A Brief History of the Federal Income Tax

One of the critical issues to be decided in this year's round of elections is the future course of the taxation policy of the United States.

As should be expected, all sides of the political equation are proclaiming their proposed changes to the tax code as the only reasonable solution to one "crisis" or another. However, everyone seems to have lost sight of the fact that, for a significant part of its history, the United States of America financed its operations without directly taxing its citizens.

The contention that excessive taxation was one of the major factors in the American Colonial rebellion against Great Britain is nothing more than a myth. While the American colonists may have demanded a greater say in Parliament regarding taxation rates and policies the fact remains that, at the time of the American Revolution, the typical Englishman paid 26 shillings per year in taxes while his colonial counterpart paid only one-half to one and a half shillings!

The first personal income tax to be levied at the federal level came during the American Civil War when the government imposed a tax of 3% of all incomes over $800. The tax was modified the following year to a 3% tax on incomes above $600 and 5% on income above $10,000. These taxes were repealed in 1872. An income tax of 2% was levied in 1894, but the tax was declared unconstitutional the following year.

Congress, at the prodding of Woodrow Wilson, passed the first income tax law in 1913 after the states had ratified the Sixteenth Amendment to the Constitution (which got around the Supreme Court's 1894 ruling).

In its first year the modern income tax called for a 1% tax on net (following allowed deductions) personal incomes above $3,000, with an additional 6% surtax on incomes above $500,000. As examples, under the 1913 tax code a net income of $5,000 would result in an income tax of $20 ($5,000 - $3,000 = $2,000 X 0.01 = $20); an income of $50,000 resulted in a tax of $470, and a $5,970 on an income of $600,000. Over time, the maximum tax rate increased or decreased before reaching its maximum at 94% on all income in excess of $200,000 in 1945.

The top tax rates hovered in the 90% range until the mid 1960s when it was lowered to 70%. It was again lowered to 50% in 1982 and then to 28% in 1988. Currently, the top rate is 35% on all income above $357,701 (after deductions and other forms of lying through your teeth).

Notice that the top tax rate declined as person income increased in the decades after World War II before edging upward again. Why do you think that happened?

The success of the GI Bill and the gradual erasure of class and racial divisions assured an "upward mobility" in both educational and small business opportunities. Coupled with the then-dominance of America in the technology sector the number of people whose incomes were subject to higher and higher tax rates increased to the point that these taxpayers put pressure on their congressional representatives to cut their taxes of face losing their next re-election campaign! Forget the "class struggle" or "capitalist suppression of the masses" nonsense! Tax rates fell because people were tired of forking over their money to a government that seemed to be interested in everything but the welfare of the citizens!

In 1764 the American colonists went ballistic over a tax of 3 pence per keg of rum. I wonder what those colonists would have thought about having to live with today's morass of taxes at the federal, state, and local levels.

I'm giving even money that they would go ballistic again. The only question now is why we haven't gone to the ballot box with that beautiful quote from the movie Network ringing in our thoughts: "I'm mad as Hell and I'm not going to take it anymore!"