As long as rulers have needed money for the military, public works, or just to enrich themselves, they have relied on taxes. As Americans approach the dreaded April 15 income tax-filing deadline, it is worth considering some key facts about taxation.
There are many different modes of taxation: individual income taxes, corporate profits taxes, capital gains taxes, property taxes, inheritance taxes, sales taxes, social insurance taxes, taxes on imports, and a whole host of government-levied fees that look and feel a lot like taxes.
Because they did not have the sort of tax reporting information we have now, ancient bureaucracies put a premium on taxes that were easy to collect and hard to avoid. A head tax—that is, a fixed fee paid by everyone in the community—would have been difficult to dodge since most people living in a community would be known to the authorities. In biblical times, a head tax was collected in conjunction with the census: those who were counted were obliged to pay a half-shekel (Exodus 30:11-16).
Property taxes, such as a tax on real estate, were also a favorite of ancient tax authorities, since the owners of land and buildings were readily identifiable and could only sneak off without paying if they were willing to abandon their property. During the reign of William III, England introduced a tax on windows. Since glass was expensive, this would seem to have been an efficient way of imposing a higher tax on the well-to-do; however, wealthy homeowners who wanted to avoid paying the tax simply reduced the number windows in their homes.
An income tax was first introduced in the United States in 1862, when President Abraham Lincoln signed the Revenue Act into law. The act, which imposed a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000, helped the North meet the high financial cost of the Civil War. After the war ended and the government’s fiscal situation improved, income tax rates were lowered; the tax was repealed in 1872.
President Grover Cleveland reinstated the income tax when he signed the Wilson-Gorman Tariff Act of 1894 into law. The main purpose of the law was to reduce tariffs—at the time, one of the government’s main sources of revenue–and a 2 percent income tax was included in the law to make up for the revenue lost because of lower import duties. The tax was ruled unconstitutional by the Supreme Court the following year on the grounds that the income tax was a “direct tax” and that the Constitution (Article I, section 2) stipulated that direct tax taxes were to be apportioned among the states on the basis of population.
The Supreme Court’s objection was overcome by the passage of the 16th amendment in 1913, which exempted the income tax from direct tax provision of the Constitution. In the ensuing tax law, a 1 percent tax was assessed on incomes above $3,000 (probably somewhere between $50,000 and $75,000 in today’s terms, depending on how inflation is calculated) for individuals and $4000 for married couples, with a 6 percent surtax on incomes of more than $500,000 (the equivalent to several million dollars today). During the subsequent century, the tax rate schedule would grow increasingly complex, but the income tax was here to stay.
We can get a sense of the income tax’s pervasiveness by dividing the number of tax returns filed by the total population (since many tax returns covered multiple people, this measure is only a rough approximation). Figure 1 plots the number of tax returns filed since the inception of the income tax. In 1913, 358,000 tax returns were filed—equivalent to less than 0.5 percent of the population. Both tax rates and the number of people subject to the income tax rose dramatically during World War I, as the government used the income tax to help finance the war effort: by 1917, the number of returns filed had increased ten times–to nearly 3.5 million (or about 3.5 percent of the population)—and by 1920, the number of returns filed rose to more than 7 million (nearly 7 percent of the population). With the sharp drop in personal income during the Great Depression, the number of returns filed declined to less than 3.5 million (2.75 percent of the population), before rising dramatically, to approximately 50 million (37.5 percent of the population), by the end of World War II. Today, approximately 144 million tax returns are filed annually, equal to about 45 percent of the population.
As Figure 2 makes clear, the income tax has been—and continues to be—the most important source of revenue for the US government. In 1965, the individual income tax accounted for just under 41 percent of total US government revenue. The percentage has varied between 43 and 49 percent of government revenue, and currently stands at just over 46 percent (payroll taxes come in second, at just under 34 percent).
Finally, it is worth noting that during its century-long history, tax law and income tax forms have grown increasingly complicated. The original 1040 form (you can still read the 1913 version) was three pages long, with one page of instructions. For those of you filing 2014 tax forms, the Form 1040 instruction booklet is more than 100 pages long—and warns the taxpayer that the instructions do not include those for the various schedules. Just how many additional forms do you need to file with your 1040 form? The answer will vary from household to household; however, Form 8885, concerning the health coverage tax credit (and presumably one of the more recently added forms), indicates that it is 134 in the attachment sequence.
Some of the increased complexity of the tax code arises because personal finance is more complicated than it was 100 years ago, and important government programs necessitate additional paperwork. On the other hand, the increasing complexity of tax returns makes it more difficult for citizens to understand who benefits—and who loses—from tax policy. While filling out our tax forms, we should be mindful of the fact that some of this additional complexity may be intentional.
Feature image credit: Abraham Lincoln, by Alexander Hessler. Public domain via Wikimedia Commons.
[…] Federal tax returns in the United States are not due until April 15. While you are getting ready to file, take a look at my April OUP blog post on the US income tax. […]
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