Has There Always Been a Federal Income Tax in America?
The first income tax in America was part of the Revenue Act of 1861. The first permanent income tax was put in place in 1913 as part of the 16th Amendment.
Before direct taxes like this, there were only tariffs (taxes on imports and exports).
Those on the lower economic rungs felt the tariff style of taxation was unfair, as it meant those profiting from industrialization weren’t “paying their fair share” and thus there was a lack of money for social programs.
The progressive-populist sentiment of figures like Lincoln, Bryan and the Roosevelts eventually won the income tax debate (with support from pro-government factions who wanted to recoup costs after the Civil War and WWI respectively), and tariffs began to be supplemented by the income tax (and other tax types like payroll taxes).
Today about half of American families pay little-to-no effective federal income tax. Meanwhile the increased federal income allows for the social safety-net programs established in the 20th century.
See PBS’s CrashCourse on economics for a clearer look at why we pay taxes, keep reading for an explanation of how America got an income tax.
Why is there taxes? The history of taxes and the American income tax. Taxes: Crash Course Economics #31.
When I find a man who is not willing to pay his share of the burden of the government which protects him, I find a man who is unworthy to enjoy the blessings of a government like ours… – William Jennings Bryan
TIP: Taxes have always been a thing. America was founded over a battle of taxation versus representation. Despite the initial battle over taxation, the Constitution allows for taxation. The 1913 16th amendment (which amends the constitution) clarifies that this can extend to income taxes.
The First Income Tax in the United States of America
The first income tax was established by the Revenue Act of 1861 to help pay for the Civil War, it was a 3% tax on income over $800 (about $20,000 in 2014).
A second Revenue Act of 1862 introduced the first progressive tax (the first tax was a flat tax of 3%, the second was progressive like we have today; see flat tax vs. progressive tax).
These taxes expired, then in 1894 we get a small income tax when Bryan’s “Free Silver” supporting Populist Party “demanded a graduated income tax” in its 1892 platform.
The socialist-populist-reformers of the day (a union of what we would consider right-wing and left-wing populists) felt that the tax system, which was like a sales tax via tariffs, was unfair as it favored the wealthy.
The Wilson-Gorman Act of 1894 then imposed the first peacetime income tax of 2%, however the court case Pollock v. Farmers’ Loan & Trust Co. of 1895 struck down this ruling declaring (referring back to wording of the constitution about direct taxes, and stating a tax on income was a direct tax.)
Finally, again with the help of Bryan under Wilson, the first permanent income tax was established in 1913 with the 16th amendment (the same year of the creation of the Federal Reserve).
Since 1913 America has officially had a progressive income tax, although the rates and the tax brackets have changed drastically from era-to-era.
Not without coincidence, the major social safety net programs start in Wilson and Bryan’s time.
The 16th Amendment Explained: The Constitution for Dummies Series.
TIP: If this sounds like the left and right in a battle between social programs and tax breaks for higher earners… then congratulations you are paying attention! If it sounds like a conversation over the role of government and individual liberty versus social justice… look at you, you are starting to get it! See our complex left-right political spectrum for more details. When Bernie Sanders says raise taxes for social benefits, and Trump says lower taxes, they are having the same conversation that was being had in 1862, 1894, 1913, etc, etc.
The First Permanent Income Tax and the 16th Amendment
In 1913 Congress proposed the Sixteenth Amendment, which states: “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.” This allowed for the first permanent income tax in the United States of America.
The first permanent income tax was established in 1913. This consisted of 7 brackets ranging from 1% to 7% for income above $500,000 (about $11.86 million in 2014).
Rising Income Taxes Until WWII
Taxes rose from 1913 to 1917, jumping quickly to a top bracket of 67% for income over $2,000,000 ($36.68 million in 2014). In 1925 taxes fell again after paying off many WWI debts, but then rose again to a 1944 peak near the end of WWII.
In 1944, during WWII, the top income tax bracket for income above $5,000,000 ($84.45 million in 2014) was 94%, this helped to pay for WWII and helped recuperate the remainder of the costs of WWI. In comparison, England had a similarly high tax rate due to the war as well.
WWII to Reagan
Despite the conflict in Vietnam, taxes were reduced for the richest Americans from WWII to the Reagan era, however the top income tax bracket began to be applied to lower income groups, meaning that a much larger fraction of the population was paying the top tax rate.
During the Reagan era the top bracket taxes were cut to 28% above $29,750 ($59,000 in 2014). While the Reagan era greatly reduced the top tax rates, it greatly expanded how many would pay those rates.
Bush to Obama
Since the Reagan era the percentage of income paid by the top tax bracket has increased. The top tax bracket itself has also increased in the sense that the effective tax rate for the middle class has changed little, while the tax rate the very rich pay has gone up.
In 1991 President George H. W. Bush raised taxes by 3%, but pushed the top tax rate from $29,750 to $82,150 easing the tax burden on the middle class. President Bill Clinton made a similar change in 1993, (Omnibus Budget Reconciliation Acts of 1990 and 1993).
After this, President George W. Bush cut income taxes, but raised the top tax rate, giving many people a break. The American Taxpayer Relief Act of 2012, signed under President Obama continued the basic theme of the Bush tax cuts, despite drawing criticism from Bush tax cut supporters.
100 Years Of Income Taxes – TheBlazeTV – REAL HISTORY.
Tax Brackets, Top Rates, Percentages, and Inflation
To understand how the income tax affects people we need to consider the number of tax brackets, the top tax rates, the amount of money that qualifies for each bracket, inflation, and the times. In other words, we may think a 94% tax rate is draconian, but the bottom rate was 23%, which was also high. The economics of WWII demanded a high cost of survival. America was supported at all costs. Tax was over $2.88M in today’s dollars, which paints a different picture than one might get as an immediate reaction.
Below is a chart from Wikipedia explaining the tax bracket over time. This can be verified against Taxfoundation.org.
TIP: For those with high incomes, the lower the tax brackets are, and the more flat the taxes are, the better it is for them. The most oppressive taxes for the rich are the ones like FDR had in 1941 where you have a really high top bracket with a really high rate (as the most money is then contributed by the rich, rather than with a lower bracket with a lower tax rate where the poor contribute more; never mind discussions of the sales tax, excise tax, and other taxes that burden the poor more). Since Reagan Supply Side taxation has grown the wealth gap in ways not seen since the Gilded Age (by some measures at least). Learn more about how taxes work, learn more about the wealth gap (and how it has led to the ruin of nations and World Wars).
|History of income tax rates adjusted for inflation (1913-2010)|
|Number of||First Bracket||Top Bracket|
|1913||7||1%||7%||$500,000||$11.86M||First permanent income tax|
|1917||21||2%||67%||$2,000,000||$36.68M||World War I financing|
|1925||23||1.5%||25%||$100,000||$1.34M||Post war reductions|
|1941||32||10%||81%||$5,000,000||$79.86M||World War II|
|1942||24||19%||88%||$200,000||$2.75M||Revenue Act of 1942|
|1944||24||23%||94%||$200,000||$2.88M||Individual Income Tax Act of 1944|
|1964||26||16%||77%||$400,000||$3.03M||Tax reduction during Vietnam war|
|1981||16||14%||70%||$215,400||$563k||Reagan era tax cuts|
|1982||14||12%||50%||$85,600||$211k||Reagan era tax cuts|
|1987||5||11%||38.5%||$90,000||$186k||Reagan era tax cuts|
|1988||2||15%||28%||$29,750||$59k||Reagan era tax cuts|
|1991||3||15%||31%||$82,150||$142k||Omnibus Budget Reconciliation Act of 1990|
|1993||5||15%||39.6%||$250,000||$406k||Omnibus Budget Reconciliation Act of 1993|
|2003||6||10%||35%||$311,950||$398k||Bush tax cuts|
|2013||7||10%||39.6%||$400,000||$403k||American Taxpayer Relief Act of 2012|
UNDERSTANDING TAX RATES AND THE WEALTH GAP: It is very hard to understand the significance of income taxes without diving into details on marginal tax rates and tax breaks and comparing that to other taxes families pay in practice. Learn more about how the progressive income tax system works. Consider the mathematics behind this example: You earn 2 million dollars in 1944, that means on dollars after $200,000 you pay a 94% rate (meaning you are going to invest in business and not claim profits and grow the wealth gap). Now, consider, you make 2 million in 1988 under Reagan, there you pay only 28% after $29,750 (just like Joe the butcher does). The difference is you get to keep 72% of your profits (unlike the 6% after $200,000 you kept under FDR). This is why the wealth gap is growing, simple economics. This does have a trickle down effect (supply side), that is true… but that isn’t the only thing going on. When there are less brackets, a flatter tax, and lower top marginal tax rates it grows the wealth gap and lifts up the bottom. When there are more brackets, higher top brackets, and a higher top rate it decreases the wealth gap and means more money for the state. There is no right answer, but there is some serious implications that are hard to get without really thinking about every aspect of taxation (and that is only regarding the federal income tax alone, there are many other types of taxes).