History of Income Tax In The United States of America


While every tax payer painstakingly pays his/her taxes sometimes each year sometimes we wonder who might have invented this system at first. The people nearly centuries ago pained little or no tax at all. In early 1800’s the U.S government levied internal taxes only on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. But the war of 1812 cost U.S government a fortune and they started levying sale taxes on gold, silverware, jewelry, and watches. But again in 1817 the taxes were repealed and they levied taxes only on imported goods.

In July, 1861 the Congress passed the Revenue Act of 1861, which once again restored the earlier tax and imposed a tax on personal incomes also this time. They imposed a tax of 3% on all incomes higher than $800 a year. But no tax was collected until the next year due to inconsistencies and inadequacies of the system. On the other hand the civil war was taking its toll on the government and government was incurring debts at the rate of $2 million a day. The government then pressed the panic button and on July 1, 1862 the Congress passed a bill to impose new excise taxes on such items as playing cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, billiard tables, drugs, patent medicines, and whiskey. The law also made important reforms to the Federal Income Tax for individuals adopting a two tier system. The incomes of up to $10,000 were taxed at a rate of 3% and for incomes higher than $10,000 the tax rate was 5%. A standard deduction of $600 was also introduced and numerous deductions were permitted for such things as rental housing, repairs, losses, and other taxes paid. In addition the employers also withheld tax of employee for timely collection of taxes. But as the need for federal revenue decreased after the war most taxes were repealed and only liquor and tobacco were taxed. The income tax law was abolished in 1872. From 1868 to 1913 almost 90% of the tax was collected from remaining excises such as liquor and tobacco.

The year 1913 was the most important year in the U.S tax era when 16th Amendment to the Constitution made the income tax a permanent feature of the U.S Tax System. The amendment allowed Congress to legally tax both individual and corporate income. By 1918, the Internal Revenue collections passed a billion mark for the first time in the U.S history and touching around $5 billion by 1920. Due to the large scale employment during the First World War the revenues also increased and the U.S economy boomed. Ultimately the tax rates were brought down, the bottom tax rate to 1% and top rate to 25% which was once as high 75%.

Due to the stock market crash of 1929, the U.S economy suffered a major blow and the tax collections were even lower than the tax collections of 1920. The congress passed Tax Act of 1932 that raised tax rates considerably again. By 1936 the lowest tax rate had reached 4% and the top tax rate was up to 79%.

In 1935, Social Security Taxes were introduced to provide unemployment compensation to the workers who lost their job. This tax was 2% of the income, one half deducted from employee’s income and other half paid by the employer. Only first $3000 of the income was taxed.

From 1940-1945 the U.S economy once again saw a period of stimulated growth due to increased production and employment during the World War II. The federal taxes as a share of GDP grew from 7.6% to 20.4% during this period and the most notable of all was that the number of income tax payers increased from million in 1939 to 43 million in 1945.

In 1981, the congress passed a bill to allow largest tax cuts in the U.S History around $750 billion over 6 years. In October 2, 1986 President Reagan signed a new law, The Tax Reform Act of 1986 lowering top tax rate on individual income from 50% to 28%, the lowest since 1916. This reform increased tax on corporations and decreased taxes on individual incomes over a period of years.

On Aug. 19, 1993 Revenue Reconciliation Act of 1993 law was signed by the then President Bill Clinton to reduce fiscal deficit by $496 billion from 1994 through 1998. Another law to cut taxes by $152 billion was signed in 1997 by President Clinton which included capital-gains tax for individuals, a $500 child tax credit, and tax breaks for education.
The Economic Growth and Tax Relief Reconciliation Act of 2001 were signed by President George W. Bush which was estimated to save taxpayers $1.3 trillion over the period of ten years. It also brought down the new lowest rate to 10% and increased the child tax credit to $1000. It also cut the tax rates from 28% to 25%; 31% to 28%; 36% to 33% and 39.6% to 35%.
The Jobs and Growth Tax Relief and Reconciliation Act of 2003 further speeded up the tax rate cuts that had been enacted in 2001. The congressed passed a series of tax breaks like option for individuals to deduct the payment of whichever state taxes were higher, sales or income tax.

Two more tax bills were signed in 2005 and 2006 raising the exemption levels for the alternative minimum tax and enacted new tax incentives to encourage individuals to save more money for retirement.

Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.