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The History of Income Taxes

The History of Income Taxes

In the early years of the United States of America, there were very few taxes. Up until 1802, the nation was mainly supported by taxes on goods (such as tobacco, carriages, sugar, and spirits). During the War of 1812, a sales tax was introduced to offset the high cost of war.

So, when did the income tax come around?

In 1862, with the Civil War in full swing, Congress introduced income tax as a law for the first time. While it was much different then (than the income tax system we have in place today), it was the first known instance of taxation on personal income. During this time, a worker who earned $600 to $10,000 annually was taxed at a rate of 3%. For those earning more than $10,000 per year, a higher income tax rate was imposed.

Also in 1862, the office of Commissioner of Internal Revenue was established. Along with the responsibilities of assessing and levying income tax, the Commissioner was also in charge of collecting payments and enforcing tax laws. If taxes were not paid, the Commissioner had the right to seize assets (e.g., property or income). As you can see, many of the duties carried out by the IRS (Internal Revenue Service) today were established back in 1862.

In 1913, the income tax system was made permanent thanks to the 16th Amendment to the Constitution. This amendment gave Congress the ability to legally assess tax on income earned by individuals and corporations. It did not take long for the government to collect substantial tax revenue. In 1918, annual collections topped $1 billion, and by 1920, tax revenue reached over $5 billion.

Fast forward to 1986 and a huge change to the income tax system took place. President Ronald Reagan signed the Tax Reform Act which resulted in reduced individual taxation, but increased business taxation. Perhaps the most important aspect of this law was the reduction of the maximum income tax rate ? from 50% to 28%.

The Economic Growth and Tax Relief Reconciliation Act of 2001 signed by President George W. Bush has been estimated as one of the biggest tax cuts in history. This act introduced a new low income tax rate of 10%, increased the child tax credit, adjusted the tax brackets for married couples, and reduced the top 4 tax rates.

The United States government first began collecting revenue by taxing goods, and then expanded to the taxation of earned income. All in all, numerous modifications have been made to the United States tax system over the years. This holds especially true with income tax, which is a relatively volatile tax. And although many changes are sure to affect tax laws in the future, it is safe to say that income tax is here to stay.

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