History of Taxes

Federal, state and local taxes in the United States have evolved in response to the changes that have occurred in the country. Over the years successive governments have played a vital role in levying or abolishing different types of taxes, which have impacted every aspect of the country's growth. History helps us understand the gradual changes in society, economy, growth and the role of the government.

Taxes in America

Between the period of the colonial and the pre-revolutionary era, taxes were primarily levied by different colonies on imports and exports of sugar, tobacco, distilled spirits, carriages, property and slaves. Some middle colonies also imposed property tax or poll tax on each adult male. The colonies taxation system was meant only to facilitate the smooth working of the colonies and to fill England's coffers. The first tax, directly imposed on the American colonies, was in 1765, when the English Parliament passed the Stamp Act, followed with a tax on tea. Both these taxes became the bone of contention between the Britishers and the Americans, leading to the revolutionary war of 1775.

Post revolution, according to the Articles of Confederation, adopted in 1781, the right to levy taxes solely rested with each state, as the country had very few responsibilities of building the nation as a cohesive whole. However, once the Constitution was adopted in 1789, it was quite evident to the law makers that a government cannot function if its resource collection depended upon the whims and fancies of other states. The Constitution powered the Congress to "...lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States." The collection, however, was left at the states disposable. Since then the Federal Government imposed several new taxes, one of them was the first direct taxes on the owners of houses, land, slaves and estates. This was done to raise funds to support the confrontation with France in the late 1790's. Direct taxes were abolished by President Thomas Jefferson in 1802.

The Civil War of 1862 witnessed the enactment of the nation's first income tax law by Congress. It also restored earlier excises taxes and imposed a tax on personal incomes. Personal income tax was levied at 3 percent on all incomes higher than $ 800 a year. The Internal Revenue Services (IRS) came into being when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue, empowering it to collect taxes on behalf of the nation. As the Civil War plunged the nation further into debt, it passed new tax laws. Tax was imposed on all professions and trades, and goods such as drugs, patent medicines, telegrams, gunpowder, iron, leather, pianos, yachts, billiard tables, playing cards, and alcohol. An inheritance tax on all properties, was also levied as a follow-up tax. Large number of taxes helped the internal revenue collections reach more than $ 310 million. Most taxes were abolished after the Civil War ended.

The 16th Amendment to the Constitution introduced income tax permanently as a part of the US tax system. This amendment not only gave Congress legal authority to tax income on individuals and corporations, but also the right and the need to know about all economic details of individuals or business. This was done in 1913. The income tax law was further amended in 1916 to bring all unlawful incomes under the tax ambit. This period saw many tax evasion charges being filed. The period between World War I and World War II, saw many new tax laws being enacted, mainly for the purpose of raising funds for the war. Between the two wars the plunging economy during the Great Depression led to the passage of the Social Security Act in 1935, also famously known as the unemployment compensation tax. This act had provisions for providing payments to workers who lost their jobs, public aid to the aged, the needy, the disabled, and to certain minors to ensure social security for them.

By the end of World War II, the tax system had evolved very well. The Economic Recovery Tax Act of 1981, popularly known as the Reagan tax cut featured a 25% reduction for individual tax brackets, spread over 3 years. The other new features adopted an economic perspective, and incentives for individuals and business. The Social Security Act was further amended to include disabled, widows and widowers also. In 1965, Congress enacted the Medicare program, making medical care mandatory for persons aged 65 or older, irrespective of their income.

On 10th August 1993, President Clinton signed the Revenue Reconciliation Act into law to reduce approximately $ 496 billion the federal deficit. In 1997, he enacted another tax act making provisions for a cut in capital-gains tax for individuals, tax incentives for education and $ 500 per child tax credit. The Bush era saw many more tax laws being passed, one of them was the Economic Growth and Tax Relief Reconciliation Act which would help tax payers save up to $ 1.3 trillion in taxes over ten years. Tax acts enacted since 2005 have been extended through 2010, raising exemption levels for the Alternative Minimum Tax, and adding incentive provisions to persuade individuals to save more for retirement. Taxes in the USA has undergone many changes since the colonial times, each law passed to empower the country and its citizens economically.