History of US Income Tax
The origin of the income tax on individuals is generally cited as the passage of the 16th Amendment, passed by Congress on July 2, 1909, and ratified February 3, 1913; however, its history actually goes back even further. During the Civil War Congress passed the Revenue Act of 1861 which included a tax on personal incomes to help pay war expenses. The tax was repealed ten years later. However, in 1894 Congress enacted a flat rate Federal income tax, which was ruled unconstitutional the following year by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state. The 16th amendment, ratified in 1913, removed this objection by allowing the Federal government to tax the income of individuals without regard to the population of each State.
Important Dates in U.S. Tax History
1862
Abraham Lincoln enacts emergency measure to pay for Civil War: Minimum 3% tax rate
1872
Lincoln’s income tax law lapses.
1894
2% federal income tax enacted.
1895
Income tax ruled unconstitutional by U.S. Supreme Court in Pollack v. Farmer’s Loan and Trust.
1909
16th amendment that authorizes Congress to collect taxes on income is proposed.
1913
Wyoming casts 37th vote, ratifying the 16th amendment. One in 271 people pays 1% rate.
1926
Revenue Act of 1926 reduces taxes: Too much money being collected.
1939
Revenue statutes codified. One out of 32 citizens pays 4% rate.
1943
One out of three people pays taxes. Withholding on salaries and wages introduced.
1954
875-page Internal Revenue Code of 1954 passes. Considered the most monumental overhaul of federal income tax system to date. 3,000 changes to tax rules.
1969
Tax Reform Act: Major amendments to 1954 overhaul.
1984
Reagan Tax Reform Act: Most complex bill ever, requires over 180 technical corrections
1986
Tax Reform Act reduces tax brackets from five or two.
1993
Clinton’s Revenue Reconciliation Act passes by one Vice Presidential vote.
1996
Four bills make over 700 changes, including Medical Savings Accounts and SIMPLE plans.
1997
Taxpayer Relief Act brings more than 800 changes. Child tax credit, Roth IRAs, capital gains reduction, breaks for higher education enacted.
2001
Tax Relief Act creates 441 changes. Lowers tax rates, repeals estate tax, increases contribution limits on 401(k)s and IRAs.
2002
The Job Creation and Worker Assistance Act brings business tax relief, including a 5-year net operating loss carryback and extends and adds depreciation.
2003
Jobs and Growth Tax Relief Reconciliation Act lowers taxes on capital gains and dividends, accelerates marginal tax rate cuts, brings marriage penalty relief, increases child tax credit, extends bonus depreciation and more. Bills passed late in the year bring military tax relief and Medicare reform.
2004
Back-to-back tax bills, Working Families Tax Relief Act and American Jobs Creation Act, brought the most tax law changes since 1986. The American Jobs Creation Act gave ordinary taxpayers, as well as businesses of all sizes, tax relief.
2005
Congress used the tax code to encourage energy savings and cope with natural disasters in the Energy Policy Act of 2005, the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005.
2006
Congress passed three major laws affecting taxes and several minor ones, making more than 500 changes to the Internal Revenue Code altogether. Among other things, temporary capital gains and dividend rates of 15% (0% for the bottom two brackets) were extended for two years beyond 2008 and the AMT exemption was increased, but for 2006 only.
2007
Congress passed another temporary “fix” for the AMT, extended the reach of the “kiddie tax” to age 18 (age 23 for students) beginning in 2008 and changed the rules on forgiveness of debt to benefit homeowners facing foreclosure or reworking their mortgages.
2008
Six big tax laws passed: Economic Stimulus Act; Heroes Earnings Assistance and Relief Tax Act; Housing Assistance Tax Act; Emergency Economic Stabilization Act; Worker, Retiree and Employer Recovery Act; and Heartland, Habitat, Harvest and Horticulture Act. Among the major provisions of these laws were economic stimulus rebates, a first-time homebuyers credit, an additional standard deduction for real property taxes, extension of expiring deductions and yet another temporary AMT “fix.”
2009
Congress passed a major stimulus bill with nearly $300 billion in tax relief, providing for a Making Work Pay Credit, an American Opportunity Credit to expand on existing higher education credits, expansion of the first-time homebuyer credit, an enhanced child credit, expanded net loss carrybacks for business and expanded energy credits. The homebuyer credit and net loss provisions were later extended and expanded in the Worker, Homeownership, and Business Assistance Act.
2010
Congress at year-end extended tax breaks that had expired at the end of 2009 for two years through 2011 and extended tax breaks from the 2001 and 2003 Tax Acts scheduled to sunset at the end of 2010 for two years through 2012; a payroll tax reduction was also enacted for 2011. Other legislation enacted during the year included tax provisions with respect to health care reform, hiring stimulus and small business stimulus.
2013
Congress permanently extends tax cuts from 2001 and 2003 for all but the highest income taxpayers. New Net Investment Income tax and Medicare Contribution tax become effective.
2014
New penalty for failure to obtain health insurance and credit to assist with health insurance premiums become effective.
2015
New penalty for employers who fail to provide health insurance becomes effective. States are authorized to set up plans to allow tax-favored accounts for disabled persons.
2017
Congress has passed the largest piece of tax reform legislation in more than three decades. Include lower tax rates and changed income ranges, alternative minimum tax exemption increased, standard deduction increased, child tax credit increased, eliminations or reductions in deductions, a myriad changes for business, etc.
1986 Tax Reform
The Tax Reform Act of 1986 is a law passed by the United States Congress to simplify the income tax code. The passage of the Act reduced the maximum rate on ordinary income and raised the tax rate on long-term capital gains.
The Tax Reform Act of 1986 lowered the top tax rate for ordinary income from 50% to 28% and raised the bottom tax rate from 11% to 15%. This was the first time in U.S. income tax history that the top tax rate was lowered and the bottom rate was increased at the same time.
The Tax Reform Act of 1986 also provided for the elimination of the distinction between long-term capital gains and ordinary income. The Act mandated that capital gains be taxed at the same rate as ordinary income, raising the maximum tax rate on long-term capital gains to 28% from 20%.
In addition to altering the tax brackets, the Tax Reform Act of 1986 eliminated certain tax shelters. Especially for real estate investments, it reduced the value of these investments by limiting the extent to which losses associated with them could be deducted from the investor's gross income. This value reduction, in turn, encouraged the holders of loss-generating properties to try to sell them, which contributed further to the problem of sinking real estate values.
It required people claiming children as dependents to provide Social Security numbers for each child on their tax returns.
It expanded the Alternative Minimum Tax (AMT) – the least tax that an individual or corporation must pay after all eligible exclusions, credits, and deductions have been taken.
It increased the Home Mortgage Interest Deduction to incentivize homeownership.
It increased personal exemptions and standard deduction amounts indexed to inflation, and earned income credit were also expanded
For businesses, the corporate tax rate was reduced from 50% to 35%. The Tax Reform Act of 1986 also reduced the allowances for certain business expenses, such as business meals, travel, and entertainment, and restricted deductions for certain other expenses.
Works Cited
“26 U.S. Code § 469 - Passive Activity Losses and Credits Limited.” LII / Legal Information Institute, Cornell Law School, law.cornell.edu/uscode/text/26/469.
Important Dates in U.S. Tax History. Wolters Kluwer Tax & Accounting US, 2015, download.cchcpelink.com/important-dates-in-us-history-chart.pdf.
“Tax Reform Act Of 1986.” Investopedia, Investopedia, LLC., investopedia.com/terms/t/taxreformact1986.asp.
“Tax Reform Act of 1986.” Wikipedia, Wikimedia Foundation, en.wikipedia.org/wiki/Tax_Reform_Act_of_1986.
Terrell, Ellen. “History of the US Income Tax.” Business Reference Services, Library of Congress, Feb. 2004, loc.gov/rr/business/hottopic/irs_history.html.
Williams, David. “2017 Tax Reform Legislation: What You Should Know.” TurboTax Tax Tips & Videos, Intuit, Inc., turbotax.intuit.com/tax-tips/irs-tax-return/2017-tax-reform-legislation-what-you-should-know/L96aFuPhc.