Nothing is certain but death and taxes, as the adage goes. Though this is true, taxes are more convoluted and inconsistent. And they didn’t always exist the way they do now. In reality, the early Americans paid virtually low taxes.
However, further taxes were imposed throughout time, such as the federal income tax, the alternative minimum tax, corporation tax, inheritance tax, the Federal Insurance Contributions Act (FICA), and so on. Some were raised, while others were removed and then reinstated. Our examination of the origins of some of the most frequent taxes we face today is provided here.
- The Constitution empowered Congress to levy taxes and other charges on the general population.
- Though the Civil War resulted in the establishment of the first income tax in the United States, the federal income tax as we know it today was not formally adopted until 1913.
- Many of the taxes we pay today, such as the inheritance tax, gift tax, and Social Security levies, were enacted in the 1920s and 1930s.
- Income tax rates used to be the same for everyone, regardless of status—single, married, or head of household.
America Before Income Taxes
Taxes, particularly income taxes, have been there for as long as we can remember. However, this was not always the case in the United States. In its early days, the nation was tax-free. This is due to the fact that there was no federal government in place at the time. Instead, colonists had to deal with the British government, which levied a number of taxes on them, including as a head tax, real estate taxes, and the famed tea tax, which sparked the Boston Tea Party.
Following the Revolutionary War, the Constitution granted Congress the authority to levy taxes and other charges on the general population. States were in charge of collecting taxes and remitting them to the federal government. The majority of them were excise taxes, which are levied on particular items or services such as alcohol and cigarettes. The government also experimented with direct taxation, which included taxing items held by individuals. That didn’t last, and the feds were forced to return to collecting excise taxes.
The Civil War resulted in the establishment of the country’s first income tax as well as the first iteration of the Office of the Commissioner of Internal Revenue—the predecessor to what is today known as the Internal Revenue Service (IRS).This agency was tasked with collecting taxes from individual states. Excise taxes were also levied on practically every product imaginable, including wine, tobacco, gunpowder, and tea.
The federal income tax as we know it was created in 1913, although corporate income taxes were imposed a year earlier, in 1909.
The first estate tax was instituted in 1797 to pay the United States Navy. It was abolished but reintroduced throughout time, often in reaction to the necessity to fund wars. The current estate tax, as we know it today, was enacted in 1916.
Multiple taxes were created in the 1920s and 1930s:
- The gift tax was enacted in 1924.
- West Virginia passed its first sales tax in 1921. In 1933, eleven additional states followed suit. By 1940, 18 additional states had enacted a sales tax. Only Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a sales tax.
- In 1935, President Franklin D. Roosevelt signed the Social Security Act. The government began collecting Social Security taxes in January 1937, but payments were not given out until January 1940.
The alternative minimum tax (AMT), which is a sort of federal income tax, did not become law until 1978. This parallel approach employs a distinct set of rules to compute taxable income after allowable deductions. It was created to prevent taxpayers from evading paying their fair share of taxes.
Tax Rates, Then and Now
Tax rates fluctuate, frequently for the worse. It’s a truth that Americans must constantly keep in mind when confronted with the prospect of a new tax. When the federal income tax was first implemented in 1913 to help fund World War I, the marginal tax rate was 1% on income of $0 to $20,000, 2% on income of $20,000 to $50,000, 3% on income of $50,000 to $75,000, 4% on income of $75,000 to $100,000, 5% on income of $100,000 to $250,000, 6% on income of $250,000 to $500,000, and 7% on income of $500,000 and up.
Everyone paid the same tax rate, and there was no filing status. This meant that regardless of whether they were single, married, or heads of families, everyone paid the same amount. But it all changed over time. Tax rates have risen significantly, with the highest marginal tax rate now standing at 37%. (As the figure below shows, the highest marginal tax rate ever in the United States was 94% in 1944 and 1945.) Modern tax rates are also determined by filing status.
Because cigarette and alcohol taxes are integrated into their costs, many Americans are unaware they are paying them. Tobacco taxes were originally imposed by the federal government in 1794, but they were repealed in 1864. A carton of 20 cigarettes was taxed at 0.8 cents that year. In 2022, the fee is $1.0066 per pack.
Cigarettes are taxed in each state. Missouri now taxes them at $0.17 each pack, whereas New York taxes them at $4.35 per pack.
Because cigarette and alcohol taxes are included into the pricing of these products, many Americans are unaware that they are paying them.
Both the federal and state governments tax spirits, wine, and beer at separate rates. The maximum federal excise tax rates were $13.50 per proof gallon of spirits, $1.07 to $3.15 per gallon of wine, depending on the wine’s alcohol concentration, and $18 every 31-gallon barrel of beer as of December 22, 2020. Each state determines its own tax rates for various types of alcohol.
- In 2021, Missouri had the lowest tax rate on spirits at $2.00 per gallon, while Washington had the highest at $35.31 per gallon.
- In 2021, the lowest wine tax rate was $0.20 per gallon in California and Texas, while the highest was $3.23 per gallon in Kentucky.
- Beer was taxed at a rate ranging from $0.02 per gallon in Wyoming to $1.29 per gallon in Tennessee.
To repay the debts accrued during the Revolutionary War, the government began taxing cigarettes and alcohol. However, societal considerations have traditionally affected the taxation of these commodities. The greater the tax, the more probable it is that Americans will be deterred from using cigarettes and alcohol. However, since cigarette and alcohol taxes are flat taxes, the poor bear a disproportionate share of the burden. In other words, since other economic groups can afford to pay the higher taxes, the poor are primarily deterred from consuming cigarettes and alcohol.
Why does the government charge gasoline if it taxes conduct that it wishes to discourage? After all, gas taxes were enacted prior to the environmental movement. Under President Herbert Hoover, federal excise taxes on gasoline were established in June 1932 as part of the Revenue Act of 1932. This legislation, as its name suggests, was intended to enhance the amount of money available to the government. The government projected the fuel tax to generate $150 million in additional tax revenue.
Gas was taxed at a rate of $0.01 per gallon in 1932. By 2022, the tax would have risen to $0.18 per gallon. State fuel taxes and levies might add an extra $0.39 per gallon to the price. Alaska has the lowest gas tax at $0.15 per gallon, while California has the most at $0.68 cents per gallon.
Taxing investment income may seem especially counterproductive considering the importance of investment in economic development, but it hasn’t prevented the government from incorporating it under its broad definition of taxable income. Along with the income tax, capital gains taxes were implemented in 1913. Dividend taxes were implemented in 1936 but only lasted until 1939. They emerged in 1954 and have since remained.
The Bottom Line
Tax revolts have occurred throughout history. Taxes prompted Americans to burn three shiploads of British tea in 1773. In 1791, the Whiskey Rebellion in Pennsylvania was sparked by Alexander Hamilton’s planned excise tax on alcohol.
Tax revolts did not continue, but pressure to alter taxes resulted in legislation that changed what Americans paid on a regular basis. The Tax Cuts and Jobs Act of 2017 was responsible for the most current modifications (TCJA).Prior to that, substantial changes in law occurred in the United States in 1981, 1986, 1993, and 1997. Many changes will occur once the TCJA expires in 2025. More changes are undoubtedly on the coming, but what they will be remains to be seen.
When Did Americans Start Paying Income Tax?
Congress enacted the first personal income tax in 1861 in order to generate funds for the Civil War. In 1872, Congress eliminated the tax. However, the concept was revived in the 16th Amendment to the Constitution, which affirmed Congress’ ability to levy a federal income tax. Congress enacted the amendment in 1909, the states ratified it, and it went into effect on February 25, 1913. During the first year, fewer than 1% of the population paid income taxes at a rate of 1% of net income.
What Are Sin Taxes?
Sin taxes are charged at the moment of purchase on specified products and services. These goods are taxed because they have the potential to be damaging or expensive to society. Tobacco goods, alcohol, and gambling operations are examples of things subject to these levies. Sin taxes are intended to discourage individuals from participating in socially damaging activities and behaviors.
What Is the Alternative Minimum Tax?
The alternative minimum tax (AMT) is a tax intended to guarantee that people earning more than a particular amount pay their fair share of taxes. The AMT caps the proportion of taxes that a taxpayer must pay to the government, regardless of how many deductions or credits they claim.
The IRS exempts income from the AMT up to a set threshold, which automatically changes with inflation. The AMT exemption amount in 2021 is:
- $114,600 for married couples filing jointly as well as surviving spouses
- $73,600 for single people and heads of families
- $57,300 for married couples filing separately.
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