Monday, February 4, 2013

Happy Anniversary – Federal Income Tax

The 100th anniversary of the implementation of the U.S. Federal Income Tax

On February 3rd, 1913, one of the two most historic events in US history took place: the ratification of the 16th amendment, which established Congress’ right to impose a Federal income tax on Americans, and overturned Article I, Section 9 of the US Constitution which explicitly prohibited a general income tax. The amendment was brief and to the point, and read as follows:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

And with that, the US Federal Income Tax was born and has been with us for precisely 100 years this week.

It’s hard to imagine that, for many years, this country was run on very limited funds. Up until the early 1800s, the government was run purely on internal sales taxes.

During the Civil War the “Revenue Act” was passed to raise money for the war, but that was repealed within a decade. But I imagine by then the sharks had already had a taste of that blood, so the income tax was reinstated in 1913:

The incomes of couples exceeding $4,000, as well as those of single persons earning $3,000 or more, were subject to a one percent federal tax.

Further, the measure provided a progressive tax structure, meaning that high income earners were required to pay at higher rates.

It would require only a few years for the federal income tax to become the chief source of income for the government, far outdistancing tariff revenues.

A little more info below. Note in particular that in 1913 the tax code was 170 pages long as opposed to about 20,000 pages today.

Here is a graphic that will provide a snap-shot history of the Federal Income Tax.

Now- for something really interesting – follow the link below to an interesting and interactive version of the graphic above. Pay special attention to a few things:

  • The eventual progression in which the lower paid or middle income Americans were eventually moved out of the lowest tax brackets. (i.e low income earners saw their taxes increased).
  • The periods of the 1970’s; which had a much higher rate on high income earners – coincides with a bad economy.
  • The 1980’s and early 1990’s is when the “tax rates” for higher income earners were nearly on par with the average income earner (i.e. high earners were given a tax cut) – coincides with periods of robust economic growth (between 1982 and 1992; over 20 million new jobs were created; the total dollars to the Federal Treasury increased). 
… [Note – job creation for this period are not in the graphic but are a matter of public records]

Here is the link to the interactive visual.

Happy Anniversary!

Resources & Links

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