America’s tax history might be the most complicated of any modern nation. To celebrate our Independence Day, we decided to delve into that history and explore some of the historic moments that helped shape our modern income tax system. Read on to learn more.
The Early History of Taxes in the United States
When they defeated the British during the Revolutionary War to earn our independence, America’s Founding Fathers hesitated to create elaborate tax codes for the new country. After all, the British had been imposing taxes on American residents for over a century without allowing them a voice in Parliament, which served as a major catalyst for the war in the first place.
Soon after the first Independence Day, the Whiskey Rebellion of 1794 seemed to validate the Founding Fathers’ reservations. Enraged by a new tax on whiskey, a group of farmers raided the Pennsylvania hillside, burning tax collectors’ homes and businesses to the ground. In some cases, they even tarred and feathered the collectors. Eventually, the military put down the rebellion, but it would serve as only the first in a long line of protests over the United States tax system.
Early on, the U.S. government raised most of its funds through tariffs. This system persisted until 1813, when Congress allowed a series of direct taxes on land, property, transactions, and products to fund the War of 1812.
However, Congress didn’t formally legalize federal income taxes until almost 50 years later when they passed the Revenue Act of 1861. This statute essentially founded our modern tax system. Again, the catalyst for this legislation was war — in this case, the American Civil War.
During this period, Congress also created the office of Commissioner of Internal Revenue, which laid the groundwork for what would eventually become the Internal Revenue Service. The commissioner was responsible for assessing and levying income tax as well as collecting taxes and enforcing tax laws. Under the Revenue Act of 1861, the Commissioner held the right to seize property or income for unpaid taxes. (Sound familiar?)
Taxes in the 20th Century
In 1913, Congress passed the 16th Amendment, which empowered the federal government to assess and collect taxes on income earned by individuals and businesses alike. This amendment made income taxes a permanent fixture in the United States.
By 1918, the federal government was collecting more than $1 billion in income taxes; by 1920, the figure exceeded $5 billion. While this might seem like a massive sum (and it certainly was at the time), it looks like small potatoes now; in 2016, the U.S. government collected $3.27 trillion (and still managed to go over its budget for the year by $587 billion).
For the next 70 years, the tax code remained relatively stable, with gradual changes coming at irregular intervals (especially during wartime). Then, in 1986, Congress passed the Tax Reform Act, which lowered individual taxes while raising taxes on businesses. This law also reduced the tax rate for taxpayers in the highest income tax bracket from 50% to 28%.
In 2001, George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act, which reduced the tax rates for the top four income brackets and set the tax rate for low-income taxpayers at 10%. Although these cuts expired in 2010, they remain some of the largest tax cuts the United States has ever seen.
S.H. Block Tax Services Looks Toward the Future
We hope you enjoyed reading about the history of our tax system and that you learned some new information in the process. (You’ll at least have some trivia you can bring up when the inevitable tax talk starts at a party.)
With the recent passing of the new tax code, it’s clear there are several pages yet to be written in our tax history. For help navigating the new tax law or any current tax liabilities you or your business might be facing, please contact S.H. Block Tax Services by calling (410) 793-1231 or completing this brief form.
Our firm has decades of experience in tax resolution and has earned an A+ rating with the Better Business Bureau. Please reach out today to receive a free consultation — during which, we can assess your unique situation and begin creating an initial plan to bring you back into compliance with the IRS and/or State of Maryland.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.
Beattie, A. (2010, April 14). A short history of taxes. Forbes. Retrieved from https://www.forbes.com/2010/04/14/tax-history-law-personal-finance-tax-law-changes.html#6805b1231cf8
Deaderick, J. (2016, December 26). What we get wrong about taxes and the American Revolution. PBS. Retrieved from https://www.pbs.org/newshour/economy/what-we-get-wrong-about-taxes-american-revolution
The history of income taxes. (n.d.) US Tax Center. Retrieved from https://www.irs.com/articles/the-history-of-income-taxes
Williams, S. (2016, October 23). This handy chart shows how much money the government collected in 2016 and where it was spent. The Motley Fool. Retrieved from https://www.fool.com/retirement/2016/10/23/this-handy-chart-shows-how-much-money-the-governme.aspx