U.S. Tax System History 1900 to the End of WWII
How the 16th Amendment Created a Permanent Income Tax Program
The reinstatement of the income tax was debated between the southern and western members of Congress, representing the agricultural and rural areas against the industrial northeast. The final agreement included an excise tax, to be imposed on business income, and a Constitutional amendment. This allowed the Federal government to impose taxes on individual lawful income without regard to the population of each State. The 16th Amendment, after ratification by the States, remained the law of the land.
Income Taxes and the 16th Amendment
By 1913, 36 states had ratified the 16th Amendment and in October, Congress passed a new income tax law. The rates would start at 1 percent, rising to 7 percent for those with incomes of over $500,000. At that time, only 1 percent of the population paid income taxes. Using Form 1040 became the standard for reporting income and remains in use today.
The original law included the wording of "lawful" income which was changed in 1916 to include all income, even if it was obtained by illegal means. The result was that those who earned income through unlawful means could be tried on charges of tax evasion if they did not file tax returns. One major complaint from tax payers was that reporting income taxes gave the government the right to knowledge about their personal affairs. In response, Congress required that information from income tax returns be kept confidential.
Income Taxes and World War I
The 1916 Revenue Act was in force when America entered World War I. The need for money increased so the lowest tax rate was raised from 1 percent to 2 percent and the top rate to 15 percent in excess of $1.5 million. It also imposed taxes on estates and excess business profits. The War Revenue Act of 1917 lowered exemptions and further increased tax rates. Taxpayers with $40,000 faced a 16 percent rate and for individuals with income of $1.5 million, the tax rate was raised to 67 percent.
In 1918, tax rates were raised again with a bottom rate of 6 percent and a top rate of 77 percent. Although only 5 percent of the population paid income taxes at that time, the income was able to fund one-third of the cost of World War I.
During the 1920's, increasing revenue from taxes allowed Congress to cut taxes five times, eventually returning the bottom tax rate to 1 percent and the top rate to 25 percent. After the stock market crash of 1929, the Federal government collected on $1.9 million dollars in taxes and by 1931, faced a budget deficit of $2.7 billion. To meet the need, Congress passed the Tax Act of 1932 that increased taxes dramatically. By 1936, the lowest tax rate was 4 percent and the top rate was 79 percent. By 1940, Congress had codified taxes and repeatedly continue to raise taxes.
During this time, in 1935, the Social Security Act was passed. It paid compensation to workers who had lost their jobs, gave aid to the aged, the needy, the handicapped, and to certain minors. These programs were financed with a 2 percent tax, half being paid by the worker and half by the employer, which were levied on the first $3,000. of the employees salary or wages.
Income Taxes and World War II
Even before the United States entered the Second World War, the need for defense spending and support of the countries opposing the Axis led to the passage of two tax laws, one of which in 1940 increased individual and corporation taxes. This would be followed by another tax hike in 1941, reductions in exemption levels, and incomes of $500, facing a bottom tax rate of 23 percent while those with incomes over $1 were raised to 94 percent. By this time, the number of income tax payers had risen from 4 million in 1939 to 43 million in 1945. As had been done during the Civil War, income taxes were once again withheld from incomes and wages, easing the collection of taxes by the Bureau of Internal Revenue.
As in previous U.S. History, income taxes were imposed or raised to meet defense needs during wartime. World War I required more revenue that were acquired by raising the income tax rates . The tax laws enacted during the 1900-World War II period would become a permanent part of the income system of the United States.
Source:
U. S. Department of the Treasury
1040 Tax Forms
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