Although it may feel as if taxes have always been a fact of life, in early US history, there was no income tax nor other forms of direct taxation. After the Revolutionary War (which began due to taxes imposed by the British), it was inconceivable that the new government would start taxing its citizens. This led direct taxation to be considered unconstitutional.
Tax History: The Early Days
To gain revenue, the government applied tariffs and duties to products including liquor, tobacco, and sugar and also taxed legal documents. This was successful until the 1794 Whiskey Rebellion, when farmers in Pennsylvania protested the injustice of a tax on whiskey. Groups began burning down the houses of tax collectors, covering the collectors in tar and feathers as they fled. Congress had to use military force to put an end to the revolt.
Wars and Taxes
In the 1790s, the government introduced property tax to fund the war with France. Shortly after, the war in 1812 necessitated higher duties and the addition of excise taxes. Finally, during the Civil War, debt became so high that Congress had to pass the Revenue Act of 1861, taxing everyone with an income of more than $800. With this came the creation of the Internal Revenue Service (IRS).
Later Revenue Acts
Following the Civil War, the first income tax bill was the 1894 Wilson–Gorman Tariff Act. This reduced tariff rates while introducing a 2 percent income tax. However, the Constitution still stated that direct taxes must be charged according to the population in the state. This led the act to be struck down just one year after it passed.
Victory for taxpayers was short lived as it became clear that revenue tariffs were impacting world trade and living standards for poor people. To resolve the issue, the Constitution gained the 16th Amendment in 1913, which removed the proportional to population clause. Income tax was introduced to those making more than $3,000 — impacting 1 percent of the population.
The next important revenue acts occurred during World War I, expanding tax payers to 5 percent of the population and adding taxes for estate and excess business profits. Yet more taxes were introduced during World War II and for the New Deal. The only exception to the increase of taxes during this period was the 1938 Revenue Act, which reduced corporate taxes.
Recent Tax Acts
After World War II, there were few changes to the tax code, other than additions of loopholes for tax deductions, until the Reagan tax cuts. The Economic Tax Act of 1981 cut taxes, whereas the Tax Reform Act of 1986 simplified the tax code.
Following the 1986 Act, there were new tax acts on almost a yearly basis during the Clinton and Bush administrations. Most important was the 2001 Economic Growth and Tax Relief Reconciliation Act, which cut taxes by $1.3 trillion over 10 years.
From no income tax after the Revolutionary War, we have progressed to a complex tax code, where almost everyone pays. This year, the IRS received more than 135 million tax returns, totaling more than $1.2 billion.
Do you owe more than $10,000 in back taxes? Protect yourself. Protect your business. Contact IRS Solver for a consultation.