It's a new tax year, a new filing season belatedly underway and a new Administration with some ideas on tax changes.
Every time a new president moves into the Oval Office, especially one of the opposite party, political wags try to make pithy observations. Personally, I bow to some esteemed wits of the past, like Will Rogers, who said, "The difference between death and taxes is death doesn't get worse every time Congress meets."
Rogers' sardonic comment came to mind because one of the several tax changes that President Joe Biden floated before taking office last month is a hike in the federal estate tax. Biden also has proposed moving the top individual tax rate back to 39.6 percent from the 37 percent enacted as part of 2017's Tax Cuts and Jobs Act (TCJA), as well as raising the capital gains tax rate on some wealthier investors and upping the Social Security wage cap, again on higher earners.
Some of Biden's tax changes could happen, like the generally well-received proposal to expand the Child Tax Credit. However, it's still unclear as to just how many tax rewrites might make it into the tax code. The early part of the 46th president's first term is going to be spent on dealing with the COVID-19 pandemic.
But on this Monday federal holiday, officially known as the commemoration of George Washington's Birthday, but popularly celebrated (at least by retailers) as all Presidents Day, I decided to take a look at some major tax changes over the years and through Administrations.
Here goes, with help from the Internal Revenue Service , the Bradford Tax Institute, the Tax Foundation, Investopedia, Encyclopedia.com, the Center for Budget and Policy Priorities, Tax Analysts' Tax History Project, the White House and the White House Historical Association.
1862: Abraham Lincoln signed the into law the first income tax as a way to help pay for Civil War expenses. 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. The measure also created a Commissioner of Internal Revenue.
Before this momentous tax move, the country's aversion to taxes meant that money (and ways to pay for wars) came from property and excise taxes and tariffs. And as you might suspect, the law was challenged in court. In 1864, the U.S. Supreme Court upheld the constitutionality of the income tax in Springer v. U.S.
1867: Andrew Johnson assumed the presidency upon Lincoln's assassination in 1865. During Johnson's term, in 1867, Congress cut the income tax rate.
Even with an income tax at any rate in effect, 90 percent of all United States' revenue from 1868 until 1913 came from what we call sin taxes: levies on liquor, beer, wine and tobacco. Serving as president during these years were Johnson, Ulysses S. Grant, Rutherford B. Hayes, James Garfield, Chester A. Arthur, Grover Cleveland, Benjamin Harrison, Cleveland (again), William McKinley, Teddy Roosevelt and Woodrow Wilson.
1872: The first income tax was repealed this year. Ulysses S. Grant was serving his first term as our 18th president.
1894: The Wilson-Gorman Tariff Act, whose original purpose was to lower tariffs substantially, revived the income tax and an income tax division within the Bureau of Internal Revenue was created. This was during Grover Cleveland's second term as president, and he supported the tariff provisions. But not necessarily the income tax component, which was added by Tennessee Rep. Benton McMillan.
1895: The Supreme Court again gets involved in our tax system. This year, the justices 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 Bureau of Internal Revenue's income tax division was disbanded.
1909: William Howard 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. While that was being debated, Congress levied a 1 percent tax on net corporate incomes of more than $5,000.
1913: Four years later, with Woodrow Wilson in the White House and the threat of World War I looming, 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, pictured below, was introduced.
1918: The Revenue Act of 1918, during Wilson's second presidential term, raised even greater sums for the WWI effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.
1919: Wilson is still in office when the 18th Amendment was ratified. It barred the manufacture, sale or transport of intoxicating beverages, aka the beginning of the Prohibition Era. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. That added task lasted until 1930, when the Department of Justice assumed primary prohibition enforcement duties.
Before Prohibition, as much as 30 percent of federal revenue still was coming from excise taxes on alcohol. States, too, had relied heavily on excise taxes from liquor sales to fund their budgets. With that money gone, they turned to the income tax.
1931: Prohibition also allowed the IRS to make its landmark case against gangster Al Capone. The tax agency's Intelligence gathered enough evidence that Scarface didn't pay tax on his ill-gotten gains and in 1931, Capone was convicted of tax evasion and sentenced to 11 years in federal prison.
1942: Franklin D. Roosevelt and ways to pay for his post-Depression New Deal Society projects saw the creation of many tax laws with which U.S. taxpayers are very familiar. This year, during FDR's second term, he hailed the Revenue Act of 1942 as "the greatest tax bill in American history." It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.
Franklin also was in office when in 1943 Congress passed the Current Tax Payment Act, which created income tax withholding from worker's paychecks. In 1944, FDR signed the Individual Income Tax Act, which created the standard deductions on Form 1040.
1945: The Revenue Act of 1945 was created as World War II drew to a close. Just weeks after V-J Day, Congress approved this law, which eliminated the corporate excess profits tax and rolled back regular income taxes on both corporations and individuals. It enjoyed solid support from Harry S. Truman, who assumed the presidency after FDR's death. But the law still left tax burdens far higher than they were before the war.
1948: The tax rates were addressed three years later in the Revenue Act of 1948. While Truman. While Truman supported the idea of eventual tax cuts, he didn't want to deal with the revenue loss. But after three vetoes by Truman, the bill finally was enacted.
1950: Truman, however, persisted. After defeating Thomas Dewey in 1949, Truman went to Congress seeking a $1 billion tax hike. His argument: "In a period of high prosperity, it is not sound public policy for the government to operate at a deficit." In a special letter to Congress, Truman argued for increased taxation, saying "we should pay as we go because that is the way to keep the Government's finances on a sound footing." That's the fiscal situation that today's Congress faces.
The Revenue Act of 1950 boosted tax revenue by $4.5 billion by increasing individual tax rates; those in the lowest income bracket faced a tax rate of up to 20 percent, while the top bracket hit 91 percent. Businesses also were affected, with large corporations seeing tax hikes, but the tax rate was reduced for smaller businesses.
1953: Dwight D. Eisenhower was in office and his endorsement of his predecessor Truman's IRS reorganization plan led to the changing of the tax collecting agency's name from the Bureau of Internal Revenue to the Internal Revenue Service.
1954: Also during Eisenhower's first term, the annual tax filing deadline for individual tax returns changed from March 15 to April 15.
1950s: Overall, this decade saw the individual income tax's top tax rate hit 91 percent, thanks to the World War II tax measures that weren't rewritten after the Allies' victory over the Axis powers. Rather than rolling back rates, the tax code was revised to allow deductions. This led to the much-lamented and abused tax loophole system. And it also meant that despite the high marginal rate, the top 1 percent of taxpayers in the 1950s only effectively paid about 42 percent of their income in taxes.
1960s and 1970s: Although there were societal, cultural and civil rights changes in the tumultuous '60s, tax rates remained high. The top marginal tax rate in 1960 under Eisenhower was 91 percent; it applied to income over $200,000 for single filers or $400,000 for married filers. Those thresholds are approximately $1.5 million and $3 million, respectively, in today's dollars.
Tax things didn't change as we moved into the '70s, with its women's liberation movement, great rock and roll, wild hair (for women and men) and bad clothes. And yes, I speak from experience, as I came of age (and filed my first tax return!) in this decade. As we neared the 1980s, the top federal income tax rate never dipped below 70 percent.
Still, presidents kept getting elected despite high tax rates. Serving as Commander in Chief during these 20 years were Eisenhower, John F. Kennedy, Lyndon Baines Johnson, Richard Nixon and Jimmy Carter.
1981: Then the 1980s and Ronald Reagan arrived. The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent and indexed the brackets for inflation during Reagan's first term.
1986: In Reagan's second term, he signed the historic Tax Reform Act (TRA) of 1986 into law. I was working on Capitol Hill back then, for a Representative who was on the Ways and Means Committee, and yes, we considered "historic" to be part of TRA86's official title. It was the most significant piece of tax legislation in 30 years and codified the federal tax laws for the third time since the Revenue Act of 1918. More impressive, it truly was a bipartisan effort, with then House Ways and Means Chairman Dan Rostenkowski teaming up with Reagan to generate public support for the tax changes.
The 1986 law contained 300 tax provisions that were implemented over the next three years. The key to individual filers, at least the wealthier ones, was the cutting of the top tax rate to 28 percent for tax years beginning in 1988. The GOP promised that the bill's broader tax base and fewer deductions would bring in the same amount of money as higher taxes had. The promise didn't last.
1988: Republican presidential nominee George H.W. Bush told attendees at is party's convention, "Read my lips. No new taxes." Bush, however, reneged on that pledge.
1990: This year, the newly-elected Bush 41 worked with Democrats on a budget compromise that did raise taxes, as well as cut spending, to help reduce the ballooning federal deficit by approximately $500 billion over the following five years. Most political pundits say that tax hike led to his loss in 1992 to Bill Clinton. But it did lead to the elder Bush receiving in 2014 the John F. Kennedy Library Foundation's Profiles in Courage Award for his tax action that put the country's fiscal welfare ahead of politics.
2001 and 2003: The next big individual income tax changes came under George H.W. Bush's son, George W. Bush (or Bush 43 or W down here in Texas). The first of the so-called Bush tax cuts was the officially titled the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It was followed two years later by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
In both Bush tax cut bills, high-income taxpayers were the largest beneficiaries, with the top 1 percent of households receiving an average tax cut of over $570,000 between 2004-2012 (increasing their after-tax income by more than 5 percent each year). The estate tax also was reduced and actually eliminated it in 2010; it was resurrected in 2011.
But the laws' promised trickle-down of tax relief to all taxpayers was not achieved and the federal deficit increased.
2008: Bush 43 also oversaw the Economic Stimulus Act of 2008, a measure passed to help folks weather the Great Recession that was sparked by the subprime lending crisis. This measure popularized tax rebates (like the COVID-19 relief payments millions have received) as a pre-filing way to advance tax cut money to taxpayers.
2012: The American Taxpayer Relief Act of 2012, signed into law by Barrack Obama during his first term. It essentially let the Bush tax laws expire, thereby increasing the highest income tax rate to 39.6 percent. The Patient Protection and Affordable Care Act, aka the health care law known as Obamacare, also added an additional 3.8 percent surtax on the investment income of wealthier individuals, bumping the maximum federal income tax rate 43.4 percent.
The Obama Administration also made the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) available to more families, as well as created the American Opportunity Tax Credit (AOTC) to pay college tuition.
2017: The first major individual tax law reform measure since the 1986 bill was signed into law in late December 2017 by Donald J. Trump. Tax Cuts and Jobs Act of 2017 was the culmination of decades of GOP tax reduction efforts, led largely by former House Speaker Paul Ryan.
The TCJA cut the top individual tax rate from 39.6 percent to 37 percent, nearly doubled the standard deduction, lowered the estate tax rate and amount of assets subject to it and reduced the corporate income tax rate. However, only the corporate provisions are permanent. The individual components of the TCJA are set to expire at the end of 2025, unless Congress extends them. That would mean the previous higher tax rates and lower standard deduction amounts would return for tax year 2026.
2021 and beyond: Will the Biden Administration do away with parts of the TCJA cuts before then? The president and many Democrats hope so. But as tax history shows, changing the Internal Revenue Code despite who sits in the Oval Office tends to be a slow an arduous process.
You also might find these items of interest:
- Why is April 15 Tax Day?
- 'Taxation without representation is tyranny' & 12 other notable tax quotes
- Attention White House wannabes: the IRS audits presidential tax returns every single year