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... eral government would gain the power to tax state and municipal bonds, but New York passed the amendment on its second try. Other eastern states also had movements against the amendment, but they eventually ratified it as well. Wyoming's ratification on February 3, 1913, gave Congress the three-quarters majority it needed to make the amendment part of the U.
S. Constitution. Congress now had the ability of the federal government to levy taxes on income. Six other states eventually ratified the amendment, bringing the total to forty-two.
Only Connecticut, Florida, Rhode Island, and Utah failed in its attempts to ratify the amendment. Pennsylvania and Virginia never attempted to ratify. The first modern income tax soon followed, with a progressive structure, shown below, along with 1994 income equivalents (Paul 97 - 98, Witte 75, table- Waltman 29, web). 1 % $ 20, 000 -$ 50, 000 $ 298, 000 -$ 746, 000 2 % $ 50, 000 -$ 75, 000 $ 746, 000 -$ 1, 119, 000 3 % $ 75, 000 -$ 100, 000 $ 1, 119, 00 -$ 1, 492, 000 4 % $ 100, 000 -$ 250, 000 $ 1, 492, 000 -$ 3, 731, 000 5 % $ 250, 000 -$ 500, 000 $ 3, 731, 000 -$ 7, 462, 000 Shortly after the Sixteenth Amendment was passed, World War I broke out in Europe. Although the United States neutrality would be a benefit in exporting goods, the first thing noticed by budget analysts was plummeting import duties, which still accounted for a large percent of government revenue.
According to Jerold L. Waltman, receipts plummeted from $ 73, 224, 173 in July [ 1914 ] to $ 44, 563, 946 in October (32). Congress responded in a similar way to the Spanish-American War, by raising and levying new excise taxes, but left the income tax untouched. This action seemed to alleviate the situation, but only because of the boom in the economy that also followed the beginning of World War I.
But by late 1915, Congress realized that higher excise taxes alone would not cure the budget deficit, so they turned to the income tax for additional funding (Waltman 32 - 33, Witte 79). After failed attempts to lower the tax exemption, which would make more people eligible to pay a one percent income tax, Congress passed the Revenue Act of 1916, which kept the minimum income to be taxed at $ 20, 000 a year, but followed the structure below: Percentage Rate Incomes (thousands) Percentage Rate Incomes (thousands) The primary purpose of the Revenue Act of 1916 was, of course, to raise revenue, but lawmakers saw it as a temporary measure, or at least that worked when the traveled back to their constituents. But, as Waltman notes, The income tax this act proved itself to be one of the easiest taxes to juggle (36 - 37, 42). 1917 saw the United States enter World War I, and expenditures were again predicted to heavily outweigh receipts. Congress knew that all taxes needed to be increased, and the income tax became the hottest item to debate. Radicals suggested a progressive structure that drastically lowered the minimum income to tax as well as taxing all incomes over $ 100, 000 a year at 100 percent, effectively making the maximum income in the country $ 100, 000 annually. Secretary of the Treasury recommended a base rate of one percent on incomes about $ 3, 000 and a maximum of forty percent on incomes over $ 1, 000, 000.
Congress was able to pass a resolution to raise war revenue on March 3, 1917, but it took months of debate before the Revenue Act of 1917 was passed, with a minimum tax of one percent on incomes over $ 5, 000 and a maximum of fifty percent on the incomes of millionaires. Again, the act was a temporary one, but Waltman notes that some of the policy choices showed the beginnings of a permanent tax behavior by Congress (44 - 50, 54). Tax rates were again looked at in 1918, and Congress wrote the War Revenue Act of 1918, raising the minimum tax rate to five percent on incomes below $ 4, 000 and to twelve percent on incomes above $ 4, 000. The maximum tax rate was also increased to 65 percent. The bill was passed unanimously by the House, but not passed by the Senate before 1918 elections and Armistice Day. But instead of rates being decreased due to the end of the war, the Senate amended the bill with a maximum rate of 77 percent (Witte 85 - 86).
World War I was a watershed in the history of American taxation. According to Witte, it marked the end of the tariff and excise as the dominant sources of revenue and although the war was an external shock, it dramatically and permanently affected the internal revenue system in the United States the income tax would never again be a minor source of revenue (86 - 87). Income tax rates stayed at the 1918 rates through 1919 and 1920 to get rid of the budget deficit gained by the war. The share of revenue gained from the income tax actually continued to rise after the war reaching a peak of 69 percent in 1920. The consensus of government by 1920 was that tax rates should be cut, especially from the upper brackets, which found ways to avoid paying such high taxes anyways. The results were income tax cuts in 1921, as well as cuts again in 1924 and 1926, due to a continual growth in government surpluses.
Rates fell in the 1920 s according to the following table: Income 1918 (%) 1921 (%) 1924 (%) 1926 (%) Overall, the tax rates reflected the nations post-war growth and prosperity (Smiley and Keehn 285 - 88, How the U. S. Income Tax System Grew, 21). Looking back through the early years of the American income tax, it is easy to see why some people were for it and others against it. Financial conservatives did not want to see money leaving their incomes and going to a growing government, while liberals argued for the money, according to David G.
Davies, to help balance the budget and to redistribute income from higher to lower classes (23 - 24). Looking at taxation today, there are similarities to the post- WWI pre-depression period. The stock market is soaring, there is a government surplus, and taxes, although not at WWI levels, are a reason for the surplus. The number of people arguing for reductions in the income tax has a valid point. The budget is taking in a surplus, yet taxes across the board have not been cuts, even though they were in the 1920 s. Although people arguing for the abolishing of the progressive income tax, and more radically, the Sixteenth Amendment all together, have been around, more and more people are jumping on the bandwagon.
Republican presidential hopeful Steve Forbes has been a long-time proponent of abolishing the progressive system in favor of a fifteen percent flat tax, while Ambassador Alan Keyes is even more radical, wanting to abolish the income tax all together in favor of a national sales tax. According to Keyes, The income tax is a 20 th-century socialist experiment that has failed (web). Others, including, John McCain, George W. Bush, and Bill Bradley have more conservative stances on the issue, but all agree that taxes need to be cut across the board (web web web web web). The history of the American income tax has never been controversial and always been politically fun to watch. Does it need to be abolished?
Some say yes. Does it need to be changed? Another yes. But until it is, we will just have to watch the government surplus grow and keep blowing the cobwebs out of our wallets. Bibliography: Bill Bradley for President. 13 Dec. 1999. 14 Dec. 1999... Davies, David G.
United States Taxes and Tax Policy. Cambridge: Cambridge UP, 1986. George W. Bush for President: Prosperity With a Purpose. 14 Dec. 1999. 14 Dec. 1999... History of the Income Tax. 12 Oct. 1998. 18 Nov. 1999... How the U.
S. Income Tax System Grew. Nations Business April 1995: 21. John McCain for President Official Site. 13 Dec. 1999. 14 Dec. 1999... Paul, Randolph E. Taxation in the United States.
Boston: Little, Brown, and Co. , 1954. President Alan Keyes 2000. 14 Dec. 1999. 15 Dec. 1999... Seligman, Edwin R. A. The Income Tax: History, Theory, and Practice of Income Taxation. New York: The Macmillan Co. , 1914.
Smiley, Gene and Richard H. Keehn. Federal Personal Income Tax Policy in the 1920 s. Journal of Economic History. 55 (1995): 285 - 303. The Steve Forbes National Online Headquarters. 13 Dec. 1999. 14 Dec. 1999... Waltman, Jerold L.
Political Origins of the U. S. Income Tax. Jackson, MS: Mississippi UP, 1985.
Witte, John F. The Politics and Development of the Federal Income Tax. Madison, WS: Wisconsin UP, 1985.
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Research essay sample on History Of The Income Tax
