In the United States, the tax system evolved dramatically through the nation's history. Modern tax code is much more broad and complex. Here’s a quick primer on the tax system we all know and love.
The First Tax Reform – The Boston Tea Party
As you may remember from history class, in 1773, the British Parliament, needing revenue from its North American colonies, passed the first law specifically aimed at raising colonial money for the Crown. Bostonians and other colonists had been subjected to taxes on tea, paint, paper, and glass. This prohibited American colonies from issuing their own currency. Complaints about taxation without representation began to increase, leading to the Boston Tea Party, which helped spark the American Revolution.
A Big Brouhaha Over Booze
The Excise Whiskey Tax of 1791, during the presidency of George Washington, was the first tax imposed on a domestic product by the newly formed federal government. It was a direct tax on Americans who produced whiskey and other spirits, to offset a portion of the federal government’s assumption of state debts (unlike tariffs paid on goods imported into the United States). Southern and western farmers, whose grain crop was a chief ingredient in whiskey, loudly protested the tax, which led to the Whiskey Rebellion.
First Federal Income Tax
Abraham Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses; the Revenue Act of 1862 was passed as an emergency and temporary war-time tax. Lincoln and Congress agreed to impose a 3% tax on annual incomes over $800. In 1872, the national income tax was repealed.
Bureau of Internal Revenue
Fiscal reformers were determined to resuscitate the authority to levy an income tax with a powerful campaign. In 1913, the 16th Amendment to the US Constitution was ratified during Woodrow Wilson’s Presidency, authorizing Congress to impose a tax on income, and the Bureau of Internal Revenue was established.
The Days of the Golden Age
The state of the global economy after World War II, and the nature of post-war industrial capitalism, created a period of high corporate earnings in the United States. A marginal tax rate of over 90% (that's right: 91%) existed in the 1950s for the top federal income tax rate for most of the decade! Despite these high marginal rates, the top 1% of taxpayers in the 1950s only paid taxes on about 42% of their income.
Tax cuts lay at the heart of the Tax Reform Act of 1986. Ronald Reagan believed that high taxes threatened individual freedom, suppressed overall economic growth, and encouraged wasteful government spending. He simplified tax codes by reducing the number of tax brackets to two: 15% for the middle class and 28% for the wealthy. As a result, the highest income-tax rate fell from 70% to 28% – one of the biggest rate reductions in American history.
Big Business Boost – 2017
Corporations are going to make more money – lots more – as their statutory tax rate gets axed to 21% from 35% with the Tax Cuts and Jobs Act, amounting to a $1 trillion tax cut for businesses over the next decade. It’s a bold piece of legislation to overhaul America’s tax code for the first time in 31 years, with hopes of making the economy surge in the coming years.
Taxes are an unavoidable component of your personal finances. Planning and preparing for taxes will ease the headache of this burden and positively affect your money management strategy. In the immortal words of one of the US greatest statesmen and one of the most revered figures in American history, Benjamin Franklin, "In this world, nothing can be said to be certain, except death and taxes."