I stumbled upon the US Department of the Treasury website and found this hidden gem — the history of taxes. This is fascinating stuff. Some highlights, in chronological order. Overall, the lesson to learn is that some Americans have paid upwards of 96% in income tax, and that every war has resulted in an increase in taxes. Taxes fund wars, so maybe we should be pro-active and figure out if we can fund things that would decrease their chance of occurring.
US Taxation in Colonial Times
There was little to no tax during this time as there were few expenses. Taxes collected, however, came from excise, tariffs, and duties. And when taxes did occur, Americans get pissed (see 1765 Stamp Act and Boston Tea Party).
US Taxation in Post Revolutionary Times
The initial federal government had few responsibilities so looked to “donations” from the states. The fed received the right to levy taxes in 1789, but left collection to the states. The biggest expense was the war debt, which was paid by taxing spirits, tobacco, and sugary. However, early Americans also got pissed at this tax (see Whiskey Rebellion).
In 1790, taxing of property (including slaves) was introduced. Jefferson dropped this in 1802 as president. Taxation would remain quite for the next half century.
US Taxation during the Civil War
The Revenue Act of 1861 introduced income tax to the US — 3% on all amounts above $800/year. A year later, a two-tiered system was created — 3% on all amounts up to $10,000/year, and then 5% thereafter. Also introduced was that taxes were withheld at employer level to help ensure collection.
This tax repealed after the Civil War, however, in 1872. 90% of taxes would then come from excise tax on additional products such as feathers and professional legal documents.
US Taxation during WWI
Things were quiet for another half century. However, war showed its face, and income taxes re-emerged in 1916. This time, in the form of a Constitutional amendment — the 16th Amendment.
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.
Income taxes ranged from 1% to 7% for those making $500k/year. To appease voters, Congress stated that information collected would remain confidential. To this day, illegal aliens can select to pay taxes without fear of being picked up by immigration.
Within one year, those making $40k were taxed at 15% while $1.5M was now taxed at 67%. War is expensive, indeed.
In 1918, the bottom was increased to 6% and the top was placed at 77%. As a result, yearly taxes increased revenue from $761M to $3.6B in 2 short years, funding 1/3 of the war. Interestingly, only 5% of Americans had to pay taxes as a result.
US Taxation Post WWI
After the war in the 1920’s, there were 5 tax cuts resulting in a range of 1% to 25%. Relief! However, it was rather short-lived. In 1929, the stock market crash
was a huge factor in cutting tax collections from $6.6B to $1.6B. In fact, the US Stock Market wouldn’t get back to pre-crash levels until 1954.
To respond to the decrease in collections, the Tax Act of 1932 once again increased taxes — 4% to 79%. Also introduced was the Social Security act of 1935, which added an additional 2%. Half was paid by the employee, the other by the employer.
US Taxation during WWII
In 1941, the bottom was increased to a then record high of 23% and 94% for those earning over $1M. Why? You guessed it! War!
Income tax collections surged from 8.7B to 43.2B. Rather than 4M people paying taxes, now 43M were.
US Taxation during Post-WWII
Taxes never really dropped. We changed the name of the Bureau of Internal Revenue to the Internal Revenue Services (it’s so service oriented), starting using one’s social security number to track taxes, and by 1967 all returns were processed by computers.
Social security increased from 2% to 6%. By 1988, it was 12.3%. By 1990, 15.3%. You should be happy to know that most of that money has been “borrowed” by the govenment to fund wars, and the chances of it being refilled is unlikely with the Baby Boomer situation.
US Taxation during the Rule of Reagan
So many Conservatives love Reagan because of what he did for taxes, particularly those in the high income brackets. In 1981 Reagan reduced taxes 25% across all brackets and indexed them for inflation (the 70’s saw an inflation rate of 13%). The IRA was introduced.
But the big change came in the Tax Reform Act of 1986. The top was decreased from 50% to 28%, while the bottom was increased from 11% to 15% (note: this fact was not in the US Treasury website under the Bush Administration — I wonder why?).
US Taxation during the Rule of Clinton
Clinton is hated by the wealthy because he started to reserve Reagan’s work. In 1993 he started to increase the top income tax rate to 31% and then 39.6%. The Medical Savings Account was introced, as well as the Education IRA and Roth IRA. He was into savings.
We had a surplus of $281B.
US Taxation during the Rule of Bush
Bush said screw you to Clinton and reduced the upper income tax to 31% over time.
We no longer have a surplus.