Photo By Mike Longo Jr.
President Donald J. Trump addresses the crowd at his rally on Oct. 13 at The John Murtha Johnstown-Cambria County Airport in Johnstown.
By Chadwick Dolgos
-Income Tax History-
The income tax has been a part of American life for as long as anyone alive can remember. What may be interesting to know is that the U.S. did not always tax income. In fact, at one point the income tax was ruled unconstitutional by the Supreme Court.
The federal government used to generate most of their revenue through tariffs, or taxes paid on imports and exports. It wasn’t until the 1920s when the government began generating the bulk of its revenue through the progressive tax system.
There are three types of income tax systems that countries utilize to generate revenue. The U.S. currently operates on a progressive tax system, a system that taxes higher incomes at higher rates. A flat tax system applies the same rate to all taxable income, while a regressive tax system places higher tax rates on lower-income earners.
The first income tax was introduced to the U.S. in 1861 in an effort to fund the Civil War.
Recognizing that the North would require a steady revenue stream in order to defeat the confederate states, Congress passed the Revenue Act of 1861. The Act imposed a flat tax of 3% on all annual incomes of $800 and over.
Though the new tax left many low-income earners exempt, only about 3% of the population was earning an income of $800 or more. With the North in need of more funding and supplies, Congress repealed the income tax provision and replaced it with the Revenue Act of 1862.
The 1862 Revenue Act created the first progressive income tax in the US. The Act established two tax brackets and did not require residents earning less than $600 annually to pay taxes. A 3% income tax was placed on earners making between $600 and $10,000, and a 5% tax was levied on residents making more than $10,000 a year. Additionally, any citizen earning more than $600 and living abroad was subject to the five percent tax bracket
The income tax quickly lost its popularity at the conclusion of the Civil War. Many believed that an income tax was a necessary evil to fund the war effort. It wasn’t until 1894 when Congress introduced the first income tax during a time of peace. The tax was passed through the Wilson-Gorman Tariff Act of 1894, which levied a 2% tax on all incomes over $4,000 a year. More than 90% of the population were exempt from the income tax.
The Supreme Court ruled the income tax unconstitutional, citing the 10th Amendment, which limits any powers not expressed in the Constitution. In response, Congress passed the 16th Amendment in 1909, which permitted the federal government to collect taxes on income. The amendment was ratified by the states on Feb. 3, 1913, opening the door to the progressive tax system used today.
President Woodrow Wilson signed the Revenue Act of 1913 into law, which reestablished the progressive income tax in the U.S. The Act placed a 1% tax on all annual incomes exceeding $3,000, again only affecting 3% of the population at the time. Those earning incomes exceeding $500,000 were subject to a 6% income tax.
The income tax was again challenged in the Supreme Court but was deemed constitutional due to the passage of the 16th Amendment. With the income tax passed into law and upheld by the Supreme Court, the revenue structure of the federal government changed drastically. While revenue was once primarily collected through tariffs, taxation became the main source of income for the federal government by the 1920s.
The top income tax bracket was increased to 77% in 1918 to fund World War I. The rate was applied to those earning more than $1 million annually.
The top rate steadily decreased during the 1920s and was as low as 24% by 1929. However, the rate increased to 63% in 1932 in response to the Great Depression. By 1944, the top marginal tax rate was 94% on income over $200,000 a year. Those subject to an income tax increased from 7% of the population to 64% by the end of World War II.
The top income tax rate remained as high or higher than 90% during President Dwight D. Eisenhower’s tenure in office. However, very few actually paid the top rate. The U.S. uses a marginal tax system that applies different tax rates to different forms of income. This system allows for top earners to pay lower rates on some forms of their income. Further, tax loopholes and deductions allowed for top earners to pay much less than the expected tax rate.
In 1958, only 0.02% of the population earned enough to qualify for the 81% tax bracket. Even less were eligible for the 91% tax rate. The marginal tax system accompanied by tax loopholes and deductions allowed for the very few of those expected to pay the 91% rate on their income to pay much lower rates.
President John F. Kennedy campaigned on lowering the highest marginal tax rate to 65%, but accepted 70% until deductions for top earners put in place during the war were phased out. By 1988, the top income tax rate was only 28%.
During the next 12 years, the top income tax rate steadily increased from 28% to 39.6% in 2000, but was then reduced down to 35% between 2003 and 2012. In 2012, President Barack Obama raised the top two tax brackets from 33% to 36% and from 35% to 39.6%.
Certified Public Accountant and resident of Pittsburgh Michael Cerveris believes that the current income tax system is complicated. “You’d normally think filling out a simple form 1040 shouldn’t be complicated, but a lot of people use assistive third party software or rely on a CPA to prepare their tax returns.”
Today, there are seven tax brackets and two-thirds of the population are now eligible to pay income taxes. The lowest single earners, making between $0 and $9,875 pay a 10% income tax, while the highest earners making $518,401 or more pay a 37% tax rate.
“The government had a system in place that was less complicated, but legislation expanded upon that to cover more specific situations, or changed course,” said Cerveris.
Although the main use of the tax system is to generate revenue, Cerveris explained there are other ways for the government to utilize the system. “The government also uses the tax system as another lever to pull to trigger economic growth and incentivize certain behaviors.
A recent New York Times article reported that President Donald Trump only paid a total of $750 in federal income taxes for 2016 and again in 2017. The authors also found Trump had paid no income taxes for the past ten of the previous 15 years.
While Trump denied the revelation during the first Presidential debate, claiming that he paid “millions of dollars in taxes, millions of dollars of income tax,” in 2016 and 2017, many question how the self-proclaimed billionaire was able to pay less in annual taxes than the average American worker.
“The tax code that put him in a position that he pays less tax than a school teacher is because he says he’s smart, because he takes advantage of the tax code, and he does take advantage of the tax code,” former Vice President Joe Biden said, during the Sept. 29 debate.
Cerveris explained there are business models that thrive on the complexity of the current tax system. “If it wasn’t complex, they wouldn’t be thriving,” he said.
He explained that, although wealthy business owners may not take a sizable income, they are personally tied into their businesses. “If you lose a ton of money in a single year, depending on the business structure, those losses can be carried forward to apply against future year’s income to reduce the tax burden.”
According to the New York Times article, Trump was able to reduce his amount of taxable income by taking advantage of the net operating loss deduction. The deduction prevents businesses from paying taxes when they're not generating profit.
Between 2000 and 2018, Trump reported losses totaling $315.6 million for his golf courses, $55.5 million for his Washington hotel property, and an additional $134 million for Trump Corporation, his real estate services company.
“Other things are that capital gains are taxed at a lower rate than normal and various tax credits,” said Cerveris, noting that all of this is completely legal.
Trump argued that it was the tax law passed while Biden was a senator that allowed for him to pay low income taxes. “He passed a tax bill that gave us all these privileges for depreciation and for tax credits, we built a building and we get tax credits.”
“Before I came here, I was a private developer, I was a private business people,” Trump said, “Like every other private person, unless they’re stupid, they go through the laws and that’s what it is.”
During the debate, Biden pledged to end the Trump administration’s tax policies that grant loopholes to the wealthy in hopes of fixing the discrepancies that allow wealthy Americans to pay less than the working class.
Prior to the beginning of the debate, the six-term senator and his wife Jill Biden released their 2019 tax returns, which revealed they paid nearly $300,000 in federal income taxes on a joint income of about $985,000.
The progressive income tax system, though ingrained into American culture, remains a subject of discussion during every presidential election.
Trump has proposed lowering the tax rate for the middle class as an initiative for his second term.
Democratic contender Biden has proposed raising the highest tax bracket from 37% to 39.6%, with no intentions of raising taxes on families earning less than $400,000 annually.