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Tax History, the Definition of Income Taxes, a Taxucation

The Definition of Income Tax: The income tax is a direct tax which is levied on the net income of private individuals and corporate profits. Income tax systems range from flat tax to extensive progressive tax systems.

Tax History - An Introduction

Taxes in general have been around since the beginning of civilization. The earliest known tax was implemented in Mesopotamia over 4500 years ago, where people paid taxes throughout the year in the form of livestock, which was the preferred currency at the time. The ancient world also had estate taxes, or death taxes. The earliest recorded evidence of a death tax came from ancient Egypt, where they charged a 10% tax on property transferred at time of death in 700 BC.

Since then the way we pay taxes has changed significantly. However, some ancient taxes still persisted into the modern world. In 2006, China eliminated what was the oldest still-existing tax in history. An agricultural tax was created 2,600 years ago and was eliminated in 2006 to help improve the well-being of rural farmers in China.

Learn about unusual taxes throughout history.

A History of Taxes in the United States

It's hard to believe America was founded to avoid high taxation.

In United States, the tax system evolved dramatically through the nation's history. There wasn’t always an income tax, and initially tariffs provided the main source of revenue for the government. New taxes were often introduced during times of war to raise additional revenue, and they were generally allowed to expire once the war was over.

Taxation in the United States can be traced to the colonists, when they were heavily taxed by Great Britain on many things from tea to legal and business documents that were required by the Stamp Tax. Most colonists objected to this form of taxation, since they had no political voice or input about the creation of new taxes, giving rise to the term "taxation without representation." Since the King of England ignored demands by the colonist to abolish taxes, some colonists participated in protests such as the Boston Tea Party. However, that is not the only stamp act that existed in America's history. Toward the end of the 1700’s, after the colonies obtained their independence from Britain, Congress passed the Stamp Act of July 6, 1797, that levied taxes on wills, personal estates, and the transferred possessions of the deceased. Estate and so-called death taxes were some of the earliest additions to the tax code. The tax only lasted 5 years, and was repealed in 1802. 

Income Taxes in America

The first income tax was created in 1861 during the Civil War as a mechanism to finance the war effort. In addition, Congress passed the Internal Revenue Act in 1862 which created the Bureau of Internal Revenue, an eventual predecessor to the IRS. The Bureau of Internal Revenue placed excise taxes on everything from tobacco to jewelry. However, the income tax did not last and was not renewed in 1872. In addition, the Revenue Act of 1862 created a federal estate and gift tax system. Following the end of the Civil War, those taxes were rolled back but the War Revenue Act of 1898 created another death tax to raise revenue for the Spanish-American War.

After the Civil War the income tax didn’t gain much support. In 1894 Congress passed the Wilson-Groman tariff which was an income tax at the rate of 2% for income over $4,000 but it was overturned by the Supreme Court in 1895. In early 20th century the income tax enjoyed renewed support, and in February of 1913 the Sixteenth Amendment was ratified to the Constitution, thus granting Congress the power to collect taxes on personal income. The new system collected the income tax at the source, it is done today, where taxes are initially withheld before the income reaches the recipient. In 1914 The Bureau of Internal Revenue released the first income tax form, called Form 1040. This still remains the main income tax form and it has been re-issued almost every year since then (learn about the evolution of the 1040 Form). The first year was a test run where people simply sent in their forms to have them checked by the bureau for accuracy without paying any taxes. By 1915 some people, including several members of Congress voiced concerns about the complexity of the income tax form, stating that it was difficult for some to prepare and file their returns.

The Revenue Act of 1916 began the practice of adjusting tax rates and income scales. The original income tax was 1% for the bottom bracket, which was comprised of income up to $20,000, and 7% for the top bracket which was comprised of income over $500,000. Revenue Act of 1916 raised the top bracket to $2,000,000 and raised the rate for the bottom bracket to 2% and the top bracket rate to 25%.

The Revenue Act of 1916 also created what is widely considered the predecessor to the modern estate tax. At first the maximum rate was set at 10% for estates greater than $5 million. However, the rate increased the following year to 22% for estates valued at between $8 and $10 million and 25% for estates valued at over $10 million. By 1924 the top rate was 40% for estates valued at over $10 million. The Revenue Act of 1941 set the tax at 77% on estates valued over $50 million. In comparison, the lowest bracket of the estate tax, which was comprised of estates valued under $5,000 only rose from 1% to 3% over the same time period. By the 1970’s the top estate tax began to fall, decreasing down to 55% by 1986.  In 1917 Congress created the corporate excess profit tax which taxed excess profits that were above a rate of return that was deemed reasonable. More changes to the tax code came over the next several years, raising the tax rate on the top bracket to as high as 77% by 1918.

Learn about the history of the e-file process.

Historical Income Tax Rates

Find a detailed overview of income tax rates and income tax brackets and you will find that income tax rates continued to change in the decades that followed. The income tax rate for the bottom income tax bracket grew, peaking at 22.2% in 1952. However, the lowest tax bracket at that point was comprised of individuals earning up to $4,000. The bracket size itself peaked in 2001 at $45,200. The tax rate for the top bracket also continued to grow and peaked at 92% in 1950. At that time the bracket was for individuals making over $400,000. Over the last decade the rate for the bottom tax bracket, which is individuals earning less than about $15,000, is at 10%. The rate for the top bracket, which is individuals earning around $350,000 is at 35%.

Tax Code History and Tax Law Page Growth

The modern tax code is often described as complicated and tax code reform is a common issue among politicians. For example, Ronald Reagan along with Congress reformed the tax code twice during his two terms in office, once in 1981, and once in 1986. His reform provided what was at the time the largest tax cut in the nation's history. While he wasn't the first or the last to reform the tax code (nearly every recent president before or after him has attempted to reform the tax code in one way or another), his tax reform was considered historic. More recently, Bill Clinton lowered taxes for the middle class in the 1990's and in 2001 George W. Bush provided another massive tax cut for all incomes. These reforms reduced taxes, but they did not drastically simplify the tax code, keeping the issue a common topic of conversation among politicians. However, despite the complicated workings of the income tax, it can provide people with many tax breaks and tax deductions, some of them being quite unusual. 

The modern tax code has grown tremendously over the years. Currently, the tax code contains over 9,000 sections. The instructions for the 1040 form alone speak for the incredible growth of the tax code over its history. In 1913 they only took up 1 page, while nowadays they take up 174 pages! However, the modern tax code is much more broad and complex than the one released in 1913 and now includes many more categories, like employment taxes, financing of election campaigns, coal industry health benefits, and trust fund code. The incredible growth can be attributed to both expansions and small changes and revisions that are made to patch up loopholes. In roughly the last 10 years it is estimated that the tax code has been amended or revised over 4,000 times.

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Detailed overview of tax history in United States and around the world.