Life Before Income Taxes

There was a time when the very idea of the government imposing an income tax seemed very strange, even un-American.

This was the land of freedom and opportunity, after all. Why would you tax someone’s income?

In the early days of the country, tariffs paid for a lot of the government’s expenses. However, as time passed it became obvious that freeing up trade would help to grow the economy, and improve international relations. Super-high tariffs didn’t help.

The country was also growing fast, and becoming a world power. It needed cash to build infrastructure, fight wars and do cool things like buy Alaska from the Russians.

But it was war expense that really brought about the need for more tax revenue.

The first income tax scheme was proposed to pay for the War of 1812. This idea was shelved when the war ended in 1815.

This bright idea stuck around, though, and was finally implemented in 1861, to pay for the Civil War.

Congress passed a law in 1894 that imposed the first peacetime income tax. Only around 10% of the country earned the whopping $4,000 annually that was the threshold for paying the income tax. Those who did paid 2% of their income.

However, an 1895 Supreme Court ruling outlawing taxes based on receipts from the use of property made it politically difficult to impose an income tax. After all, it wasn’t fair to tax wages if you couldn’t tax income from property, was it?

Still, the idea didn’t exactly go away.

As the U.S. Census Bureau points out, it was 104 years ago that the 16th Amendment to the Constitution was ratified, authorizing Congress to levy taxes on income.

In its first two years, the tax was modest, affecting only a very few citizens and provided only a small part of the government’s total revenue. But the need to fund our involvement in World War I moved income taxes to the center of federal finances.

At that point, there was no turning back.

In 2015, individuals paid around $1.9 trillion in federal income tax, while state and local income taxes amounted to over $348 billion in that tax year 2015.

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