The History of Tax

FEDERAL TAXES (GENERAL, MARGINAL)

1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.

1872 - Income tax repealed.

1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.

1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.

1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.

1913 - Income Tax instituted. Less than 2 percent of the population had to pay it. Income up to $20,000 was taxable at 1 percent, and above $500,000 at 7 percent. It exempted the first $3,000 earned by a single person and the first $4,000 by married couples. Since the overwhelming majority of Americans supported families on less than $1,000 a year, most were exempted from the tax.

1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "Congress shall have the 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." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.

1916 - Income tax, top rate: 15 percent.

1917 - Twenty graduated steps established for the income tax. Top rate on income over $2 million: 67 percent. Under $2,000: 2 percent. Exemptions reduced. Number of returns from 1916 to 1919 will climb from 437,000 to 4.4 million. Even so, 95 percent of all Americans will pay no income tax.

World War I - Income tax, top rate at 73 percent. Capital gains, top rate: 77 percent.

1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.

1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.

1921 - Capital gains, top rate: 12.5 percent. Income tax, top rate: 56 percent.

1924 - Income tax, top rate: 46 percent.

1926 - Income, top rate: 25 percent. Income tax on first $4,000 lowered from 2.0 to 1.5 percent. Estate tax, top rate, lowered from 40 to 20 percent. Abolished gift taxes.

1930s - Increased capital gains tax rates in the 1930s. For a short period, realized gains were taxed under a complicated schedule that taxed gains from very short-term investments in full, but excluded as much as 70% of gains from sales of assets held for more than 10 years. This system was widely criticized as unwieldy and complex, and in the early 1940s it was scrapped.

1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.
1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.

1932 - Income, top rate: 63 percent

1936 - Income tax, top rate: 79 percent. Roosevelt also institutes an inheritance tax, estate tax, gift taxes, dividend tax and progressive corporate tax.

Early 40s - capital gains taxed at half the regular rate or 25 percent, whichever is lower.

1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.

1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.

1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.
World War II - the bottom income tax rate climbs from 4 to 19 percent between 1940 and 1943. Top income tax rate climbs to 88 percent by 1943. By 1945 it hits 91 percent, where it remains until 1964.

1964 - Income tax, top rate: 77 percent.
1965 - Income tax, top rate: 70 percent.
1950s - Corporate tax: 52 percent.

1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service
system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.

1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.

1954 - The filing deadline for individual tax returns changed from March 15 to April 15.

1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.

1965 - IRS instituted its first toll-free telephone site.
Late 60s - cap gains start rising from 25 percent.

1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.
Mid 70s - cap gains reaches 39 percent.

1977 - Social Security Act Amendment of 1977 passed. With Social Security in trouble, Congress passed a schedule of Social Security tax increases, ending in the year 2030, that would gradually raise the combined amount paid by employers and employees from 11.7 to 15.3 percent. Also raised the maximum taxable income from $16,500 in 1977 to $42,000 in 1987. This schedule would be accelerated in 1983.

1978 - Revenue Act of 1978 makes unemployment benefits taxable for first time. Capital gains, top rate: 28 percent (enacted November, 1978).

1981 - The Economic Recovery Tax Act of 1981 (ERTA) passes. Otherwise known as Reagan's supply-side tax cuts. They included: An across-the-board reduction in individual income tax rates of approximately 23 percent, phased in over 33 months. A reduction in the maximum top rate from 70 percent to 50 percent, beginning in 1982. (Only unearned income - from interest and dividends - had been taxed at 70 percent. Wage and salary income was already taxed at 50 percent.) Inflation-indexing for the individual income tax brackets, the zero bracket amount and the personal exemption, beginning in 1985. The accelerated cost recovery system (ACRS), which provided depreciation write-off periods ranging from 3 years for equipment to 15 years for structures. Reduction of the maximum tax rate on capital gains to 20 percent.

1982 - Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) passes. Institutes a half-basis adjustment for investment tax credits in calculating depreciation. Repeals the acceleration of depreciation scheduled in 1985 and 1986 by ERTA. Raises the federal unemployment tax (FUTA) wage base from $6,000 to $7,000 and the FUTA tax rate from 0.7 percent to 0.8 percent. Increases airport, airway, cigarette and telephone excise taxes. Reduces tax-free contributions to a defined-contribution pension plan from $45,475 to $30,000 and reduced limits on benefits from a defined-benefit plan from $136,425 to $90,000.

1983 - Social Security Amendment Act of 1983 passes. This dramatically accelerates the schedule of tax hikes in Social Security originally passed in 1977. The schedule is to be completed by 1990 instead of the year 2030.

1984 - The Deficit Reduction Act of 1984 (DEFRA) passes. A repeal, beginning in 1985, of the provision that allowed an exclusion from income tax of 15 percent of up to $3,000 in interest income for a single taxpayer ($6,000 for couples). A $2 per gallon increase in the excise tax on alcohol and a one-year extension of the 3 percent telephone excise tax. An increase in the minimum recovery period for real property from 15 to 18 years. A reduction in the holding period for long-term capital gains from one year to six months for assets acquired between June 1984 and January 1988.
1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.

1986 - The Tax Reform Act of 1986 passes. A reduction in the number of individual income tax brackets to two - 15 percent and 28 percent. Increases in the zero bracket amount and personal exemptions. Repeal of the two-earner deduction, income averaging, and the state and local sales tax deduction. Repeal of the 60 percent capital gains exclusion for individuals. Reduction in the maximum corporate income tax rate from 46 percent to 34 percent. Broadening of the corporate tax base through repeal of the investment tax credit, limiting depreciation deductions, restricting the use of net operating losses, etc. Capital gains, top rate: 28 percent. Corporate tax: from 46 to 34 percent.

1990 - Omnibus Budget Reconciliation Act of 1990 passes. Income tax, top rate: 31 percent.

1992 - Taxpayers who owed money were allowed to file returns electronically.

1993 - Omnibus Budget Reconciliation Act of 1993 passes. Income tax, top rate: 39.6 percent. Corporate tax: 35 percent.

1997 - Taxpayer Relief Act of 1997 passes. Capital gains taxes are slashed in a complicated schedule. After July 29, 1997, assets that have been held for a year are taxed at 28 percent. For assets held over a year and a half, the rate is 20 percent (10 percent for individuals that were earlier taxed at the 15 percent rate). After the year 2000, assets that have been held for 5 years will be taxed at 18 percent (or 8 percent). The Alternative Minimum Tax is removed for C Corporations that earn less than $7.5 million in receipts after 1997. Also included: a $500 per child tax credit, tax breaks for college expenses and tuition, a higher exemption for estate taxes and expanded Individual Retirement Accounts.

1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.

2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.

2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.

2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.

INCOME AND CAPITAL GAINS TAXES (TOP RATE, MARGINAL)

Chart prepared by Citizens for Tax Justice.
Source: http://www.huppi.com/kangaroo/TaxTimeline.htm
Source: https://www.irs.gov/newsroom/historical-highlights-of-the-irs