Published on Apr 26, 2024 5 min read

The Historical Landscape of the US Federal Taxes: An Ultimate Guide

In the United States, taxes were not always as prevalent as they are now. Over time, the United States federal, state, and local revenue systems have undergone notable modifications in reaction to shifting conditions and shifts in the function of the government. Major changes have occurred in the types of revenues collected, how they are distributed, and the amounts of revenues collected over the past 50 or 100 years.

Certain historical occurrences, such as a war or the adoption of the 16th Amendment to the Constitution, which gave Congress the authority to impose a tax on personal income, can be linked to some of these modifications. Continue reading to learn more about the history of federal tax system!

Brief History of the US Federal Tax System

Throughout the years, the federal tax system has changed, being more generous at times than not. This is a brief overview of the federal tax system in the United States throughout history.

Colonial Period

Throughout the majority of our country's history, the federal government's tax collection came from sales taxes, costs, and customs duties. Thus, private taxpayers rarely had any meaningful interaction with federal tax authorities. The colonial administration had little requirement for revenue before the Revolutionary War, but as each colony took on more responsibility, their demands for revenue increased as well. To meet these needs, the colonies imposed various taxes.

The Post-Revolutionary Era

Congress imposed excise taxes on refined sugar, distilled alcohol, tobacco and snuff, carriages, auctioned property, and a variety of legal papers in order to pay off the debts incurred during the Revolutionary War. But even in the early Republic, societal goals shaped what was subject to taxes.

Congress increased various customs fees, levied new excise taxes, and issued Treasury notes in order to generate funds for the conflict of 1812. Following the removal of these taxes by Congress in 1817, the federal government did not collect any domestic revenue for forty-four years.

The Civil War and the Birth of the Income Tax

The Revenue Act of 1861, passed by Congress in the wake of the Civil War, reinstated previous excise taxes and levied a personal income tax. All incomes over eight hundred dollars per year were subject to a 3% income tax. With its emphasis on consumption taxes and customs fees, the federal tax system took a new turn with the introduction of the personal income tax. Congress understood the income tax's shortcomings early on; thus, no money was taken in until the next year.

The 16th Amendment

As per the Constitution, Congress was only authorized to impose direct taxes in proportion to the population of each state. Because it was a tax imposed directly and was not distributed based on state population, the 1894 federal income tax was swiftly challenged, and the US Supreme Court declared it unconstitutional in 1895.

Congress gave citizens some measure of protection in 1916 by mandating that information on tax returns be kept private, acknowledging the income tax's inherent intrusiveness into the personal lives of taxpayers.

World Wars and Economic Crises

Congress passed the 1916 Revenue Act in response to the United States' significant rise in revenue following its involvement in World War I. For taxpayers with incomes exceeding 1.5 million dollars, the 1916 Act increased the top rate to 15% and the lowest rate from 1% to 2%.

Prior to the United States' entry into World War II, rising defense expenditures and the requirement for funding to bolster the resistance against the Axis invasion prompted the enactment of two tax laws in 1940 that raised both individual and corporate taxes. A further tax increase was then implemented in 1941.

Developments after World War II

The United States went through an unheard-of period of economic expansion following World War II. In order to reflect this increased riches, tax rates were changed; in the 1950s, the top individual income tax rate rose to almost ninety percent. However, many wealthy people paid substantially less ineffective taxes due to a variety of deductions and loopholes.

After its role was reorganized in 1953, the Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS). In order to highlight the service component of its business, a new name was selected.

The Tax Reform Act OF 1986

The idea that a more comprehensive revision to the income tax was required grew after the tax laws of the years 1981, 1982, and 1984 were passed. Many political leaders from both parties were persuaded by the economic boom that followed the 1982 recession that a robust economy required lower marginal tax rates. Additionally, policymakers gained an understanding of the intricacy of the tax system due to the legislation's frequent changes.

The 1990s saw a strong economic performance despite the higher tax rates due to other economic fundamentals like low inflation and interest rates, an improved global outlook following the fall of the Soviet Union, and the introduction of new information technologies that were both qualitatively and quantitatively advanced.

The Bush Tax Cut

An anticipated joint budget surplus of 281 billion dollars and a cumulative 10-year planned profit of $5.6 trillion was generated by the total tax revenue by 2001. A large portion of this surplus was caused by the combination of growing real incomes and a progressive tax structure, which increased the tax burden as a percentage of GDP.

The tax cut in 2001 signaled the continuation of several key tax-policy trends. For instance, it increased the $500 per kid Child Tax credit to 1000 dollars. The credit for Dependent Child Tax was also raised.

Conclusion

To sum up, the political philosophies, societal demands, and economic realities have all influenced the lengthy and intricate history of the US federal tax system. World wars and economic crises influenced tax laws, from colonial taxation to the introduction of the income tax. While post-war prosperity resulted in greater tax rates, the 16th Amendment revolutionized taxes.

The goal of the 1986 Tax Reform Act was simplification; this was followed by the 1990s economic growth. The Bush Tax Cuts maintained current patterns while taking into account shifting social and financial demands.