Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Income Taxes – A Long Road Traveled

As news comes in this morning of our almost leap over the fiscal cliff, you may ask, “How did we get here and has it always been this complicated?”

Well, President Lincoln signed the first revenue-raising measure to help pay Civil War expenses in 1862.  The measure created a Commissioner of Internal Revenue and the nation’s first income tax.  The tax rate was 3% on incomes between $600 – $10,000 and 5% on incomes over $10,000.  In 1867, heeding public opposition to an income tax, Congress cut the tax rate.  From 1868 to 1913, 90% of all revenue came from taxes on liquor, beer, wine, and tobacco.

The income tax was repealed in 1872 and then revived in 1894 by the Wilson Tariff Act which also created the Bureau of Internal Revenue.  Then in 1895 the Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population.  So the income tax division was disbanded.

In 1913 as the threat of war loomed, Wyoming became the 36th and last state to ratify the 16th Amendment.  The amendment stated, “Congress shall have the 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.”  The first Form 1040 was introduced.

The Revenue Act of 1918 raised even greater sums for the World War I effort.  It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77%. The Revenue Act of 1942, hailed by President Roosevelt as “the greatest tax bill in American history,” passed Congress.  It increased taxes and the number of Americans subject to the income tax.  It also created deductions for medical and investment expenses.

The Current Tax Payment Act passed by Congress in 1943 required employers to withhold taxes from employees’ wages and remit them quarterly.  President Eisenhower renamed the Bureau of Internal Revenue to the Internal Revenue Service in 1953.  The filing deadline for individual tax returns changed from March 15 to April 15 in 1954.

The first electronic filing of tax returns began in 1986 when President Reagan signed the Tax Reform Act which contained 300 provisions and took 3 years to implement.  The act codified the federal tax laws for the 3rd time since the Revenue Act of 1918.

So what changes will we see in 2013?

By Pamela Wheeler