Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

October 18, 2013

On October 3rd, our nation’s federal income tax turned 100 years old.  Usually lots of people show up for anyone turning 100, but sadly, for the federal income tax, there was no grand party.  In fact, most of its closest friends – the 106,000 employees of the Internal Revenue Service were at home due to the government shutdown!  Americans celebrating the federal income tax would be lackluster at best – maybe on par with the excitement of throwing a party for your boss.  But let us at least pay some tribute to this system and perhaps gain a little more perspective

The roots of the income tax go deeper than 1913.  Abraham Lincoln set up the first income tax in 1862 in order to finance the Union efforts in the Civil War, and he established a position called “Commissioner of Internal Revenue” to handle this job.  The tax was a temporary tax and expired in 1872.  It provided about 21 percent of the cost of the war efforts, and about 10 percent of Union households were touched by the income tax.

Tariffs and excise taxes were the typical means of generating most revenue before and after the Civil War, but the country was looking for a better system.  In 1894, Congress tried to reenact the income tax but it was shot down by the Supreme Court which declared it unconstitutional.  The Constitution basically said that direct taxes had to be apportioned to the states based on relative population.  An income tax clearly violated that since it was not divided out based on population but different to each person based on each individual’s income.

During the early 1900s, there was a growing movement by the people in support of a permanent income tax that would mainly be levied on wealthy individuals.  Tariffs and excise taxes hit low and middle income people squarely on the shoulders since a much higher percentage of their total income was taxed as a result.  The only way to have an income tax, however, was by laying the groundwork to make it constitutional via an amendment.

Three main campaign issues defined the election of 1912: monopolies, women’s suffrage, and tariffs.  Woodrow Wilson wanted to break up monopolies, he dodged women’s suffrage by saying it should be decided at the state level, and he wanted revenue reform.  He was elected with nearly 82 percent of the Electoral College vote and the next year the 16th amendment was ratified which states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

I have a facsimile on my office wall of the first income tax return in 1913.  It was three pages long with one page of instructions (2012 instructions were 214 pages by comparison).  Adjusted for inflation in today’s dollars, if you made less than $70,000 as a single individual, you had no income tax liability.  If you made between 70,000 and $465,000, you were assessed a one percent income tax!  The top bracket was only seven percent, and assessed to those filers making over $11.6 million in today’s dollars.

Compare that to 2013…our bottom tax bracket is 10 percent assessed on single individuals making between $10,000 and $18,925, and our top bracket is 39.6 percent assessed on individuals making over $400,000.  In fairness to history, after the first three years tax rates started rising and they skyrocketed during World War I when the top bracket hit 77 percent on earnings over $15 million in today’s dollars.

Since 1975, there have been dozens of court cases from crafty people trying to figure out how they can get out paying income taxes.  The cases involve everything from claims that ratification procedures of the sixteenth amendment in certain states were not properly followed right down to claims that differences in punctuation and capitalization marks in versions ratified by the various states means the ratification was null and void. None of the ratification cases have ever been victorious and the courts have ruled ratification arguments are now frivolous or fraudulent.

The federal income tax is quite resilient, and has spent its entire life being pulled in many directions.   I am sure it will soon get over any hurt feelings from not having a 100th birthday party as did the Department of Labor, the U.S. Forest Service, and the National Archives.  Maybe on its 200th birthday it will get a cake.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.