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Income taxes entwined with nation's long history

Deadline to file federal, state taxes arrives Tuesday.

Posted: April 12, 2008 9:54 p.m.
Updated: June 14, 2008 5:02 a.m.
 
"No taxation without representation" was the cry of American colonialists between 1763 and 1776. The phrase, which was coined by Rev. Jonathan Mayhew in a 1750 sermon in Boston, is symbolic of what many Americans are often taught in history books - that the United States of America was founded on protesting taxes (among other issues).

Yet taxes have been an American mainstay in some form or fashion, whether it was on the federal, state or local level. Popular protests such as the Boston Tea Party aside, there was also some justification for assessing taxes on American citizens. One such example was the Civil War, where President Abraham Lincoln created what is now known as the Internal Revenue Service in order to collect revenues to fund the military conflict with the Southern states.

On Tuesday, the deadline for Americans to file their federal income taxes - and for Californians to file their state income taxes - arrives.

"A strong and sound federal tax system is essential to America's future," President John F. Kennedy said in 1961. "Without such a system, we cannot maintain our defenses and give leadership to the free world. Without such a system, we cannot render the public services necessary for enriching the lives of our people and furthering the growth of our economy."

Along those lines, here is an overview of the history and development of a federal tax system in the United States:

Pre-Revolutionary War
When the British governed the American colonies, a few key taxes were enacted. In 1765, the English Parliament passed the Stamp Act. It was the first tax directly imposed on the colonies. Later, Parliament also imposed taxes on tea, which led to the Boston Tea Party.

The colonies themselves taxed only based upon need. Hence each colony had a different type of tax.

'Federal donations'
When the Articles of Confederation was adopted in 1781, it did not establish a nationwide tax system. Instead, the federal government relied on donations from the States for its revenue.

However, in 1789, the newly drafted Constitution granted the Federal Government the authority to raise taxes.

A nation split
The Civil War led to the creation of the modern-day IRS, when President Abraham Lincoln created the Commission of Internal Revenue in 1862 to levy personal income taxes. As the Union's debt during the Civil War grew at the rate of $2 million per day, the creation of the IRS was vital to funding the conflict.

16th Amendment
Approximately 50 years later, the 16th Amendment to the Constitution was ratified, authorizing a new income tax law. Tax rates began at one percent and rose to seven percent for taxpayers with income in excess of $500,000. Only one percent of the population paid income tax when the amendment passed. Form 1040, currently used for tax reporting, was also instituted in 1913.

World War I
The entry of the United States into World War I greatly increased the need for revenue and Congress responded by passing the 1916 Revenue Act. The 1916 Act raised the lowest tax rate from 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates and excess business profits.

Social Security
After the stock market crash of 1929 and ensuing Great Depression, President Franklin D. Roosevelt passed the Social Security Act, which provided unemployment compensation to workers who lost their jobs. The benefit was financed by a two percent income tax, half of which was taken from an employed person's check, the other half collected by the employer on the employee's behalf.

In 1953, the Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS).

Reagan tax cut
President Ronald Reagan ushered in a new era of income taxation, when he passed the Economic Recovery Tax in 1981 in response to state of the economy when he took office. It created the Individual Retirement Account and reduced individual tax brackets by 25 percent.

While the development of the American tax structure far more intricate than described above, the key is understanding that such a structure and necessary is vital to the operation of any country. Most Americans may dread paying income tax each April, yet its function is indispensable.

"The tax system must be adequate to meet our public needs," Kennedy said. "It must meet them fairly, calling on each of us to contribute his proper share to the cost of government. It must encourage efficient use of our resources. It must promote economic stability and stimulate economic growth.

"Economic expansion in turn creates a growing tax base, thus increasing revenue and thereby enabling us to meet more readily our public needs, as well as our needs as private individuals."

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