The Boston Tea Party
In the 18th century, taxes were a flashpoint between colonists and the British parliament. The colonists believed if they had no voice in government, they shouldn’t be taxed. “No taxation without representation!” So when the Tea Act was passed in 1773, the colonists rallied to protect their liberties. And, when ships bearing the newly taxed tea arrived in the colonies in late November, protesters forced all but one to return to England. But up in Boston, both sides dug in until December 16, when up to 130 colonists, many disguised as Mohawks, boarded three ships and tossed 342 crates, or 17 tons of tea into the icy waters of Boston Harbor.
The Whisky Rebellion
When the Revolution ended in 1787, many saw the British defeat as the end of all government. The Founders then had a huge task forming a new government and imposing taxes on people who thought they’d thrown that off forever. But the federal government had assumed the states’ wartime debts and needed revenue. So, in 1791 Washington signed the Whiskey Tax. Protests began immediately, with many producers simply refusing to pay. Violence followed, with tax collectors routinely attacked. For three years, the violence escalated until President Washington assembled 12,000 men to put down the rebellion. The show of force worked and while two men were found guilty of treason, Washington pardoned them both.
Revenue Act of 1862
To help make up for the depressed economy after the Southern states seceded in 1861 and to help pay the mounting costs of the Civil War, the federal government passed the Revenue Act of 1862. It taxed a wide range of luxury goods and “sin” products including liquor and tobacco, telegrams, pianos, playing cards, jewelry, and more. It also created a progressive income tax, with incomes below $600 free of taxes, 3% on incomes between $600 and $10,000 and 5% for incomes above $10,000. For comparison, $600 in 1862 would be almost $15,600 today. The taxes were renewed in 1864, but allowed to expire in 1873.
The Federal Income Tax
By 1913, the U.S. Treasury was relying on tariffs and excise taxes. These taxes dramatically increased the cost of all consumer goods across the country. Not only were they a huge burden on nearly everyone, they hurt economic growth. Reformers, including newly elected president Wilson, helped pass the Revenue Act of 1913, eliminating or greatly reducing tariffs and establishing a federal income tax of just 1% on incomes above $3,000 ($77,500 today), with an additional surtax of 6% on income over $500,000 (that’s over $11M today).
The Golden Age
The state of the global economy after World War II, and the nature of post-war industrial capitalism, vastly increased 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, taxpayers in the top 1% during the 1950s only paid taxes on about 42% of their income.
The conservative wave that elected Ronald Reagan in 1980 fundamentally changed the direction of the country. Conservatives long believed high taxes, indeed any taxes, encouraged wasteful government spending, suppressed economic growth, and threatened individual freedoms. It was a compelling argument and led to the Tax Reform Act of 1986. It streamlined the tax code by eliminating hundreds of deductions, reduced the number of tax brackets, and yielded one of the biggest rate reductions in history as the highest rate fell from 70% to just 28%.
Even Lower Rates for Corporations
Passed in the last days of 2017, the Tax Cuts and Jobs Act dramatically reduced the tax rates that corporations paid, from 35% to just 21%. It amounted to a projected $1 trillion tax cut for businesses over the decade to follow. It’s the biggest overhaul of America’s tax code in 31 years, with the goal of creating a surging economy. Though the jury is still out on its success, it’s a development we all need to watch closely.
As Benjamin Franklin so aptly put it, "In this world, nothing can be said to be certain, except death and taxes." Because we can’t escape them, it’s critical then that we do our best to plan and prepare for them as part of a well-managed money management strategy.
Happy President’s Day!