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Benjamin Franklin was correct in his assessment when he said nothing was certain except death and taxes. But while taxes have been eminent, they've been far from consistent, especially in the United States. The tax plan has undergone a series of reforms and changes over the years, tracing its roots back to pre-independent America.
Before a federal government was established, America was tax-free, at least for income taxes. Although they didn't pay taxes on earnings, American colonists paid the British excise taxes on everything from real estate to tea. The colonists revolted, leading to the infamous Boston Tea Party and an uprising against the British in 1773.
Following the American Revolution, the newly established government was cautious about taxation, and direct taxation was prohibited by the Constitution. Government revenues were collected through tariffs and duties on liquor, tobacco, sugar, and legal documents.
The first challenge came in 1794 with the Whiskey Rebellion when Pennsylvanian farmers burned down tax collectors' houses. Defending the right to collect indirect taxes, Congress put down the revolt by military force.
The sanctity of the Constitution and the ancestral aversion to taxes was tested in the 1790s when conflict with France led to a property tax. The War of 1812 was funded through higher duties and excise taxes. The impact of the Civil War created the income tax.
The American Civil War incurred a massive amount of debt. To help pay for it, Congress passed the Revenue Act of 1861, and tax was levied on incomes exceeding $800 and was not rescinded until 1872. This act created the modern progressive tax system with allowances for deductions. The U.S. Internal Revenue Service (IRS) was founded, originally called The Office of the Commissioner of Internal Revenue.
World War I led to three acts that raised tax rates and lowered exemption levels. The number of people paying taxes in the U.S. increased to 5%, and separate taxes were introduced for estates and excess business profits.
These taxes were rolled back following the war in five phases, and the economy experienced a huge boom. Government tax receipts reached $3.6 billion in 1918, the last year of the war. Despite lower taxes, the government raised $6.6 billion in 1920. The stock market crash in 1929 and the financial fallout saw these revenues fall to $1.9 billion by 1932.
The U.S. Constitution originally forbade taxes levied in proportion to each state's population. The 16th Amendment was ratified in 1913 and implemented an income tax on those with an annual income over $3,000, affecting less than 1% of Americans.
Roosevelt's New Deal and WWII saw taxes introduced or increased to boost the economy. The New Deal ran a heavy deficit that required revenue. By 1936, the top tax rate was a staggering 79%, and the economy's output plummeted. Taxes were raised several more times, except the 1938 Revenue Act contained a corporate tax cut that Roosevelt objected to but was nevertheless passed.
By 1940, the need for the U.S. to prepare for war and support its allies led to aggressive taxation. By 1944, those with incomes of $500 faced a 23% tax, and the rates climbed to 94%. By 1945, 43 million Americans paid taxes, and the yearly receipts were more than $45 billion, up from $9 billion in 1941.
The Social Security Act of 1935 was part of Roosevelt's New Deal.
The Revenue Act of 1945 rolled back $6 billion in taxes, but the burden of Social Security and an expanded government kept them from going much lower. The highest tax rate was over 80% in the 1950s, and the pay-as-you-go withholding system introduced as a wartime measure was never eliminated.
Rather than rolling back rates, the tax code was being rewritten to allow deductions or to lower rates on private foundations while raising rates on corporate profits. This explosion in loopholes made the tax code difficult to understand.
The 1960s and 1970s were a time of massive inflation, with government deficits growing with the addition of Medicare to the Social Security system. Taxes were not indexed for inflation, and the real value of income decreased. President Richard Nixon was forced to pay over $400,000 in back taxes. The controversy over the Watergate scandal eclipsed the president's tax evasion.
The Economic Recovery Tax Act of 1981 was a temporary turning point for taxation. This Act significantly lowered all the individual tax brackets and changed how companies accounted for capital expenditures, encouraging investment in equipment.
The Reagan administration's budget was based on an accepted inflation rate, and when the attempts to quash inflation kicked in too quickly, a deficit was created. Consequently, Reagan decreased some of his tax cuts in 1984 to cover the shortfall. In 1986, the IRS claimed that 900,000 Americans were millionaires, partially due to the high-level tax cuts under Reaganomics.
In 1986, another tax reform act lowered the top rate from 50% to 28%, cutting corporate taxes from 50% to 35%. With more Americans now willing to take their wealth in taxable income, the overall tax receipts were relatively unchanged despite the drop.
Under President Bill Clinton, modest tax increases started in 1993, and 1997 saw the expansion of negative income tax. Negative income tax allowed those below certain income thresholds to obtain tax credits.
The 2001 tax cut introduced by former President George Bush once again dialed back the trend of tax increases but continued to increase tax credits and negative income tax. Though not intended for it, this long-term tax cut helped shorten the recession following the dotcom crash, sparing the economy from any specific stimulus measures. The tax cuts expired in 2010 just as baby boomers were leaving the workforce and the world was reeling from the effects of the financial crisis and the Great Recession.
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), based on Reagan Administration tax proposals to slash individual, corporate, and estate tax rates. The law made a series of concessions, including cutting tax rates across various income tax brackets. The TCJA lowered tax rates across income levels to reduce Americans' income tax burden, but also eliminated popular itemized deductions.
President Joe Biden campaigned on the premise that the 2017 Tax Cuts and Jobs Act benefited large corporations and wealthy individuals. He proposed to increase top-income tax rates, limit or eliminate incentives, and use the resulting revenue to pay for middle-class tax relief.
President Biden’s FY 2024 Budget outlines several tax increases that would garner $4.8 trillion in new taxes from businesses and high-income individuals. After $833 billion in expanded tax credits, it would raise nearly $4.0 trillion in new taxes.
Two provisions in the federal tax code were affected by the Tax Cuts and Jobs Act TCJA of 2017, including the state and local tax (SALT) deduction and the home mortgage interest deduction (MID).
Individual tax provisions of the 2017 TCJA expire at the end of 2025. As of 2023, President Biden supported extending the TCJA’s income tax cuts for many households.
In 2023, the three leading expenditures were Social Security, Health Insurance, and Defense spending.
After the American Revolution, Americans paid excise taxes on liquor and real estate. Income taxes were first introduced during the Civil War. The 16th Amendment of the U.S. Constitution provided the ability to levy taxes on individual states. Taxation provides funds for Social Security, Medicare, education, and military spending.
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