100 Years of the Federal Income Tax

As we approach the centennial of the creation of the federal income tax (Sunday, Feb. 3 marks the 100th anniversary of the ratification of the 16th Amendment), a lot of people are reflecting back on the very different system which started its life in 1913. As USA Today founder and columnist Al Neuharth mentions today, tax burdens and distributions have changed dramatically:

When Congress passed the income tax law in 1913, a couple making over $4,000 in taxable income after all deductions was subject to a 1% tax rate.

With inflation that $4,000 then is equal to about $93,700 now. But the tax rate now is 25% or more for those in the $100,000-plus salary range.

For a full history of U.S. Federal Individual Income Tax Rates from 1913 to 2013, with both nominal and and inflation-adjusted brackets, click here.

Richard Rubin at Bloomberg also has a great story today on the history of the income tax, including a quote from Tax Foundation chief economist William McBride:

The income tax has caused U.S. economic growth to be slower than it would be otherwise, said Will McBride, chief economist at the Tax Foundation, a Washington-based group that favors a simpler, flatter tax code.

“As a direct result of the burden of the income tax, and the fact that so many people pay it, over the years there’s been an accumulation of ways to take it apart, to carve out loopholes,” he said. “It would be completely unrecognizable and unpredictable. It didn’t evolve in any sort of rational way.”

Rubin mentions that the original 1913 tax form was "a model of simplicity," being only four pages long – including all the instructions. As any taxpayer today knows, four pages barely explains which forms to fill out, much less complete guidance for completing them all. As in previous years, the most recent annual report to Congress by IRS Taxpayer Advocate Nina Olson focused on tax complexity and the need for Congress to provide simplification.

The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns, and leaving many unaware how their taxes are computed and even what rate of tax they pay. It enables sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and by creating an impression that many taxpayers are not compliant, it undermines trust in the system and reduces the incentive that honest taxpayers feel to comply.

You can hear more from Ms. Olson on the Tax Policy Podcast here.