The nation had few taxes in its early history. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves.
The high cost of the War of 1812 brought about the nation's first sales taxes on gold, silverware, jewelry, and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs on imported goods to provide sufficient funds for running the government.
1643: The colony of New Plymouth, Massachusetts levies the first recorded income tax in America.
1861: Congress passed the first income tax law as an emergency measure to fund the Civil War. In order to support the Civil War effort, Congress enacted the nation's first income tax law, Revenue Act of 1861. It was a forerunner of our modern income tax in that it was based on the principles of graduated, or progressive, taxation and of withholding income at the source. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%. Those with incomes of more than $10,000 paid taxes at a higher rate. Additional sales and excise taxes were added, and an “inheritance” tax also made its debut.
The Act of 1862 established the office of Commissioner of Internal Revenue. The Commissioner was given the power to assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and income and through prosecution. The powers and authority remain very much the same today.
In 1866, internal revenue collections reached their highest point in the nation's 90-year history—more than $310 million, an amount not reached again until 1911.
In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872.
1872: Congress repeals (eliminates) the income tax law.
1894: As a response to complaints that excessive reliance on tariffs as a source of revenue resulted in an increase in the cost of imported goods, Congress again passed an income tax law which had a short-lived revival.
1895: The US Supreme Court ruled that the income tax law was unconstitutional. US Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution. Pollock v. Farmers' Loan & Trust Company, 157 U.S. 429 (1895), aff'd on reh'g, 158 U.S. 601 (1895), with a ruling of 5–4, was a landmark case in which the Supreme Court of the United States ruled that the unapportioned income taxes on interest, dividends and rents imposed by the Income Tax Act of 1894 were, in effect, direct taxes, and were unconstitutional because they violated the provision that direct taxes be apportioned. (The decision was superseded in 1913 by the Sixteenth Amendment to the United States Constitution.)
1909: Modern income tax: Fifteen years after Pollock, Congress took two actions to deal with their increasing revenue needs.
- Corporate income ("excise") tax. First, they passed a corporate income tax, but labeled it an “excise tax.” The tax was set at 1% on all incomes exceeding $5,000. In 1911, the U.S. Supreme Court upheld this corporate “excise tax” as constitutional in Flint v. Stone Tracy Company, in which the court ruled that the tax was a special excise tax on the privilege of doing business.
- Sixteenth Amendment. More importantly, in 1909 Congress passed the Sixteenth Amendment, which would do away with the apportionment requirement of the Constitution if enacted. This amendment reads as follows:
- 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.
1916: The Federal Estate Tax was enacted to help generate additional revenue to fund America's anticipated entry into the first World War. The US Supreme Court in 1916 upheld the progressive income tax as constitutional in Brushaber v. Union Pacific Railroad Company, 240 U.S. 1 (1916). The Supreme Court indicated that the amendment did not expand the federal government's existing power to tax income (meaning profit or gain from any source) but rather removed the possibility of classifying an income tax as a direct tax on the basis of the source of the income. The Amendment removed the need for the income tax to be apportioned among the states on the basis of population. Income taxes are required, however, to abide by the law of geographical uniformity.
1917: Congress raised tax rates in response to the increasing cost of the war and approved credit for dependents and deductions for charitable contributions.
1918: The maximum combined basic and super income tax rate reached 77%. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920.
1922: For the first time preferential tax treatment was provided for capital gains.
1932: The tax law was amended to provide that US presidents were liable for federal income tax on their salaries. Franklin Roosevelt was the first president since Abraham Lincoln to pay federal income tax on his presidential salary.
1935: The Social Security tax, 1% on the first $3,000 of wages, was enacted.
1940: First Social Security benefits were paid.
1941: Tax tables for low-income taxpayers were introduced, simplifying the calculation of tax liability.
1942-1945: With the advent of World War II, employment increased, as did tax collections—to $7.3 billion. New tax laws, in response to the cost of World War II, created withholding on wages in 1943, more tax brackets for lower income taxpayers, the standard deduction, a personal exemption for dependents, a deduction for medical expenses, and increased tax rates. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945. By the end of the war the maximum tax rate was 94%.
1953: The Bureau of Internal Revenue becomes the Internal Revenue Service.
1954: Congress completely revised the Tax Code, changing rates, redefining Adjusted Gross Income, and adding credits for retirement income and dividends and new itemized deductions.
1961: Taxpayers were required to provide their Social Security or other taxpayer identification number to banks and other financial institutions so they could report interest and dividend payments to the IRS.
1964: Tax rates were reduced from a range of from 20% to 94% to from 16% to 77%. The Income Averaging method of tax computation was introduced.
1970: Congress created a Minimum Tax so high-income individuals could not completely avoid paying taxes through the use of preferential tax shelters, loopholes and deductions.
1974: Congress created the deductible Individual Retirement Account (IRA) for taxpayers not covered by employer pension plans as part of ERISA.
1975: Low-income taxpayers were allowed to claim a refundable Earned Income Tax Credit (EITC).
1979: Unemployment compensation was made partially taxable.
1981: Tax legislation reduced tax rates by 25% over 3 years, indexed tax brackets for inflation, and applied the same tax rates to earned and unearned income. In 1981, Congress enacted the largest tax cut in U.S. history, approximately $750 billion over six years. The tax reduction, however, was partially offset by two tax acts, in 1982 and 1984, that attempted to raise approximately $265 billion.
1984: For the first time recipients of Social Security and Railroad Retirement benefits were subject to tax on up to 50% of the benefits received (President Reagan), depending on the recipient's income.
1986: On Oct 22, 1986, President Reagan signed into law the Tax Reform Act of 1986, one of the most far-reaching reforms of the United States tax system since the adoption of the income tax. The top tax rate on individual income was lowered from 50% to 28%, the lowest it had been since 1916. Tax preferences were eliminated to make up most of the revenue. In an attempt to remain revenue neutral, the act called for a $120 billion increase in business taxation and a corresponding decrease in individual taxation over a five-year period.
The largest revision of the Tax Code since 1954, the Tax Reform Act of 1986, was enacted. The law reduced the number of tax brackets from 14 to 2, decreased the maximum tax rate from 50% to 28%, repealed the dividend exclusion, Income Averaging, the itemized deduction for sales tax paid and the preferential treatment of long-term capital gains, introduced the passive activity rules, the Kiddie Tax, the deduction from gross income for health insurance premiums paid by self-employed individuals, and the 2% of AGI limitation on most miscellaneous itemized deductions, phased out the itemized deduction for personal (credit card, auto loan, etc.) interest, limited the deduction for business meals and entertainment to 80%, and replaced the additional personal exemption for age 65 and blind with an increased standard deduction.
1987: For the first time taxpayers were required to list the Social Security number of dependent children, age 5 and over.
1990: Following what seemed to be a yearly tradition of new tax acts that began in 1986, the Revenue Reconciliation Act of 1990 was signed into law on Nov. 05, 1990. As with the '87, '88, and '89 acts, the 1990 act, while providing a number of substantive provisions, was small in comparison with the 1986 act. The emphasis of the 1990 act was increased taxes on the wealthy.
Revenue Reconciliation Act of 1990 added a third tax bracket (31%) and instituted the reduction of itemized deductions and phase-out of personal exemptions for high-income taxpayers.
1993: On Aug. 10, 1993, President Clinton signed the Revenue Reconciliation Act of 1993 into law. The act's purpose was to reduce by approximately $496 billion the federal deficit that would otherwise accumulate in fiscal years 1994 through 1998.
OBRA 1993 increased the taxable share of Social Security and Railroad Retirement Tier I benefits for some beneficiaries. That law taxes up to 85% of benefits for individuals whose provisional income exceeds $34,000 and for married couples whose provisional income exceeds $44,000.
Omnibus Budget Reconciliation Act added the 36% and 39.6% tax brackets, increased the maximum tax on Social Security benefits from 50% to 85% (President Clinton), and reduced the deduction for business meals and entertaining from 80% to 50%.
In 1997, Clinton signed another tax act. The act, which cut taxes by $152 billion, included a cut in capital-gains tax for individuals, a $500 per child tax credit, and tax incentives for education.
1998: In response to abusive treatment of taxpayers by the Internal Revenue Service, the IRS Reform and Restructuring Act of 1998 was enacted.
2001: Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in over 20 years, with 85 major provisions. All provisions of this act will expire in 2011.
President George W. Bush signed a series of tax cuts into law. The largest was the Economic Growth and Tax Relief Reconciliation Act of 2001. It was estimated to save taxpayers $1.3 trillion over ten years, making it the third largest tax cut since World War II. The Bush tax cut created a new lowest rate, 10% for the first several thousand dollars earned. It also established a slow schedule of incremental tax cuts that would eventually double the child tax credit from $500 to $1,000, adjust brackets so that middle-income couples owed the same tax as comparable singles, cut the top four tax rates (28% to 25%; 31% to 28%; 36% to 33%; and 39.6% to 35%).
2003: To stimulate the economy, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, the third major tax bill in as many years, and the third largest tax cut in history. The Jobs and Growth Tax Relief and Reconciliation Act of 2003 accelerated the tax rate cuts that had been enacted in 2001, and temporarily reduced the tax rate on capital gains and dividends to 15%.
2004: The US was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization. Along with that tax hike, Congress passed a cornucopia of tax breaks, which for individuals included an option to deduct the payment of whichever state taxes were higher, sales or income taxes.
Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.
2010: Commonly called Obamacare or the Affordable Care Act, signed into law by President Barack Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act, it represents the most significant government expansion and regulatory overhaul of the US healthcare system since the passage of Medicare and Medicaid in 1965.
The PPACA is aimed at increasing the rate of health insurance coverage for Americans and reducing the overall costs of health care. It provides a number of mechanisms—including mandates, subsidies, and tax credits—to employers and individuals to increase the coverage rate.
2012: American Taxpayer Relief Act of 2012 was passed by Congress on January 1, 2013, and was signed into law by President Barack Obama the next day.
The Act centers on a partial resolution to the United States fiscal cliff by addressing the expiration of certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (known together as the "Bush tax cuts"), which had been temporarily extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Act also addressed the activation of the budget sequestration provisions of the Budget Control Act of 2011.
As a compromise measure, the Act gives permanence to the lower rate of much of the Bush tax cuts, while retaining the higher tax rate at upper income levels that became effective on January 01, 2013 as a result of the expiration of the Bush tax cuts. The Act also establishes caps on tax deductions and credits for those at upper income levels. It did not tackle federal spending levels or debt control to any great extent, instead leaving that for further negotiations and legislation.
Source: Tax Foundation, Wikipedia, Internal Revenue Code
