Small Business Questions & Answers


Filed under Managing Your Taxes

Ask About Our Tax History

by Flyboy Jack | May 20, 2012

Subject :Taxes

Dear Toolkit,

When did we as Americans actually start paying taxes?

Dear Flyboy Jack,

If you're thinking of our beloved modern-day federal income taxes, the answer is easy. On February 12, 1913, the following words became a part of the United States Constitution:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Some of us even remember a few sainted ancestors complaining about the outrageous initial tax rate of 1 percent on their first $20,000 of income that this dreaded 16th Amendment imposed on them. The 1913 rates were progressive, rising to 6 percent if you made more than $500,000.

By 1925, the marginal tax rate was kicked up to 1-1/2 percent on the first $4,000, increasing to 5 percent over $8,000 and capped at 25 percent of income above $100,000. Adding insult to injury, Social Security taxes came on the scene in the mid-1930s, adding a maximum of $60 a year. (Now you understand why elders call these pre-WWII times the "good old days!")

But if your question refers to our total taxation history as Americans, we need to hark all the way back to Colonial days. The so-called Sugar Tax was levied around 1764, closely followed by the Stamp Tax Act levied on newspapers and a variety of other documents. (The other side of the coin, of course, was the Boston Tea Party in 1773. That was a protest against the lowering of taxes on goods being shipped into the Colonies from England—ostensibly creating an unfair price advantage over domestic products.)

Moving right along, we come to the infamous Whiskey Rebellion of the early 1790s. Many farmers in the hilly areas of western Pennsylvania found it beneficial to convert their excess grain harvests to barrels of whiskey, which was more resistant to contamination from mold or disease, much easier to transport over the mountains to their eastern markets, and much more lucrative as well.

The fledgling federal government saw an opportunity to raise some revenues on such a popular product and promptly levied a tax on whiskey. The farmers objected to what they deemed to be an unfair tax, and by 1794 they not only refused to pay the tax, they menaced the federal tax collectors with threats of armed violence.

President Washington asked the governor and courts of Pennsylvania to have the local militia restore order, but was promptly rebuffed. So George had to muster a federal army of several thousand men to march into the state with him and enforce the tax. Washington felt it necessary to personally put down this tax rebellion in order to preserve the newly created government of the 13 "united" states. He didn't want the other 12 states going postal and acting independently, following Pennsylvania's example. Eventually his forces arrested several agitators, none of whom was ever really punished as his point had already been made.

So much for our regressive tax history. Property taxes, as well as sales and use taxes, persist to this day in one form or another. No need to dwell on them. Let's move on to the War of 1812. In order to foot the bill for this conflict, the first progressive income tax was proposed (but never actually imposed).

The concept didn't rear its head again until the 1860s, when Lincoln needed to foot the bill for the Civil War. The 1864 Tax Act, for example, imposed a 5 percent tax on income from $600 to $5,000, rising to 7-1/2 percent up to $10,000, and then to 10 percent thereafter. And precious few deductions were permitted. That tax structure was later amended to a flat tax of 5 percent for all income over $1,000 and then 2-1/2 percent for everything over $2,000. But in 1872 that Act was repealed! The courts had decided that progressive income taxes were "unconstitutional." (Ah yes, those really must have been the good old days.)

But we Americans didn't invent this taxing tradition. The ancient Egyptians suffered them, and the Roman Empire imposed tax on everything imaginable. Even the Saints got into the act. Remember that St. Matthew started life as a lowly tax collector.

And let's not forget dear old Lady Godiva who, legend has it, rode naked through the streets of 11th century Coventry as a tax protest. As you may recall, the good Lady griped to her husband about the oppressive taxes he demanded from his poor serfs and he said he'd abolish them if she'd take that famous gallop down Main Street—which, to the delight of the equally legendary Peeping Tom, she bravely did. (Nonetheless, taxes in Coventry were never reduced—but give her an "A" for effort!)

And now we Americans eagerly await the next wave of tax reform. Will it be a flat tax? A value added tax? Our generation may not live long enough for Congress to get its collective act together to even consider tax reform, no less implement it. So you'd better sharpen your pencil and apply it to your friendly Form 1040 before the Ides of April.