Posted by Abundant Wealth Planning LLC

A Brief History of US Taxes

A Brief History of US Taxes

You know the saying that says, "Nothing is certain in life except death and taxes." While this may be true, taxes tend to be more complicated and extremely inconsistent. And they haven't always existed as they do today. Early American citizens enjoyed very little tax. But over time, several taxes have been added: federal income tax, income tax, wealth tax, alternative minimum tax, the Federal Insurance Contributions Acts( FICA), etc. Some have been increased, while others have been revoked to be added again. Let's recap back to the origins of some of the most common taxes we face today. 


Tax History: an introduction

Taxes have generally existed since the beginning of civilization. The first known tax was introduced in Mesopotamia over 4,500 years ago, where people paid taxes all year round in the form of cattle, which was the currency of choice at the time. The ancient world also had inheritance or death taxes. The first recorded evidence of a death tax came from ancient Egypt, where they collected a 10% tax on property transferred at the time of death in 700 BC. 

The way we pay taxes has changed a lot since then. However, some old taxes remained till date. In 2006, China eliminated what the oldest tax in history was. An agricultural tax was created 2,600 years ago and abolished in 2006 to improve Chinese farmers' welfare.


History of taxes in the United States

It's hard to believe that the United States was founded to avoid high taxes. In the United States, the tax system has evolved considerably in the history of the country. There was not always an income tax, and tariffs were the main source of government revenue at the outset. New taxes were often introduced during the war to increase additional income and generally expire at the end of the war.

Taxes in the United States fall on the settlers, when Britain taxed them on many things, from tea to legal and business documents required by stamp duty. Many settlers opposed this form of tax because they had no political voice or contribution to creating new taxes, which gave rise to the term " taxation without representation." While the King of England ignored the colonists' demands for tax cuts, some settlers took part in demonstrations like the Boston Tea Party. However, this is not the only stamp act that has existed in the history of the United States. In the late 1700s, after the colonies gained independence from Great Britain, Congress passed the Stamp Act of July 6, 1797, which imposed taxes on wills, personal property, and property transferred by the deceased. Estate taxes and so-called death taxes were among the first additions to the tax code. The tax only lasted five years and was canceled in 1802.


Income Tax in America

The first income tax was created in 1861 during the Civil War as a mechanism for financing the war effort. Also, Congress passed the Internal Revenue Act in 1862, which created the Bureau of Internal Revenue, a possible predecessor to the IRS. The Internal Revenue Service has imposed special taxes on everything from tobacco to jewelry. However, the income tax did not last and was not renewed in 1872. Also, the Income Tax Act of 1862 created a federal system of inheritance and inheritance taxes. After the Civil War, these taxes were reduced, but the War Income Law of 1898 created another death tax to increase income from the Spanish American War.

After the Civil War, income tax did not receive much support. In 1894, Congress approved the Wilson-Groman Tariff, a 2% income tax on income over $ 4,000, but was revoked by the Supreme Court in 1895. In the early 1900s, the Renta tax received renewed support, and, in February 1913, the Sixteenth Amendment was constitutionally ratified, giving Congress the power to impose personal income taxes. The new system collected income tax at the source, and it is still done today, where taxes are initially withheld before the income reaches the recipient. 

In 1914, the Federal Revenue Service released the first income tax form, called Form 1040. It is still the main form of income tax and has been printed almost every year since. The first year was a test in which people submitted the forms to the agency for verification, without paying any taxes. In 1915, some people, including several Congress members, expressed concern about the complexity of the income tax form, saying that it was difficult for some to prepare and record their returns.

The Income Act of 1916 initiated the practice of adjusting tax rates and income scales. The initial income tax was 1% for the fund group, which included income of up to $ 20,000, and 7% for the top group, which included income over $ 500,000. The Income Tax Act of 1916 raised the level above $ 2,000,000 and raised the bottom bracket rate to 2% and the top bracket rate to 25%.

The Income Act of 1916 also created what is widely regarded as the predecessor of the modern inheritance tax. Initially, the maximum rate was set at 10% for properties over $5 million. However, the rate increased the following year to 22% for properties valued between $ 8 and $ 10 million, and 25% for properties valued over $ 10 million. In 1924, the maximum rate was 40% for properties valued over $ 10 million. The Income Act of 1941 set a 77% property tax worth over $ 50 million.

In comparison, the lower portion of the property tax made up of properties valued at less than $ 5,000, increased by only 1% to 3% over the same period. In the 1970s, the principal wealth tax began to fall, falling to 55% in 1986. In 1917, Congress created a surplus income tax that imposed excess profits on the rate of return deemed reasonable. In the following years, further changes were made to the tax code, raising 77% in 1918.


Historical Income Tax Rates

Find a detailed description of tax rates and income tax holders, and you will see that income tax rates have continued to change over several decades. The income tax rate for the lower income tax rose to 22.2% in 1952. However, the lowest tax category was for people who earned up to $4000. The bracket size itself reached $ 45,200 in 2001. The upper-tier tax rate also continued to increase, reaching a peak of 92% in 1950. At that time, the level was focused on people earning over $ 400,000. 

In the last decade, the lowest rate, which applies to people earning less than $ 15,000, is 10%. The highest tax, which applies to people earning about $ 350,000, is 35%.


History Of The Tax Code And Extension Of Tax Law

The modern tax code is often described as complicated, and the tax code reform is a common problem among politicians. For example, Ronald Reagan, along with Congress, reformed the tax code twice in the two terms, once in 1981 and again in 1986. His reform provided what was then the largest tax cut in the country.  

While he was not the first or last to reform the tax code (almost all recent presidents before or after attempting to reform the tax code in one way or another), his tax reform was considered historic. More recently, Bill Clinton cut taxes for the middle class in the 1990s, and in 2001, George W. Bush proposed another massive tax cut for all incomes. These reforms reduced taxes but did not radically simplify the tax code, making the topic a common topic among politicians. However, despite the complicated operation of income tax, it can offer people many tax exemptions and deductions, some of which are quite unusual.

The modern tax code has developed tremendously over the years. Currently, the tax code contains more than 9,000 sections. The instructions for Form 1040 speak only of the incredible growth of the tax code throughout its history. In 1913 there was only one page, whereas today there are 174 pages! However, the modern tax code is much larger and more complex than that published in 1913 and now includes many other categories, such as labor taxes and campaign finance, the health benefits of the coal industry, and the trust fund code. The incredible growth can be attributed to small expansions and changes and revisions made to fill in the gaps. Over the past ten years, it is estimated that the tax code has been amended or revised more than 4,000 times.


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