Musings on Tax Day

Tax Day—everyone’s favorite day. Jokes aside, April 15th now serves as an infamous day in the minds of modern Americans.

Seventy years ago, the Internal Revenue Service (IRS) decided to make April 15th the annual deadline for federal income tax returns in America. The IRS now processes over 160 million individual tax returns annually and refunds hundreds of billions of dollars in income tax refunds each year.

Now that Tax Day has passed this year, I thought it would be appropriate to briefly discuss the history of the income tax in the United States. While income taxes are a primary form of taxation in modern America, income taxes are a fairly new feature in the annals of American history.

Going back to the early history of America, the main forms of taxation in the late 1700s and 1800s in early America were very different from today. During the Founding era of the USA, Americans mostly paid taxes through “indirect” forms of taxation like excise taxes and tariffs. In fact, income taxes did not exist in America until the Civil War. But after just a single decade, the US Congress repealed the temporary income tax from the Civil War after about ten years.

The Federal income tax only became a permanent fixture of American life in 1913 with the ratification of the 16th Amendment. Prior to the 16th Amendment, the US Supreme Court had made previous rulings against the Federal Government enforcing a direct income tax on citizens–such as in the Pollack v. Farmers Loan & Trust Co case (1895).

But in 1913, more than three quarters of US States ratified the 16th Amendment and allowed the US Federal government to pass the Revenue Act of 1913. The unfortunate consequence of this Act is that the US Federal government came to depend almost entirely on a direct income tax instead of taxing foreign companies in the form of tariffs.

Here is the exact wording of the 16th Amendment for your convenience :

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.

Additionally, the overall tax burden for Americans citizens for the one hundred fifty years of American history was much lower than it is today. Early Americans (in the late 1700s) only paid an effective tax rate of only a few percent in the early decades of our nation. Compare that low level of taxation to the current day. In modern America’s burdensome tax system, you will find state, local, and federal forms of taxation on income, property, and purchases (sales). Depending on your jurisdiction, many Americans will easily pay an effective tax rate of 25%-30%–which can easily clear 50% and above for high-level income earners in the United States.

So if you are upset about the significant amount of taxes that you pay, it’s important to know how we got to the point as a nation. Modern America is a place where productive Americans pay a substantial portion of their earnings to the government for little in return. Meanwhile, unproductive members of our society and foreign governments get to reap the rewards of our hard-earned dollars in the form of welfare and foreign aid.

Thank you for reading this brief history lesson about the taxation in the United States, and don’t forget to pay Uncle Sam his due.