The taxation system of the United States has undergone significant changes in response to the changing environment both inside and outside the country. The types of taxes, the percentage, extent of coverage and revenue generated; all are very different today from what they were a few decades ago. The role of Government, industries, world economy and relations with the outside world keep changing, thus, tax rules and laws also keep changing accordingly. Let’s go through the various stages of the US tax system and try to get a broader view on how the current system has evolved.
Some Main Phases Of US Taxation System
Early historical phase: In the colonial era, the Government had a lesser need for revenue, thus, there were very few taxes, as the greater responsibility fell on the colonies. The Federal Govt. levied taxes on refined sugar, distilled spirits, tobacco and snuff, slaves, carriages, corporate bonds and property sold at auctions. Social issues and policies mostly governed the kind and amount of taxes levied on the citizen. Still, the collection of taxes was the responsibility of the states.
During the confrontation with France in 1780s, the Federal Govt. levied the first direct taxes on people on house, property, slaves and land. These were called as direct taxes because these were paid directly to the Federal Govt., without the State Govt. acting as a mediator.
19th Century US : The high cost of war in early 19th century brought first time taxes on jewelry, gold, silverware and watches. But, in 1817, the Congress did away with all internal taxes, mostly relying on tariff on imported goods for revenue. In order to support the ongoing Civil War, in 1862, the Govt. introduced income tax for the first time. It was based on the principles of progressive taxation and the system of collecting tax in form of withholding income at source was introduced. Next, the sales and excise duty and inheritance tax were introduced. In 1866, the tax revenue of the Govt. reached $310 million, the highest then.
The Office of Commissioner of Internal Revenue was established in 1862. The Congress eliminated the income tax in 1868 as the US Supreme Court concluded that income tax was unconstitutional.
Beginning of 20th century: The income tax made a permanent comeback in the 16th Amendment of the Constitution, in 1913. The 16th Amendment gave Congress the legal authority to collect income tax from individuals and companies. When World War II ended, employment increased, thus increasing the total tax revenue. The tax on wages was introduced in 1943 which increased the number of tax payers substantially. Tax collections zoomed to $43 billion by 1945. The Congress enacted the biggest tax cut in 1981.
Modern History: The Tax Reform Act of 1986, signed by President Reagan, it was the most far reaching tax reform of US after the introduction of income tax. The top tax rate on individual income was reduced from 50% to 28%. Tax preferences were eliminated and in order to retain the same revenue, there was a $120 billion increase in business taxation.
Following the tax reforms in 1986, there were yearly new tax acts in which the 1990 Revenue Reconciliation Act was important as it emphasized on increasing the taxes on the wealthy. The 1997 Tax Act signed by the then President Bill Clinton included tax cuts in form of $500 per child tax credit, tax incentives for education and a cut in capital gains tax for individuals.
When President George Bush came to power, in 2001, he signed a series of tax cuts that were a part of the Economic Growth and Tax Relief Reconciliation Act of 2001. The income tax rates were now as low as 10% in the lowest income bracket. Increase in rates was also slow and eventually, the child tax relief was to double to $1000 per child. In the two tax bills signed in 2005 and 2006, extended through 2010, tax incentives were designed to encourage individuals to save more for retirement.
As you can see now, the tax system, tax laws as well as tax cuts and incentives were drawn and followed according to the scenario and situations that the United States was facing at that particular time. It takes lots of research, understanding and foresight in creating Tax Acts that are both beneficial for the government as well as lucrative for the people.