1913 celebrates the 16th Amendment to the constitution of the United States marking the beginning of income taxes. The tax code is more complicated than anyone can imagine and a look at the major events over the past 100 years might help you understand how we got to where we are today.
In researching for this article, I kept looking for a single word or phrase that could easily describe the “History of Taxes”. The only thought that kept popping into my head was… “Schizophrenia”. Defined by Webster: schiz·o·phre·ni·a Noun; 1) A long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty… 2) A mentality or approach characterized by inconsistent or contradictory elements.
Today’s tax code is made up of perhaps the most complex assembly of contradictory rules, regulations, and laws on earth. For the sake of this article, I’m only going to touch on the key factors and point out how to make your way through this maze. Even the most respected authorities on the topic of taxes are confused by the nearly 10,000 pages of tax code.
There were many taxes before the 16th Amendment. To help fund the War of 1812 there was a tax on gold, silver, jewelry, and watches. Once the debts from the war were completely settled, the taxes were halted in 1817. Revenue to operate the government was adequate with tariffs and fees on traded goods until the Civil War. In 1862 Congress enacted the first income tax law to support the costs of the Civil War. The tax rate was at 3% and higher on some luxury items. Then in 1868 Congress enacted a new tax on tobacco and distilled spirits. This is the first sign of a ‘parallel’ tax along with an income tax. Revenue was the highest ever achieved at $310 million and quickly settled all debts of the country, so in 1872 Congress eliminated the income tax.
Following the Civil War, America experienced a great economic boom with the ‘Reconstruction Era’. In the years from 1870-1900 the benefits from the Industrial Revolution were put into action. Chicago hosted the World’s Fair in 1893, celebrating the 400th anniversary of Columbus’ arrival in the new world in 1492. In 1894, Congress revived How to calculate tax income the income tax law and looked to aggressively grow revenue. Just one year later on May 21st 1895 the Supreme Court Ruled that income taxes were ‘unconstitutional’. The 5/4 decision stated that a direct tax on the income of real and personal property was unconstitutional and void. In the years that followed this Supreme Court decision the economy once again grew rapidly. The very wealthy became wealthier and there were jobs for everyone. The good life in America was celebrated with growing immigration from Europe bringing tradesmen looking for a better life. In 1904, Saint Louis hosted the World’s Fair celebrating 100 years of the 1803 Louisiana Purchase. This event showed the world how abundant every aspect of life was in America.
In 1907, only three short years later, America faced a huge crisis. The economy of America fell to a point where the average family income fell by 40%. A panic set in because many banks closed and people lost trust and hope. Times were difficult for average families. When banks closed, hardworking people lost their savings. President Taft addressed Congress in 1909 proposing a 2% federal income tax on corporations (for the privilege of doing business). On July 12, 1909, Congress passed a resolution proposing the 16th Amendment. This amendment to the constitution allows Congress to levy an income tax. Federal Income tax is not required to be distributed or apportioned to states nor have any connection to Census results. It was written to avoid being a ‘direct tax’ and avoid conflict with the Supreme Court ruling in 1895. With 48 states in the union, 36 states were needed to ratify before it could be passed as an amendment.