How did Income Taxes start in the USA ?

Answer 1

8.c. Taxation and Inflation




The previous chart is real eye-opener. It is a true representation of how much we are actually taxed. The government taxes us directly as “Taxpayers” and it taxes us indirectly as “Consumers”. When it taxes us indirectly, we feel like we are not being taxed, we feel someone else is getting taxed, like a Corporation. The ft of the matter is the Corporation passes the tax on to you as a consumer in the form of higher costs. Ultimately, you, the taxpayer and consumer, pays for all the taxes. This chart shows what our gross income would be if we paid all the taxes directly.

What follows is the only way that taxation can be transparent to the taxpayer, and for the taxpayer to be accountable for the level of taxation that they agree to. In much of what follows, it will become clear that our present policies have led to fiscal irresponsibility, and are likely leading to financial destruction. There is no doubt whatsoever, that much of our wealth is being needlessly destroyed, and we are working very hard to make up for it.

Taxation is done this way is to politically hide most of the taxation, otherwise we taxpayers would revolt, just like good Americans did during the Boston Tea Party. I suggest it is party time again.

“The avoidance of taxes is the only intellectual pursuit that carries any reward.” – John Maynard Keynes

I would have never thought that Keynes would make such a correct remark, since his economic theories were one of the causes of high taxation in today’s nations, globally.

An Example of Using this Graph
Taxation is very politicized. People, not politicians need to have the power of taxation in a very equal manner with no winners and no losers. Before proceeding, here is an example of high-level analysis using this graph.

On June 19, 2006 on C-Span, the Democratic Representative from Florida was on the floor complaining that the oil companies were getting wealthy at the taxpayers expense. The oil companies were provided leases in the Gulf of Mexico to drill for oil on public land with reduced royalty payments to offset the high cost and risk. This political representative noted that these reduced royalties, below the normal 12%, had cost the “Taxpayers” $100 Billion and were a disgrace, caused by the Republicans and Bush White House. This politician spoke sincerely and passionately. Even though I knew better in my head, in my heart I was getting upset at the oil companies and the politicians that allowed this deal to increase my taxes.

When you examine this politician’s remarks using the bar graph at the start of this chapter, the impacts are clear. If the oil companies were taxed at the full 12% royalty, then the oil companies would have passed the taxes onto us, the taxpayer, in terms of the higher cost of goods and services. So what is the best option for us who are both (1) taxpayers who want low taxes, and (2) consumers who need low cost goods and services?

Option1: If the oil companies keep the $100 Billion, then “most” of the $100 Billion results in lower cost gas for us the consumers. Or, if the $100 Billion is used to find new sources of oil, then with the greater investment in finding supply, we are less dependent on Mid-East oil. The added supply will keep gas prices lower and will stabilize price. This is good for us the consumer. Most of us consumers and taxpayers abhor hearing that we are making oil companies wealthy. However, oil companies are public corporations that employ people, create jobs and provide goods and services. In general, as consumers, we will get most of the benefit of the $100 Billion. Thus, we are protected and not harmed.

Option 2: If the government gets the $100 Billion as tax revenue, it is utopia to think that our political representatives will reduce our taxes by $100 Billion. They will find new ways to spend or use $100 Billion in ways that do not create wealth for the nation. We taxpayers will be more highly taxed and worse off. The $100 Billion will not be used to create new oil. We consumers will see supply reduced, and prices will increase. We will be worse off as both taxpayers (same taxes) and as consumers (higher costs). The politicians that make people feel that they will get something for nothing will be reelected, and those leaders that make hard choices to support business investment will not be reelected. Result, our country is worse off.

Comment: I am not an apologist for the oil companies or corporations. However, I will be a greater fan once the unacceptably high salaries, unrealistic bonuses, parachute clauses and other abuses are eliminated. Oil companies are public corporations. They need to be profitable at the corporate level to maintain jobs and competitiveness. However, as public corporations, the executives who run the corporations must make a fair wage and not profit as if this were their own company, which it is not. Fair and just guidelines for executive remuneration for publicly held corporations are sorely needed: for example, a flat % bonus for all employees (no options, etc). If all corporations have these rules, all the excuses about talent become a non-issue.

The solution is that taxation needs to become “more” democratic (we vote for what we are willing to pay for) and absolutely equitable (each of us are taxed for what we voted for). There is no other option that is as inherently fair and just which also de-politicizes taxation. This is discussed later.

The History of the Income Tax
Few people realize or can conceive that there was no federal income tax until 1913. Here is the history:
“In 1863, the federal government collected the first income tax. This graduated tax was similar to the income tax we pay today. Those who earned $600 to $10,000 per year paid at a rate of 3 percent. A higher rate was paid by those who earned in excess of $10,000. A flat-rate tax was imposed in 1867. Five years later, in 1872, the national income tax was repealed altogether.
Spurned on by the Populist Party's 1892 campaign, Congress passed the Income Tax Act of 1894. This act taxed 2 percent of personal income that was more than $4,000, which only affected the wealthiest citizens. The income tax was short-lived, as the U.S. Supreme Court struck it down only a year after it was enacted. The justices wrote that, in their opinion, the income tax was unconstitutional because it failed to abide by a Constitutional guideline. This guideline required that any tax levied directly on individuals must be levied in proportion to a state's population.
In 1913, the income tax became a permanent part of the U.S. government. Congress avoided the constitutional roadblock mentioned above by passing a constitutional amendment. The 16th Amendment reads, "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."
The 16th Amendment gave the government the power to levy taxes on individuals regardless of state population. The Underwood Tariff Act of 1913 included an income-tax section that initiated the system we use today.” –HowStuffWorks.com
Should this amendment be repealed? I believe it should be repealed and replaced for reasons to be described. Why did our founders specify that taxation be fairly apportioned? The 1913 16th amendment has led to a taxation nightmare, lack of accountability, unfairness, complexity, and tremendous waste.
With this system, any politician can promise anything to get elected, and then when the financial problems due to irresponsible spending begin, some other politicians has to fix it. Who suffers? Taxpayers and the nation suffers.
“The income tax has made more liars out of the American people than golf has.” – Will Rogers

One Solution is a Flat Tax that Replaces all Taxes
For taxation to be fair, all people ought to pay an equal % of their income in taxes. All people ought to vote on programs that increase or decrease taxes, only, if they pay taxes and are equally impacted. Progressive taxation is patently unfair.

If you are wealthy and make $1 Million per year and our flat tax is 25%, then you pay $250,000 per year in taxes. If you make $10,000 per year, you pay only $2,500 per year in taxes. If we must pay taxes, then we all should pay taxes, equally, fairly and for certain.

Wealthy people tend toward philanthropy, which creates hospitals, universities, foundations, and cultural establishments. If they are over taxed, our heritage suffers.

How was America able to grow so rapidly, fight wars, without an income tax until from 1777 to 1913? What happened to people without welfare? How did senior people survive without social security, Medicaid and Medicare for so many years? How were schools funded? How were roads, railroads and bridges built? Why was there no inflation? In fact, deflation due to productivity gains occurred since our currency was backed by gold and silver. In other words, as we became more productive, the cost of goods and services decreased, a good thing.

If these entitlement programs were not in place, would our citizens suffer? I believe our citizens suffer more now than in the past. So, do these programs help or hinder people and eventually lead to greater suffering? If one looks at history and at the results of government spending on social programs, they will find that the end result is destructive for the nation.

These entitlement programs were enacted because the wealth of our nation increased, and politicians could pride themselves for giving away the wealth of others. However, if people had retained the wealth of their own income, many permanent, self-sustaining solutions would have been established to help people, at far less cost.

There is no doubt that society has become more complex and that there is a role for the government to play as facilitator between private groups. If the government accepts their role as servant of the people, facilitator on public issues, and removes themselves from all entitlement programs, then taxation can be far less than it is today.

Regardless, there seems to be no better solution than to simply taxes to a flat tax that is strictly based on gross income that all people pay.

No deductions, no loop holes for the rich, no so called negative taxation for the poor, who not only do not pay taxes but get income. A flat tax is crucial, so that everyone is an equal stakeholder, for the issues that are voted on. I’d almost go so far to say, that only people who pay taxes are entitled to vote, at least on issues that affect taxation.

Everyone will be proportionately impacted. There is a perfect fairness and simplicity in this: a simple flat tax that everyone pays but once.

In addition, only people pay taxes. Since businesses do not vote, they do not need to be involved in the political process. This is good. Thus, at minimum, there will be no need for lobbyists; at best there will be less corruption. For example, when the railroads were first being built, the politicians in every state, city and county would propose onerous regulations against the railroads, that for some reason would never come to pass, i.e., the requisite political contribution or bribe. Moral: do not tax businesses, allow them as much freedom as possible, to grow and create jobs.

Think, why pay our taxes inefficiently, thousands of times through multiple transactions like sales taxes. Whether it is sales tax or flat income tax, we all ultimately pay it.

Why are all these taxes in place? This is done politically, so we never really know how much we do pay in taxes. For example, observe the graph at the beginning of this chapter. It shows that compared to our take home pay, nearly double our net income is used by the government. We do not realize the impact of 50% of the taxes we are charged, which increase the cost of goods and services, and takes a great deal of effort to collect.

If you factor in the time wasted in paying taxes through avoidance (bad decisions), time to keep up with taxes, especially if you are in business, and the 1000’s of transactions of sales tax and tax on every move you make, then I’d suggest that when you include the effort of paying taxes, time that could be used productively, that a simpler system makes great sense.

Some people will say a flat tax is not optimal, or unfair. Many other people strongly disagree with that. A flat tax would be far better than what we have now for many reasons.

Assault on the Middle Class
The 16th amendment and a political process to get elected have placed the middle class under assault. Just in the last 20 years, it now takes 2 people in a family to provide what 1 person in a family used to be able to provide. This forces the mother out of the home and the kids into the school, or the street.

A CNN report on 10/16/05 indicates that the assault is just beginning: bankruptcy laws have been tightened up (they were too loose anyways), the minimum charge card payments will be increased (they were too low anyways), energy and health costs are increasing substantially (they will), and many deductions in income tax are being eliminated (to tax the middle class).

“We’re [United States] looking more and more like a developing country. We have a concentration of wealth in the top 5%, but what is happening to the middle-class and poor people” – Luz Vega-Marquis, president of the Marguerite Casey Foundation

The answers are (1) the destruction of the wealth of the country by the government for reasons to be discussed, and (2) the joining of special interests and politicians to appropriate the wealth of the country.

“We hang the petty thieves and appoint the great ones to public office.” – Aesop

Public Corporations are Public, Not Private
Thus, the rules must change to be in the interests of all Americans. For example, public corporations, a government protected entity, should never allow corporations to over-compensate management. Corporate leaders, at times, appropriate (bonuses), which destroys a large portion of the wealth of a public corporation.

Once a corporation is formed, versus a privately owned company, a public corporation has a greater public responsibility. With the right of being a public corporation, comes a public set of responsibilities. A public corporations should as a minimum increase the wealth of all those that work for it, equally, as a % of salary. For public corporations, “Golden Parachutes”, must be eliminated as soon as possible.

“Malik is dismissive of the multinationals in Germany's blue-chip DAX 30 Index, many of which have modeled themselves on U.S. and British management practices. "When you look at the DAX, you get a false picture of the German economy. Those companies are important, but not as important as the media portrays," Malik says.

His maxim is that the aim of a company should be to create a happy customer. Profits, yes, but not obscene profits. "When companies such as Infineon (IFX ) or Deutsche Telekom (DT ) give their managers higher salaries while they're firing people -- that shouldn't happen."

ADDRESSING SOCIAL UNREST
To Malik, the strength of the German economy lies with family-run enterprises such as media company Bertelsmann, chainsaw maker Stihl, or cake-mix and frozen-pizza maker Dr. Oetker. "That's what's really decisive in Germany. They are entrepreneurially led enterprises. Shareholder value, stakeholder value -- they were never infected by these terms," -- Of Management and Morality, Fredmund Malik

Right now, the deck is stacked against the middle class and poor people. Here are some common sense criteria that should be implemented.

1.If you have a private company, it is your company, and it is up to you how to operate it so it is successful.
2.If you are working for a public corporation, then all employees, including management, share bonuses equally. Management with a higher salary, gets the same % but more $. That is fair. They should not get a larger %. If a corporation is public, rules of fairness apply.
3.Even if an individual comes into an existing public corporation that is near collapse, and they with the support of others, re-organize, motivate, cut costs, and create success, then everyone should share “equally” in the success. Since they are paid more, then with an equal %, they still get more. For public corporations, there should be guidelines on what paid more means.
4.Salaries of management in public corporations must be proposed, by the board of directors to stockholders, and agreed to by vote, by the stockholders. This includes bonuses for employees and management. This avoids the unacceptable relationship between management and the board of directors.
5.Eliminate golden parachutes and contracts. If there are none for all executives, then no one will need one to compete for talent. Executive positions must be performance based, no more, no less.

The same set of common criteria is needed for government officials. Taxpayers must be able to vote for their salaries, benefits, pensions, and other perks. One example is sick days. Civil servant employees are retiring with sick days that they did not take for years, and getting 100’s of thousands of $. As soon as possible, an amendment is needed to specify that all civil servant benefits must be voted on by taxpayers. It is irresponsible that financial benefits to be implemented by the people who will benefit from them.

“The death-knell of the republic had rung as soon as the active power became lodged in the hands of those who sought, not to do justice to all citizens, rich and poor alike, but to stand for one special class and for its interests as opposed to the interests of others.” – Theodore Roosevelt

Inflation: the Hidden Tax
If productivity is gaining at 4% per year, then we should see our standard of living doubling every 15 years. If our money supply was fixed, then the value of our money, purchasing power, would double every 15 years through a process of deflation.

However, what is actually happening is the Government creates money at the rate that productivity is increasing, and then adds some inflation. Inflation and the lost benefit of our productivity is an added tax that is rarely discussed. The tax of increased money supply robs us of the hard work we did to improve productivity.

If productivity is increasing at 4% and inflation is 2%, then the government has taxed each of us 6% by creating 6% more money in the money supply, in addition to the taxes we pay. Another way to look at this is, our spending power should have increased by 4% yet we lost 2%. This, invisibly to us, and painlessly for politicians, pays for the increased spending of entitlement programs, since taxes do not have to be raised. If deflation were allowed, this would expose the unacceptable financial underpinnings of government spending programs, and would cause politicians and citizens to make better choices.

Before 1913, the economy went through growth and depression spirals, though never as great as the great depression, which began in 1929, which was caused by governmental manipulation of the money supply to try to maintain the high growth of the 20’s.

We as lay people need to realize that intellectuals are taught that they need to control the rate of growth of the economy for they have the power to do so. They are taught it is in the interest of our society for them to do so.

Do not Control the Economy
The market can be likened to the weather. Some years it is cold, some years it is hot, some years it is bountiful, some years there are floods, or fire, or insects, and some years there is famine. These events currently cannot be controlled, nor should they be. If we over-control the economy to be stable and not give us storms to grow through, we will be weakened. From a prior quote, “Calm seas do not make great sailors.”

The one coin issue is that on one side of the coin people want stability in life (the glass is ½ empty). The other side of the coin is that life is not very stable (the glass is ½ full). The coin called life has both aspects. Therefore, for the most stable life, assume life is unstable and learn how to deal with change, so you can maintain stability during instability.

Alan Greenspan, Chairman of the Federal Reserve Board, has done our country much good, but he walked a very difficult high wire act. I do not think there will be many people that can do what he did for the last 15 years. He had to allow for the right growth in the money supply to reduce inflation, in a political world that in many cases was not interested in the right growth.

Politicians Love Inflation
Politicians know that inflating the money supply reduces the debt burden, and this reduces deficits. The value of money in the future is worth less with inflation, thus this reduces the value of the debt for debtors, as well as the value of the savings of people who save. This creates bad choices.

With inflation, politicians do not have to deal with issues that were caused by their predecessors. For this reason, a better and more stable method of allowing for economic growth without manipulation is needed.

In summary, through all the productivity improvements, the average American taxpayer ought to be able to manage a household with one income and have funds to spare. We no longer can do that, for we are inefficiently paying for charity through entitlement programs, we are giving countries foreign aid inefficiently, we have too great of an international military presence globally, our tax system is highly inefficient, and last, the growth in the money supply causes our real income to decrease.

If we address these primary issues, then I predict our standard of living can more than double in one generation.

Answer 2

"Taxes have been a part of American history since our earliest days. In fact, taxes are one of the reasons the colonists fought for independence from Great Britain in the first place. When our Constitution was being written, the authors knew that our young country would need taxes for items such as roads and defense. " <1>

"1861-1872
The federal income tax has not always been a part of the American taxation system. Civil War debts caused Congress to enact the first federal income tax. It was a progressive tax that was based on citizens ability to pay--only people above a certain income level were expected to pay. The government relied on voluntary compliance with the income tax. Many were willing to pay the tax, but many were not. Less than one percent of all households actually paid the tax, yet it generated $55 million. The federal income tax was repealed in 1872.

1894-1895
Congress passed a new version of the federal income tax in 1894. It required people to pay a flat income tax rate of 2 percent. The following year, the Supreme Court declared the income tax unconstitutional because it violated the part of the Constitution that requires any direct tax to be divided among the states according to population. Higher regressive taxes, such as tariffs and excise taxes, were put in place instead.

Early 1900s
By the turn of the twentieth century, the American economy had grown as a result of industrialization and modernization. The government supported more people and more programs than ever before. With industrialization, a small section of the population became wealthy, but many remained poor.

1909-1913
In 1909 Congress proposed an income tax that would not be based on the population of the states. Ratification of the Sixteenth Amendment in 1913 made the income tax legal and constitutional. It allowed the federal government to tax citizens' incomes directly. " <2>

Answer 3

When Did Income Tax Start

Answer 4

You are taxed based on how much you actually earned in 2011. Sometime in the beginning of 2012, you will receive W2 statements which will tell you how much you earned and how much you were taxed (taxes are taken out as you go). Filing your returns is generally pretty straightforward and you will use your W2 forms to fill in all the boxes and the charts (schedules) included with the forms to determine what your taxes should be. Try not to worry about it too much right now. There is free help available during tax season to those who need it.

Answer 5

Lincoln, to finance the Union Army and Reconstruction, imposed taxes of of 3% on all persons with incomes greater than $600.

Answer 6

Other tha taxation that was necessary to fund the revolutionary war, the first civil use for taxation went to fund road building and other infrastructure to fund the US Postal System.

Answer 7

Illegally, to fund the Civil War.

Answer 8

I often end up submitting the same question on other sites

Answer 9

The government figured he was not getting enough of your money.

Answer 10

civil war, somebody had to pay for it...