Thank you for a fascinating post, Pat. We hired a tax accountant to do our taxes in February; we consider the cost to be money well spent. Best wishes to all who are in the (tax filing) trenches!

[Patricia Rice]

You're an organizer! That's not any more an illness than disorganization. And it's great you're using your skills to help others. I worked taxes with the AARP for years and it's a fabulous service.
and yeah, I think Congress has been reduced to arguing fund allocation 90% of the time.

[Patricia Rice]

can you imagine 90%? although I suspect they had lots of way hiding income back then

[Patricia Rice]

those of us who have to pay taxes tend to drag our feet!

[KathrynK]

I used to do our taxes with the help of TurboTax because our finances were simple. But when my husband's parents died and we inherited stocks, it suddenly became very complicated indeed. I have no ability to read the statements they send from the companies, so I need a professional to keep track of it all. I feel it's quite worth the expense. All I have to do is gather the documentation that they need, so that's much easier.

[Patricia Rice]

if you know the name of your stockbroker and access them online, you can now download all that info through Turbotax! But a professional to look over it all provides reassurance a computer program can't, fer shure.

[Janice]

Go by the annual 1099s the stockbrokers send you. That's what the IRS is going by :) You need not keep monthly statements for long, unless you have a special interest in such things. If need arises you can always get them off the broker's website anyway.

[Janice]

I did not know I would become an accountant. I was an English major in college. I thought at the time studying medieval lit and such was not a practical choice, but I learned things I might not have otherwise learned. English majors tend to be organized (we have to know where that source material is and find our way around a library or a search engine) and to be able to express themselves clearly. Think of all the business majors you know who can't do either one :)