U.S. Taxes: A Brief History

Benjamin Franklin was correct in his assessment of both death and taxes, but while taxes have been certain, they have also been far from consistent. The famed economist Milton Friedman’s quote of ambiguous, voracious government programs, that included the U.S. monolith, complex, esoteric tax system, noted that “nothing is so permanent as a temporary government program.” As politicians figure out the electoral benefits of expanding programs and people figure out that they can let others work on their behalf, the ratio of workers versus consumers breaks down. When governments treat their hightaxed populations with an attitude of greed, brutality, and arrogance, world history documents that the result is eventual deep acrimonious political divisions, added central governmental controls, and frightening social upheaval.

America was free from direct taxation for much of its early history. Prior to the Civil War, duties and tariffs financed the government’s occasional desperate needs, usually to finance wars. Congress passed the Revenue Act of 1861 to help pay for the Civil War and levied a progressive tax on incomes exceeding $800 that was not rescinded until 1872.

While various forms of taxation continued, it was the 16th Amendment in 1913 that taxed incomes over $3000, though less than 1% of Americans were subject to the tax. Then, during WWI, there was an increase in those paying to 5%. Roosevelt’s New Deal and WWII saw many taxes introduced or increased. By 1936, the top tax rate was a staggering 76%, contributing to the Great Depression’s longevity. By 1945, 43 million Americans paid income tax. By the 1950s the highest tax rate was over 80%. During the following two decades, the tax code was rewritten often to allow for tax shelters, deductions, exemptions, tax loopholes, and fine-print exceptions. During the 60s and 70s, taxes were not indexed for inflation that effectively increased tax rates. During the Reagan administration of the 80s, tax reform was a top priority to stimulate the stagflation faltering economy. The slogan ‘broaden the base, lower the rates’ was implemented, and the structure was upended, and the economy was primed for prosperity into the Clinton era. During the Clinton, Bush, and Obama administrations, taxes were manipulated for political purposes, though new social programs were installed that resulted in tax increases. During the Trump administration, tax reform was a priority, thus, overall, most people and corporations paid less taxes, stimulating productivity and wages and investment, all combined resulting in an economic boom. As a partial offset to the reduction in Treasury revenue, deductions were limited for higher taxpayers, tariffs were implemented on many imports, and incentives were provided to corporations to repatriate dollars and onshore their operations. And in Washington today, the Biden administration intends to further expand existing social programs, healthcare programs, and pandemic stimulus programs that will require additional tax levies to partially of fset a bloated budget deficit.

The widespread view in the U.S. is that while some form of taxation is certainly necessary to secure a sound democratic government and a stable and content society, there is polar excoriating disagreement regarding economic views for a fair taxation system. History is riddled with good and bad examples of confiscatory overbearing governments that have and will continue to eventually fail. Once imposed, a smothering, higher-tax wish list quickly grows into a massive drain on family incomes and savings, no matter to which political platform one subscribes. What is the purpose of taxation if not to serve the general welfare of the public and the country? Would the public really be better off if the tax system diverted billions of dollars into government coffers from productive companies, ambitious individuals, and altruistic charitable-giving purposes? Why use tax increases or decreases as a perennial election football? Because the issue raises campaign dollars for the very politicians who passionately declare their view as true and correct for the country. How progressive should our tax system be designed to be considered fair? Fair-minded people and demagogues will propose that the answer to the question cannot be deduced reductively but depends more upon combative political dialectics than on definitive, bipartisan, agreeable solutions.

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