No one is happy paying taxes from their hard-earned income. But, in reality, you may not realize that many Americans have it very easy when it comes to federal taxes, compared to taxpayers half a century ago. It has not always been like this, as the government has always had a chunk of its citizen's money in the form of taxation before the ink dried on the Declaration of Independence, and this has taken a lot at some point in our history.
Here is an overview of federal taxes throughout American history.
America before income tax
Taxes have been around for as long as we remember, especially income taxes. But this has not always been the case in the United States. The country was exempt from income tax in its early days. It is because there was no federal government at the time. Instead, the settlers dealt with the British government, which imposed a series of taxes on the settlers, including a head tax, property taxes, and the infamous tea tax that led to the Boston Tea Party.
After the revolutionary war, the constitution gave Congress the power to impose taxes and other charges on the general public. States were responsible for collecting them and passing them on to the government. Most were excise duties, taxes on certain products or services, such as alcohol and tobacco. The government also tried to apply direct taxes: to tax things that an individual owned. It did not last long, and the federal government returned to collect the excise duty.
Income tax
The Civil War led to creating the country's first income tax and the first version of the Office of the Internal Revenue Commissioner, the old version of what we now call the Internal Revenue Service (IRS). This office was saddled with the responsibility of collecting taxes for each state. Special taxes have also been added to almost all possible products: alcohol, tobacco, gunpowder, tea.
Federal income tax, as we know, was officially enacted in 1913, while income tax was enacted a little earlier in 1909.
Other taxes
The first property tax was passed in 1797 to finance the United States Navy. It was repealed but was re-enacted over the years, often in response to the need to fund wars. The modern inheritance tax, as we know it, was introduced in 1916.
In the 1920s and 1930s, several taxes were created:
The gift tax was enacted in 1924.
Sales taxes were first adopted in West Virginia in 1921. Eleven more states followed suit in 1933. By 1940, 18 more states had a sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon were the only states without sales tax.
President Franklin Roosevelt signed the Social Security Act in 1935. The government first collected Social Security taxes in January 1937, although no benefits were paid until January 1940.
The Alternative Minimum Tax (AMT), a type of federal income tax, was not adopted until 1978. This parallel system uses a separate set of rules to calculate taxable income after allowable deductions. It is designed to prevent taxpayers from avoiding their fair share of taxes.
Tax rates then and now.
Tax rates tend to change, often for the worse. It is a fact that Americans should always consider whenever they face the threat of a new tax. For example, when the federal income tax was put in place to help finance World War I in 1913, the marginal tax rate was 1% for income from $0 to $20,000, 2% on income of $20,000 to $50,000, 3% on income of $50,000 to $75,000, 4% on income of $75,000 to $100,000, 5% on income of $100,000 to $250,000, 6% on income of $250,000 to $500,000, and 7% on income of $500,000 and up.
The tax rates were the same for everyone, and there was no filing status. This meant that everyone paid the same rate, whether single, married or dependent. But all of that has changed over time. Tax rates have increased significantly, with the top marginal tax rate reaching 37%. Modern tax rates are also dependent on marital status for reporting purposes.
Sin taxes
Because cigarette and alcohol taxes are included in the prices of these products, many Americans don't even know they're paying them. Federal tobacco taxes were first enacted in 1794, but they came and went until 1864. In that year, a box of 20 cigarettes was taxed at 0.8 cents. In 2020, the tax was $1.0066 per pack.
States also tax cigarettes. In 2019, Missouri taxed them up to 17 cents per package, while New York City taxed them at $4.35 per package.
With cigarette and alcohol taxes included in their prices, many Americans don't realize they are paying them.
Spirits, wine, and beer are taxed at different rates by the federal and state governments. In 2020, the highest federal excise rates were $13.50 per gallon of spirits, $1.07 to $3.15 per gallon of wine, depending on the alcohol content of the wine, and $18 per 31-gallon barrel of beer. Each state sets its tax rates for each type of alcohol.
Beer was billed at 2.0 cents per gallon in Wyoming and $1.29 per gallon in Tennessee.
For wine, the lowest tax rate in 2019 was 20 cents per gallon in California; the highest was $3.26 per gallon in Kentucky.
The lowest tax rate for spirits in 2019 was $2.00 per gallon in Missouri, and the highest rate was $32.52 per gallon in Washington.
The government began to tax cigarettes and alcohol to pay off debts incurred during the Revolutionary War. However, social objectives have long influenced the taxation of these items. The higher the tax, the more discouraged Americans will be from abusing tobacco and alcohol use. But since tobacco and alcohol taxes are fixed taxes, they weigh disproportionately on the poor. In other words, the poor, in particular, are discouraged from using tobacco and alcohol because other income groups may pay higher taxes.
Gasoline
If the government taxes the behavior, it wants to discourage, why tax gasoline? After all, gasoline taxes existed long before the start of the green movement. Federal gasoline taxes were implemented in June 1932 by President Herbert Hoover as part of the Revenue Act of 1932. As the name suggests, this law was designed to increase the amount of money available to the government. The gasoline tax was to generate $150 million in new tax revenue for the government.
In 1932, gasoline was taxed at a rate of 1 cent per gallon. In 2020, the tax increased to 18.4 cents per gallon. Taxes and state taxes on gasoline can add a cost additional, from just 14.35 cents per gallon in Alaska up to 60.60 cents per gallon in California.
Investment
Taxing investment income may seem particularly counterproductive, as an investment is necessary for economic growth, but that has not stopped the government from including it in its wide range of taxable income. Capital gains taxes were enacted in 1913, as were income taxes. Dividend taxes were passed in 1936 but lasted only until 1939. They reappeared in 1954 and have persisted ever since.
Bottom Line
History is full of tax rebellions. In 1773, taxes forced the Americans to destroy three ships loaded with British tea and in 1791, Alexander Hamilton's special alcohol tax was enough to start the Pennsylvania whiskey rebellion. The question is: what does tax reform mean to us?
Summary
Income tax rates are applied to all according to income, regardless of status: single, married, and head of household.
Many of the taxes we pay today were created in the 1920s and 1930s, including property taxes, gift taxes, and social security taxes.
The constitution gave Congress the power to impose taxes and other charges on the general public.
While the Civil War led to creating the first income tax in the United States, the federal income tax, as we know it, was officially enacted in 1913.
FOR MORE INFORMATION ON HOW DANIEL P VIGILANTE, CPA & PROFIT CONSULTANTS CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
Daniel P Vigilante CPA and Profit Consultants