The Origin of the Income Tax goes back to the Civil War:
In July 1861, the Congress passed a 3% tax on all net income above $600 a year (about $10,000 today). However, no revenue was ever raised because a second tax passed before the first was due (on June 30, 1862). [...] In March, the Congress passed an income tax of 3% on annual incomes of $600 to $10,000 and 5% on incomes from $10,000 to $50,000 and threw in a small inheritance tax too. Lincoln signed the bill on July 1, 1862 to take effect a month later. [...] This tax also included the first appearance of withholding and was applied to federal salaries and on interest and dividends.
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By 1866, 30% of federal revenues derived from the income tax totaling $73 million, and derived primarily from just three states, New York, Pennsylvania and Massachusetts.In a move to increase compliance and the veracity of returns, the government even made tax returns available to the press. This practice was outlawed in 1870.
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In 1867, progressing rates were replaced with a flat tax of 5% on all incomes above $1000 a year. However, the penalty for failure to file was raised to 50% and the payment date was moved from June 30 to April 30.This income tax expired in 1870 and was replaced with a 2.5% tax on incomes above $2,000. Finally, when that law expired in 1872, the United States was again without an income tax.
I didn’t realized that Lincoln’s war-time income tax lasted over a decade. Then it slumbered a bit, only to return at the end of the century — unsuccessfully:
Amid the panic of 1893, an amendment was passed establishing a 2% tax on all incomes above $4,000 a year (about $50,000 today), but exempted the salaries of state and local officials, federal judges, and the president.
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President Cleveland opposed the income tax, but let it become law without his signature, believing it to be unconstitutional. In 1895, the Supreme Court ruled 5-4 against the income tax, saying that its provisions amounted to a direct tax, which was prohibited by the U.S. Constitution.
Congress ratified the Sixteenth Amendment, legalizing an income tax, in 1913, then “proceeded to pass an income tax of 1% on incomes above $3,000 and applied surcharges between 2% and 7% on income from $20,000 to $500,000.” That was just the start:
At first the revenue raised by the new income tax was disappointing: only $28 million in 1914. But then it accelerated. $41 million the next year, when the top rate was 7%, and nearly $68 million in 1916, when it was raised to 15%.[16] Eventually more than $1 billion would be pulled in by the income tax during the whole of World War I, when the rates were raised to 67% in 1917 and 77% in 1918, and make the hated tax the permanent feature it has become today.[17]After the war, the top rate would fall to 73%. In the 1920′s it fell to a low of 24% in 1929 but never again got as low as the pre-war rate of 7%. [...] Hoover and the Republicans raised the rates to 25% in 1930, then to 63% in 1932. Under the corporate statism of the New Deal, rates leaped to 79% in 1936, 81% in 1940, finally exhausting itself at 94% in 1944?1945.
The lowest rates showed the same appetite, advancing from a 1% rate on incomes below $20,000 in 1915. In 1917, it became 2% up to $2,000, then 6% up to $4,000. By 1941, the lowest rate was 10% on incomes below $2,000. In 1945, this had jumped to 23%. Today it is 10% on annual income up to $7,000; 15% on income below $28,000. The top 10% of all income earners pay 60% of all tax revenue. And the top half pay over 95% of all revenue raised by the federal income tax.
I knew that the withholding started during World War II — as an emergency war-time measure, of course — but I didn’t realize who suggested it:
In 1943, the government began withholding taxes on the advice of Milton Friedman.
And what’s the chief result of all this?
Adjusting for inflation, in the 81 years between the enactment of the income tax in 1913 to 1994, government spending increased 13,592%!
Whoa.