As we approach the centennial of the creation of the federal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (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 incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. after all deductions was subject to a 1% tax rate.
With inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. 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 TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. 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.