income tax, holidays — July 04, 2015

A Brief History of Income Tax in America - Part 3

by Bob Williams

Declaration of Independence

Tax As We Know It

Part III. 1900 – Present

The turn of the last century was the dawn of the American income tax. Proponents of an income tax as a fair way to tax those with more wealth were not daunted by the Supreme Court ruling striking down the 1894 income tax. Instead, they were more determined than ever that it was the right thing to do – if they could craft the structure correctly.

In 1907, Theodore Roosevelt, then in his second term as president, stated his support for a national income tax in his speech to Congress. But it fell to his successor, William Howard Taft, to deal with the reality. By that time a coalition of Republicans and Democrats had formed to craft an income tax that would survive scrutiny from the Supreme Court.

Hoping to cool down the lawmakers hot for an income tax, Taft suggested a mere 1 percent tax rate on net corporate income. It was designed to sidestep the constitutional issues that had nixed the previous income tax. Like the income taxes before it, all returns under the 1909 version would be public information. Taft’s compromise passed – but in 1910, Congress decided to close the disclosure hole and make all tax returns confidential material – as they have been ever since.

Answering the Constitutional Question

But even though his corporate income tax was successful, Taft had sown the seed for the individual income tax at the same time. He had also agreed to support an amendment to the U.S. Constitution authorizing income tax. Such an amendment would settle the constitutional questions the Supreme Court found insurmountable, and avoid a messy showdown with the high court. Congress agreed in 1913, and passed the amendment.

Opposition from conservatives didn’t stop the measure from being ratified by the states, and it became the Sixteenth Amendment to the Constitution:

"Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

The first iteration of the income tax under the new amendment came later that year, when new President Woodrow Wilson signed a tariff reform bill that included a 1 percent tax rate on individual income over $3,000, or $4,000 for married filers. For the first time, returns were kept confidential.

The Bureau of Internal Revenue unveiled its form for the new tax in 1914. Just four pages, it was called Form 1040, named as part of the BIR’s regular numbering process. In a glimpse of things to come, in 1915 several congressmen were already complaining that the income tax forms were too complicated.

The income tax was expanded during World War I to once again help pay for wartime expenses. In 1918 the income tax had a top rate of 77 percent for the wealthiest taxpayers.

A Few Changes Since Then

The original filing deadline in 1913 was set at March 1. By the 1918 update, it was moved to March 15. It took until 1954 to get the filing deadline moved back to April 15 where it remains today.

Anyone who’s looked at a tax return lately would agree there have been a few changes in the paperwork since 1913. Here are some of the more significant milestones since then:

  • In 1942, President Franklin Roosevelt’s Revenue Act increased taxes for World War II expenses, increased the number of Americans who were subject to the income tax, and created deductions for medical and investment expenses.
  • Congress passed the Current Tax Payment Act in 1943; it required employers to withhold taxes from workers’ wages.
  • The standard deduction on Form 1040 was created in the Individual Income Tax Act, which was passed in 1944.
  • In 1986, limited electronic filing of income tax returns began.
  • By 1992, taxpayers who owed money were allowed to file their returns electronically.
  • Electronic filing reached a new high for 2003, when 52.9 million tax returns – more than 40 percent of all individual returns filed – were send to the IRS electronically.
  • So far this year, the IRS reports that almost 114 million tax returns were e-filed – more than 43 million of them self-prepared individual returns. E-filed returns from tax professionals accounted for over 70 million.

Sources: The Tax History Museum and the IRS. Images used by permission of The Tax History Museum.

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