Due to the fiscal situation in the country, I’ve decided to start a new series of blogs. I’ve had one related to China’s financial situation and I’ve written another series based on the trade off between the economy and the environment. This blog series, however, will focus on taxation: different tax systems, how taxes affect society, proposed reforms to the tax system, and perhaps most importantly, the history of taxation in the US.
The series will kick off the last item in that list – the history of American taxation. In this blog, I hope to educate my readers about how our tax system has evolved over our relatively short history and put our current tax system in perspective.
Any elementary school kid could (hopefully) tell you that the history of the American Revolution arguably began with “taxation without representation.” The British Parliament unfairly levied taxes on the 13 Colonies without giving them a say in governance. This system of taxation ultimately led to the Boston Tea Party, and you know the rest.
But what happened once the Americans won their independence in 1789? How did the new American government, so against the idea of unfair taxation, get funds to pay for public goods?
A surprising fact is that the United States of America government did not levy an income tax until 1861 in order to pay for the American Civil War. Until that time, tariffs were the government’s greatest source of income. America first employed a comparatively modest flat income tax – three percent on incomes greater than $800 and five percent on those greater than $10,000. However, the income tax was repealed in 1872, but reenacted in 1894.
Even though the federal government wished to levy this kind of income tax, the Constitution required it to apportion the funds to the states based on the census. In order for the federal government to collect funds, it ultimately changed the Constitution by ratifying the 16th Amendment. When the income tax of 1894 – two percent on incomes greater than $4,000 – was considered by some to be “undemocratic,” it was challenged and brought before the Supreme Court, who ruled that taxation on property must be apportioned to the States, but that taxation on income was not.
However, the passing of the amendment overruled this Supreme Court decision, which essentially allowed Congress to levy income taxes “from any source” without apportioning it to the States. This subject of an income tax became a hot button topic, and ultimately was the issue most politicians campaigned on for several years.
This was just the beginning for the American income tax.