The Rushmore Report – A Surprising History of the National Income Tax


As tax day approaches, a review of the history of the American tax system is in order. The U.S. government has been taxing its citizens for most of its history. However, during the early years, the tax was minimal and applied only to the affluent. Beginning with the Great Depression and FDR’s New Deal, that all changed.

Since FDR, the government has been growing larger and requiring more and more revenue. Let’s review the individual income tax and the corporate income tax.

A Brief History of the U.S. Income Tax

During the American Revolution (1775-1783), most states levied a faculty tax, which was a tax on a person’s property and ability to earn income from commerce or trade. For several years after the Revolution, there was no national tax and the government provided very little for its citizens. The Constitution of 1789 gave taxation powers to the federal government to “pay the debts and provide for the common welfare of the United States.”

Because of the Civil War (1861-1865), the U.S. government levied a temporary income tax on individuals. Decades later, in 1894, Congress enacted the Wilson-Gorman Tariff Act, which included a two percent flat tax on incomes over $4,000 ($115,000 in today’s dollars). This tax affected fewer than 10 percent of households and was the first tax levied during peacetime.

The modern tax era was birthed in 1913, with the passage of the 16th Amendment, allowing for a federal income tax. This applied mostly to high wage earners.

The top marginal bracket was raised to 77 percent to pay for World War I. By the 1920s, the top bracket was back down to 25 percent. This fueled the “Roaring Twenties,” a bubble in the financial markets, followed by the Great Depression of 1828.

Corporate Income Tax

The corporate tax has ranged from six to 15 percent. Beginning in 1943, the percentage collected via corporate tax began to deline. But the personal income tax has not wavered much. Today, the corporate tax generates far less revenue for the government than does the personal income tax.

Conclusion

Today, we have a tax code of over 700,000 pages. It is unwieldly, cumbersome, and entirely too complex. Moreover, the individual income tax is the largest source of federal revenue. With an ever-expanding federal government, it seems plausible that future taxes will be more creative and less obvious to the casual observer. However, because government’s primary targets are individuals and corporations, any additional tax on businesses will only serve to drive companies away.

As companies leave the U.S., the country could become like Detroit, once a beautiful city with a strong tax base. Today, its tax base has migrated to other localities, leaving the city with a severe tax shortage. Could the U.S. become like Detroit on a larger scale? Yes, if politicians continue to attack the golden goose. The prudent path would be to cut spending and implement greater fiscal control in Washington. It is no longer acceptable to give politicians a blank check to use for personal gain. We need the George Washingtons of this nation to step forward, serve the country, and return to private life to live under the rules and regulations that they helped to enact.

About the Author

Mike Patton is a contributor to Forbes.


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