A condensed history of the origins of the personal income tax from the Civil War to the Economic Depression of 1893 to the disruption caused by the pandemic of 2020
This year the IRS has postponed the federal income tax day to May 17. In 2020, the deadline was extended from April 15 to mid July due to the pandemic. The tax preparers believe that this year you may need that extra time more than ever, given the new and potentially thorny issues including unemployment insurance claims, stimulus check income and pandemic-driven changes in residence, which impact your taxes. Yet, if you need to take a break before or after filing your taxes these days, you might be interested in a condensed history of the origins of the personal income taxes in the United States, including a brief description of how taxes are calculated, how refunds are decided, and even a glimpse at some excuses people have tried in order to avoid paying taxes.
Individual income taxes have been the primary source of revenue for the U.S. federal government starting from the year 1950. The American Taxation History goes back to the Civil War. President Abraham Lincoln signed into law the first tax on personal income. In 1909 President Taft came up with an ingenious solution—combining tariff reduction legislation with a Constitutional amendment authorizing the federal government to collect income tax. In late 2018, President Donald Trump signed the Tax Cuts and Jobs Act, which represented the most significant change to the tax code in more than 30 years. The references of this compilation come from Records of Congress, Tax History Project and History.com.
During the Civil War President Abraham Lincoln signed into law the first tax on personal income to help pay for the Union war effort. In 1861, Lincoln convinced Congress to pass the Revenue Act and impose a temporary 3 percent tax on incomes over $800, as an emergency measure to help finance the massive military expenditures required by the Civil War. That measure was allowed to expire in 1872.
The idea of a federal income tax resurfaced after the Panic of 1893, an economic downturn so severe that it caused a quarter of the nation’s labor force to lose their jobs.
After it was repealed a decade later, Congress tried again in 1894, enacting a flat rate federal income tax. But the following year the U.S. Supreme Court ruled the tax unconstitutional because it didn’t take into account the population of each state.
In 1894, Congress Democrats joined forces with progressive Republicans to pass legislation that created a 2 percent tax on incomes over $4,000, along with reduced tariffs. But that tax didn’t last long. In an 1895 case, Pollock v. Farmers’ Loan and Trust Company, the Supreme Court found that directly taxing Americans’ income was unconstitutional. William Taft succeeded Theodore Roosevelt as president in 1909. He was a progressive Republican with moderate instincts and also an institutionalist, especially with regard to the Supreme Court. Taft faced a dilemma. A debate raged anew in Congress, with Democrats and progressive Republicans rallying to back a new income tax, while GOP leaders in both the House and Senate remained strongly against the idea.
President Taft saw a personal income tax as a political move that would help him to get Congress to pass the law to get the tax on businesses that he needed to replace tariff revenue. His goals were tariff and corporate tax reform. He came up with an ingenious solution—combining tariff reduction legislation with a Constitutional amendment authorizing the federal government to collect income tax, which the court wouldn’t be able to overturn.
In July 1909, Congress passed the 16th Amendment to the Constitution allowing the federal government to tax individual personal income regardless of state population.. To the shock of conservatives, the amendment was approved by enough state legislatures so by 1913, Congress enacted a federal income tax and ever since then Americans have been required to pay federal income taxes. Since 1950, individual income taxes have been the primary source of revenue for the U.S. federal government. Together with payroll taxes (used to fund social programs like Social Security and Medicare), income taxes amount to roughly 80 percent of all federal revenue, and are the essential fuel on which our government runs.
When is the Federal Tax Day?
Initially, in 1913 the official due date for paying taxes was March 1, but in 1918, Congress changed the federal tax day to March 15. In 1955, another tax overhaul pushed back the deadline an entire month, to April 15, giving the government more time to hold on to tax dollars before paying any refunds it might owe. In the case that April 15 falls on a Saturday, Sunday or holiday, Tax Day becomes the first succeeding business day after that date.
In 1955, Congress moved it back another month, to April 15.
Who Pays Taxes?
By law, any American whose gross income is over $10,000 (or $25,000 for married couples filing jointly) or who earned more than $400 from self-employment must file a federal income tax return. There are also a number of other circumstances that might require you to file, including selling your home or owing taxes on money you withdrew from your retirement account.
How are Taxes Calculated?
The federal income tax system is designed to be progressive, which means the more taxable income you make, the higher the tax rate. Taxpayers can often reduce the amount of tax they owe by using various tax credits, deductions and exclusions (or loopholes).
Tax rates have varied widely over the years, especially for the nation’s highest earners, ranging from an initial low of around 7 percent in 1913 to a top rate of 91 percent in the early 1960s. In 2016, taxpayers in the top tax bracket (income level) paid a tax rate of 39.6 percent, according to the Tax Policy Center, they included some 860,000, or 0.5 percent of the total number of U.S. households. Nearly 80 percent of U.S. households were in the 15 percent bracket or lower, including those Americans with no taxable income and those who don’t file tax returns.
Because the United States has a marginal tax rate system, not all of an individual’s income may be taxed at the same rate. When you earn enough income to put you into a higher tax bracket, only the extra income in that bracket is taxed at the higher rate, not all of your income. For individuals in the highest tax bracket, their first dollars of income are taxed in the lowest bracket, and they go up from there.
How are Refunds Decided?
Most Americans pay their taxes as they go through the year, rather than in one lump sum on Tax Day. Employees often have their income tax deducted from each paycheck and sent directly to the IRS while self-employed workers are required to pay estimated taxes quarterly. At the end of the year, if you’ve paid more than what you owe, the federal government will issue you a tax refund. The IRS typically sends out refunds within 21 days of receiving tax returns, but in some cases it can take as long as eight weeks.
What Has Changed in the Recent Tax Law?
In late 2018, President Donald Trump signed the Tax Cuts and Jobs Act, which represented the most significant change to the tax code in more than 30 years. The bill lowered tax rates in five out of the seven tax brackets, starting in 2018 and going through 2025. While it increased the standard deduction for both individuals and married couples filing jointly, the new law eliminated the personal exemption, which every individual had been entitled to claim on their tax return (provided they weren’t dependent of someone else).
Among various other changes, the new tax law raised amounts that workers can contribute to retirement savings accounts, doubled the existing Child Tax Credit to $2,000 for every child in a household under 17 and expanded the use of funds in specialized college savings accounts (called 529s) to include other levels of education, like private K-12 schooling. In a benefit that applies only to a small percentage of wealthy Americans, the new law also doubled the estate tax exemption to $11.2 million per individual and $22.4 million per couple, greatly reducing the amount of families subject to the estate tax.