Happy Birthday to you! Happy
Birthday to you! You don't look a day over 99.
It's doubtful most people will
notice, let alone celebrate, Friday's 100th anniversary of the U.S. income tax
code. But, yes taxpayers, Oct. 4, 2013, is the centennial.
So, happy birthday income tax?
In 1913, the tax code consisted of
400 pages. By 2012, the tax code was 73,608 pages, and we have gone from a
simple tax system to a complex, unfriendly system.
It was the 16th Amendment, adopted in
February 1913, that gave Congress the legal right to levy an income tax. On the
evening of Oct. 3, President Woodrow Wilson signed the Revenue Act of 1913 that allowed the collection
of a federal income tax—starting the next day.
But having some sort of taxation
goes back to the country's beginning. From 1791 to 1802, the government was
supported by tax revenue from the sale of such items as liquor, tobacco, sugar,
property sold at auction and even through the sale of slaves.
The high cost of the War of 1812 saw
the first sales tax on gold, silverware, jewelry and watches. But by 1817,
Congress eliminated all taxes and relied on tariffs from imported goods for
revenues.
It was in 1862, to fund the Civil
War, that Congress enacted the first income tax. Anyone making between $300 to
$10,000 a year paid a rate of 3 percent. That tax ended soon after the war.
Congress also established the Internal Revenue Service at the same time, which had much the
same power and authority then as it does now.
Jumping to 1894, Congress passed the
first peacetime income tax law, but a year later the Supreme Court declared it
unconstitutional. The court said that taxes on rents and real estate income had
to be divided among the states according to population, which the law did not
allow.
But the court did make a crucial
statement in its ruling. It said that Congress had the right to impose a direct
income tax—and that led to the passage of the 16th Amendment.
Taxes in the post-World War II era
were very high, at a 70 to 80 percent rate in some cases, and people were more
or less willing to pay them.
But our overall prosperity started
to decline in the 1960s and '70s, and people wanted to start paying less in
taxes.
The tax system has seen its share of
changes over the years. In 1943, the withholding tax on wages was introduced
for the first time. In 1981, Congress passed the largest tax cut in American
history, some $750 billion in cuts over six years. That was partially offset in
1982 and 1984 when Congress raised taxes to the tune of $265 billion.
The Tax Reform Act of 1986 is considered the biggest reform
measure since 1913. The top tax rate on individual income was lowered from 50
percent to 28 percent, the lowest it had been since 1916.
But along with the lower rate came
the elimination of certain loopholes to make up the lost revenue.
And the act put in a $120 billion increase in business taxes.
President George W. Bush signed
several tax cuts into law in 2001 for the third-largest tax cut since World War
II. President Barack Obama's tax bill for
2013 kept some of the Bush tax cuts for lower incomes but raised
levels for higher incomes, which had been reduced under Bush.
Among other moves, Obama restored
the full amount of the payroll tax (6.3 percent) and raised the rates on
capital gains and included a 3.8 percent surtax on incomes of $200,000 or more
for single people to help fund the Affordable Care Act. The
dreaded alternative minimum tax (AMT) received a
permanent patch to try to keep thousands from having to pay it.
Calls for tax reform have led to recent hearings on Capitol Hill.
Suggestions include going to a flat tax and eliminating deductions like
mortgage interest and charitable giving.
Taxes are always a hot button issue.
Depending on whose study you look at—or your political persuasion—the U.S. is
either the most overtaxed nation on the planet, the least taxed (especially for
the wealthy), or it's somewhere in the middle,
as some have said.
Wherever it is, taxes are money for government services,
like Social Security, Medicare,
defense, federal worker payrolls, veterans' benefits, education and health
care.
And the amount needed keeps growing.
The Treasury Department will likely collect around $4.9 trillion from income and payroll taxes in 2014.
That's a huge jump from the $5.4 billion collected in 1920 and the $43 billion
in 1945.
If Americans do circle their
calendars for taxes, it's usually April 15, the yearly filing day, not the
100th birthday of the federal income tax.
Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication
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