In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income of both individuals and corporations. According to the U.S. Treasury Department, the goal of Congress in enacting tax-related legislation is to balance the need to raise revenue, the desire to be fair to taxpayers and the desire to influence the way taxpayers save and spend their money.
Interestingly enough, in the original version of the income tax act, Congress required that taxes be paid on all lawful income. However, by 1916, Congress realized that the word "lawful" was a problem, as lawful income was not defined in the law. If you derived your income from illegal means, such as bootlegging, you were not required to pay tax on that income. To solve this problem, the act was amended in 1916 to remove the word "lawful." After this change, all income, legal and illegal, became taxable.
How effective was the new income tax system? The incomes of couples exceeding $4,000, as well as those of single people earning $3,000 or more, were subject to a 1 percent federal tax. Less than 1 percent of the population paid federal income tax at that time. In 1918 annual internal revenue collections passed the billion-dollar mark, rising to $5.4 billion by 1920. In 1943, withholding taxes on wages was introduced. The number of taxpayers increased to 60 million and tax collections to $43 billion by 1945. Reported in the Internal Revenue Service Data Book, in fiscal year 2012, the IRS processed more than 237.3 million federal tax returns and supplemental documents, and collected more than $2.5 trillion in gross taxes. After accounting for nearly 123.4 million refunds, totaling more than $373.4 billion, collections (net of refunds) totaled almost $2.2 trillion.
The 1913 income tax return looked nothing like it does today. The actual form and directions fit on a mere four pages in 1913. The instructions for the 1040 are an intimidating 214 pages today. Going back to the goal of Congress in enacting tax-related legislation, 214 pages usually just confuses most taxpayers. By the time you have added lines 4 and 7, and multiplied by 13.5 percent, and then subtracted line 1, you have forgotten what you were trying to figure out in the first place.
The highest rate in tax history peaked in 1944 at 94 percent on taxable income of more than $200,000. That makes the rate of 39.6 percent in 2013 not such a big increase. Over the years, the tax rate has increased and decreased. The tax code in 1913 was 400 pages. Today, it is more than 73,608 pages. Tax reform is not going to be an easy task.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at email@example.com.