Before taxes were a line on your paycheck, they were a reason to revolt-let’s rewind. As we find ourselves one year closer to our nation’s 250th birthday, I am reminded of a familiar grade school teaching, “no taxation without representation. "I hope I am not alone in this startling admission, but as a product of the American school system, my feeling is that I am in good company in the fact that I do not know what kind of taxes were being referenced. I know this statement was a rally cry for the American Revolution, but before this article, I did not know exactly what was being taxed. After all, I have heard plenty discussion, as of late, as to when the United States federal income tax system was started which is far later than the birth of our nation. So, please humor me as I regale you with a brief history on taxes and what we can do about it today.
History
“The only thing certain is death and taxes,” Benjamin Franklin said in 1789.The interesting thing is that he made this statement over 100 years before the first US federal income tax was created by the ratification of the 16th Amendment in 1913.If the first income tax was not created before then, how did the US make money? Tariffs and excise taxes, but there is a tax history before that.
Even as the original colonies, Americans have never liked taxes. Case in point, the original taxes the colonists lambasted about were less than what their British counterparts were subject to. Granted, they did not have representation like the Brits, so perhaps they had a legitimate gripe. After all, is it fair that they had to pay taxes on printed material due to the Stamp Act of 1765? While the Quartering Act was not a “monetary” tax, one could argue that the requirement to house British soldiers was a “tax” that had a monetary impact.We’d be remiss to not mention the spark that ignited it all: the Sugar Act. This act cut foreign taxes of molasses by half, but it simultaneously increased enforcement.Additionally, it added new taxes on sugar, coffee, wine, and other goods. It also limited the colonies’ export of lumber and iron to Britain.
“Luckily,” the Stamp Act was repealed, but the Declaratory Act was instituted the same day. TheDeclaratory Act gave Britain the right to make binding laws over the colonies in any case. With this tinderbox of highly combustible accelerants, the American Revolution led to the formation of a fledgling nation.
Like any good startup, we were forced to identify a revenue source. Enter tariffs, excise taxes, land sales, and other fees and charges. Before we dive into these items, I’d like to draw your attention to a potential theme of Americans’ disdain for taxes.
Has anyone heard of a tariff? Sorry, too soon? A tariff is a tax on imported goods and is considered “regressive.”Tariffs are considered regressive because a bigger portion of a lower income household’s income is impacted by tariffs.
Excise taxes are taxes on specific goods such as distilled spirts, tobacco, and manufactured goods. TheWhiskey Tax of 1791 is a great example of excise tax, and the Whiskey Rebellion of 1794 is an even better example of how Americans feel about taxes.Alexander Hamilton implemented the excise tax to pay for our nation’s debt.Sounds like debt issues are not new? Fifteen short years into our nation’s life, and we were already in debt.
The federal government also raised money by selling public land to individuals and companies. Lastly, the federal government made money through work permits, various fees and charges, and interest on debts.
The first federal income tax was started in 1862 by President Lincoln. The tax was levied to help pay for Civil War expenses. The role of the Commissioner of the Internal Revenue was born, too. The first tax was three percent on incomes between $600 and $10,000. Anything over $10,000 was taxed at five percent, oh, the good ‘ol days. Congress cut the rate in 1867 which resulted in 90 percent of America’s revenue coming from “sin” taxes (taxes on liquor, beer, wine, and tobacco) from 1868 to 1913. In 1872, the income tax was repealed only to be reinstated in 1894 thanks to the Wilson-Gorman Tariff Act in order to offset the reduction of tariffs on imported goods. This act introduced a two percent tax on incomes over $4,000. The Supreme Court quickly deemed this new tax unconstitutional in 1895.
A whole one percent income tax was introduced on net personal income tax in 1913. The tax jumped up to a whopping six percent on income greater than $500,000. Did anyone even have that much money back then? The low rates did not last long because the Revenue Act of 1918 ratcheted up the top tax bracket to 77 percent in an effort to raise funds for World War I expenses.The Individual Income Tax Act of 1944 gave us the standard deduction.
Conclusion
There have been a number of changes to the Tax Code since 1944 with the most recent one being the Tax Cuts and Jobs Act (TCJA). It seems the adage, "change is the only constant," applies to the Tax Code, too. The irony of discussing Tax Code changes right now is that the TCJA made many changes to the tax code that were set to revert back to the "original" provisions, and at the time of this article being penned, there is one House approved proposal and another proposal in the Senate to make many of the TCJA provisions permanent. In short, we changed things, planned to un-change them, and now may never change our minds again. This probable should have been stated at the onset of this fun history lesson, but these comments are meant to be apolitical. Therefore, please tiptoe through this potential political midfield. "Pre-Americans" and Americans yesterday and today do not like tariffs or taxes, but unfortunately, our government needs to have revenue to provide services to its constituents. Considering our strong hate relationship with taxes, the next comment may be taken as un-American, but we stand at the ready to pay more taxes to help decrease our deficit for future generations. Until then, we stand with you to stay abreast of taxes changes to take full advantage of all the deductions, credits, and tax reduction strategies available. After all, it is the American way. May your day be filled with celebration and gratitude-Happy Independence Day!