The History of the American Income Tax
by Robert L. Harrison
On April 15th Americans are reminded of the customary personal income tax filing deadline. This year, to account for the disruption caused by the corona virus pandemic, the federal government has moved the filing date to July 15 th . In recent years the income tax has been a major source of financing for the federal government.
In the early years of the American nation there was no income tax. For its first nine decades the federal government was primarily financed by tariffs. To pay for the War of 1812 a one-year excise tax on whiskey augmented the temporarily diminished revenues from tariffs.
In early California, most references to the income tax referenced how it was imposed in European countries. Such a discussion appeared in the San Joaquin Republic in the 1850s. The newspaper did not support a tax on personal incomes because: “….the income to be taxed could be ascertained solely by the statements of the party interested [and] it would require parties to expose their private business.” The Republic continued, “We know the idea of an income tax is repulsive to Americans, because it implies a double tax. In Great Britain, property is taxed on its assessed value, and then a further tax is levied on the income from the same property.”
On July 13, 1861 the Main Journal reported, “It is said that Secretary [of the Treasury] Chase will recommend to Congress to impose a slight income tax.” In August 1861 Congress did indeed enact the first American personal income tax to pay for the Civil War. The Journal on December 20, 1862 reminded its readers: “The tax on salaries and incomes is not to be levied until the first of May, 1863, when the tax will be collected on incomes for the year ending the first of December next preceding, or for this year.”
Another reminder to its readers appeared in the of June next.” During the Civil War the rate of income tax was less than currently required. The tax rate listed in the Marin Journal on February 21, 1863: “The income tax is to be paid on the year ending the 31 st of December, and is payable on or before the 30 th Journal article was, “….three per cent on the amount over $600.” The rates set by Congress for 1863 were 3% on incomes over $600 (about $12,000 in 2020) and 5% for incomes over $10,000 (about $200,000 in 2020).
The Treasury Department advertised in the September 10, 1864 Marin Journal: “By joint resolution of the Congress July 4 th , 1864, there is imposed a special tax on incomes for the year ending December 31 st , 1863. Notice is hereby given to all persons in the 1 st Division, 5 th District, comprising the County of Marin, that they are required to make detailed statements of their income, and return the same to this office, on or before October 1 st , 1864….It is expected that all persons will be punctual in making their returns, and will avoid being assessed and having to pay additional penalties, as provided by law.”
The Republican-inclined Marin Journal dismissed concerns regarding the income tax in a July 27, 1867 opinion piece titled “Democratic Complaints.” The article explained, “Marin County contains about one thousand voters, less than fifty of whom pay income tax….” The Journal suggested that because the tax was only on those making over $1,000 annually (about $20,000 in 2020) it was not a burden on the poor. The article concluded: “….but when these Copperheads [anti Civil War Democrats]….play the demagogue by sounding the note of alarm in the ears of those who do not suffer by the national indebtedness,….would it not be well for the people to consider whether it would be well to reinstate the Democratic party in power.”
A note in the Marin Journal of May 13, 1871 read: “Get Ready — Those persons who are liable to pay Income Taxes….will have an opportunity of seeing the Collector on the 25th instant. His headquarters while here will be at the Marin Hotel.” The 1870 tax year was the last that the Civil War income tax would be collected. Congress repealed the tax in 1872.
A second income tax proposing a 2% rate on income over $4,000 annually (about $120,000 in 2020) was enacted by Congress as part of the 1894 Tariff Act. This tax did not meet an 1895 legal challenge and was declared unconstitutional by the U. S. Supreme Court.
The income tax was made permanent by the 16th Amendment to the U. S. Constitution. In 1913 President Woodrow Wilson ratified the amendment and thus established what is often referred to as the year the American income tax was instituted. In 1915 the tax rate was 7%. By 1916 it had more than doubled to 15%. To finance World War I the 1917 War Revenue Act raised the top tax bracket to 67%.
The Marin County Tocsin (which leaned toward the Democratic Party) supported Wilson’s ratification of the income tax in an October 31, 1914 editorial. That editorial bore the title “President Wilson Did Right,” a quote from James D. Phelan, Democratic candidate for U. S. Senator. The Tocsin explained, “….the income tax has been imposed — the most just of all taxation — because it falls upon those who can best bear it.” The editorial concluded, “His [Wilson’s] course demonstrates his courage.”
The top income tax rate was raised to 73% in 1920, reduced to 46% in 1924 and further reduced for the remainder of the 1920s and into the 1930s to 25%. With the onset of World War II the top tax rate rose to as high as 94% in the War years. Following the War the top tax rate stayed at over 90% until 1964. Few paid at the top rate with the highest incomes paying at an effective rate of about 70%.
The top tax rate was lowered to 50% in 1982 and eventually went down to 28% in 1988. It rose to 39.6% in 2000 and then was lowered again to 35% between 2003 and 2012. By 2018 and remaining through 2020, the top marginal tax rate, including the 3.8% premium for the Patient Protection and Affordable Care Act, was an effective 40.8%.
In 2019 the income tax provided about half of the federal government’s receipts. The combination of Income and Payroll Taxes were the source of nearly 90% of federal government revenues. Where income taxes were once a temporary measure intended to finance the Civil War, they now provide crucial financing for the federal government.
Originally published at https://annetkent.kontribune.com.
