History of Federal Taxation in the United States
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The existing taxation policies in the U.S. have been characterized by a myriad of changes over the decades as a result of variations in the government's roles as well as the changing circumstances. The U.S. Department of Treasury asserted that the kinds of taxes imposed, their percentages as well as the size of the collections differ from what they were 100 years ago due to various historical events, including the war, the 16th Constitutional Amendment, changes in the society, economy, and the changes in the government's roles and responsibilities.
During the colonial times and the post-revolutionary era, which spanned from 1791 to 1802, the U.S. had no income tax law. Therefore, to finance its roles and responsibilities, it relied on the contributions made by the states and internal taxes on whiskey and other distilled spirits, tobacco and snuff, refined sugar, carriages, properties sold at auction, slaves, and the corporate bonds (Sandbox Networks, Inc.). When President Jefferson was elected in 1802, he abolished these direct taxes, leaving the federal government, for the next decade, with only the internal revenue taxes. However, in 1812, more funds were needed to finance the war and Congress imposed extra excise taxes, issued Treasury notes, and raised certain customs duties (U.S. Department of the Treasury). In 1817, all these taxes were cancelled and for the following 44 years, the country relied on the customs duties and the public land sales for its revenues.
Upon the eruption of the Civil War, Congress enacted the "Revenue Act of 1861", reintroducing the former excise taxes and imposing taxes on personal earnings at a rate of 3% on all incomes above $800 a year (U.S. Department of the Treasury). However, due to some noted inadequacies, the personal income taxes became effective only in 1862. The increased cost of the war made Congress pass a new excise tax law in 1862 focusing on items like the pianos, gunpowder, feathers, playing cards, leather, iron, drugs, patent medicines, telegrams, billiard tables, whisky, legal documents, and license fees. In 1872, the income tax was abolished, but it was again revived in 1894 and 1895 before being deemed unconstitutional (Sandbox Networks, Inc.).
The 16th Amendment of 1913 reintroduced the income tax and made it a permanent item in the U.S. tax system. Through this law, Congress imposed taxes on incomes of both individuals and corporations. The U.S. entry into World War I saw Congress pass in 1916 and 1918 Revenue Acts, all increasing the tax rates. In 1943, there was an introduction of the withholding taxes on wages. The need for more far-reaching reforms in the U.S. tax system led to the enactment of the Tax Reform Act of 1986, which lowered the individual income tax rate from 50% to 28%. Other notable changes to the U.S. tax system were made through the 1993 "Revenue Reconciliation Act" and the 2001 "Economic Growth and Tax Relief Reconciliation Act of 2001" under the Clinton and George Bush administrations, respectively.
Taxation is an important fiscal policy item in every economy. The view of this paper in regard to the contribution of the taxation on the economic growth depends on its policy, the purpose for which it is collected and the administration. Lower tax rates for the lower-income groups have been linked with improvements in the economy, especially through the creation of jobs (Worstall). This idea of spurring the economic growth by reducing the tax rate was advocated for by President Reagan in 1986 due to the effects on the economic incentives experienced by businesses and individuals. Therefore, the government should reduce the marginal tax rates with a view to significantly expand the tax base. Also, a tax imposed to collect revenues to finance war activities may not lead to improvement in economy unlike the one used to finance various economic activities.
Sandbox Networks, Inc. "History of the Income Tax in the United States." 2017, http://www.infoplease.com/ipa/A0005921.html. Accessed 17 Jan. 2017
US Department of the Treasury. "History of the US Tax System." Aug. 2003, http://www.policyalmanac.org/economic/archive/tax_history.shtml. Accessed 17 Jan. 2017
Worstall, Tim. "Tax Cuts Do Increase Employment, Do Create Jobs, the Science Is In." Forbes, 22 Apr. 2015, http://www.forbes.com/sites/timworstall/2015/04/22/tax-cuts-do-increase-employment-do-create-jobs-the-science-is-in/#28d752437382. Accessed 17 Jan. 2017