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Happy Tax Day!

April 16, 2011

Now that you all have mailed your income tax returns (LOL), I thought it would be interesting to look at the history of income taxes and the top-bracket tax rates over the last century.

Abraham Lincoln instituted America’s first income tax in 1862, as he searched for money that would enable the union to wage and win the Civil War. The first income tax collections began after the Revenue Act of 1862, which established the commissioner of Internal Revenue. The income tax generated approximately $55 million in government revenues during the war. The tax was progressive: the initial rate was 3 percent of incomes over $600, and 5 percent on any income over $10,000. In 1864, the rate bumped up to 5 percent on incomes above $600 and 10 percent on incomes above $5,000. The primary revenue source before the war was customs duties, which raised less than $40 million in 1861.The government ran huge deficits that were financed through borrowing.

In 1868, Congress again focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. It had a short-lived revival in 1894, but in 1895 the U.S. Supreme Court decided that the income tax was unconstitutional because it was a direct tax on individuals and not apportioned among the states in conformity with the Constitution.

In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system and the first Form 1040 was introduced. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations. In fiscal year 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. With the advent of World War II, employment increased, as did tax collections—to $7.3 billion. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.

My chart shows what the top-bracket tax rate has been since 1913 with major events highlighted. The rate for top income Americans reached a high of 94 percent during World War II. Since then, the top rate has fallen gradually, reaching 50 percent in 1982 and 35 percent today. Notice that this rate was only lower than it currently is twice – during the lead in to the Great Depression, and just before the Dot-Com Boom. Note also that, during most of America’s Golden Age (when we were truly the world’s wealthiest nation), the top rate was its highest. During that time we were a manufacturing powerhouse and there was plenty of after-tax wealth to go around. It’s also interesting to compare the top rate during our current wars with the top rate during all other wars of the 20th century.

It’s no wonder we’re in deep do-do. Republicans want to give the wealthiest Americans a free ride while the weight of government is born on the backs of those of us who can least afford it. It’s time the rich paid their fair share once again.

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