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TheStreet Open House

Income Tax Turns 100. Did You Celebrate?

NEW YORK ( TheStreet) -- Did you forget to say happy birthday to income taxes? Feb. 3 was the 100th anniversary of the ratification of the 16th Amendment -- the one saying "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."

Congress passed the Revenue Act of 1913 on Oct. 3 of that year, which created the first permanent federal income tax.

Congress had made two previous attempts at instituting a federal income tax. The first, in 1861, was an emergency measure to fund the Civil War and was repealed in 1872. In 1894, in response to complaints that excessive reliance on tariffs as a source of revenue caused the price of imported goods to rise, Congress again passed an income tax law, which the Supreme Court ruled unconstitutional in 1895.

Some facts about the 1913 Form 1040:

  • The tax applied to salaries and wages, interest, dividends, rents, royalties, pensions and annuities, income from estates, trusts, sole proprietorships and partnerships and gains from the sale of most types of property.
  • The salaries and wages of state and local government employees were exempt from income tax.
  • Interest from federal, as well as state and local, government bonds was exempt from income tax.
  • Deductions were allowed for "personal" interest, federal excise taxes, taxes paid to state and local governments, casualty and theft losses, bad debts, business expenses and depreciation of property used in business.
  • There was an exemption of $3,000 for single people and $4,000 for married couples.
  • A "normal" tax of 1% was applied to the first $20,000 of taxable income. Dividends were exempt from this "normal" tax. An additional "super" tax was applied to income, including dividends, in excess of $20,000. It started with 1% on net income over $20,000 and not exceeding $50,000 and rose to only 6% on net income over $500,000.
  • The return was due "on or before the first day of March."
  • There was only one page of instructions!

In the first year of the income tax, only one out of every 271 American citizens were taxed and $28 Million in revenue was raised.

Over the years the federal income tax has evolved into the mucking fess that it is today. According to former Treasury Secretary Paul O'Neill, "Our tax code is so complicated we've made it nearly impossible for even the Internal Revenue Service to understand." Some of the landmarks of this evolution:

  • A personal exemption allowance for dependents and a deduction for charitable contributions were added in 1917.
  • Capital gains were singled out for preferential treatment in 1922, although profits on the sale of certain types of property received special tax treatment as early as 1918.
  • A deduction for medical expenses was introduced in 1942.
  • The Standard Deduction was added in 1944 as an alternative to requiring taxpayers to itemize qualified expenses.
  • An Income Averaging method of tax computation was initiated in 1964, to be taken away by the Tax Reform Act of 1986.
  • A "minimum" tax on specified "tax preference" items first appeared in 1970, and was replaced by the dreaded Alternative Minimum Tax in 1979.
  • An Individual Retirement Account for taxpayers not covered by an employer pension plan was introduced in 1974.
  • The refundable Earned Income Credit for low wage earners with dependent children was created in 1975.
  • Unemployment compensation was made partially taxable in 1979, and was eventually made fully taxable.
  • Social Security and Railroad Retirement benefits became partially taxable in 1984.
  • Taxpayers were required to list the Social Security number of dependent children age 5 and over for the first time in 1987. Eventually Social Security numbers were required of all dependent children, and are now applied for at birth.

By the way, if you who think taxes are too high today, from the end of World War II through the early 1960s the top tax rate was more than 90%!

Robert Flach has more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

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