Earlier this month marked the day that the tax code as we know it, complete with income tax, became law. The 16th Amendment was properly approved in February of 1913, and Woodrow Wilson signed the requisite legislation for our tax code on October 3, 1913. So the tax code — and the income tax as codified in the Constitution — has reached its 100th birthday.
Not the First Income Tax
Even though 1913 was the year that the 16th Amendment was ratified and added to the Constitution, it wasn’t the first time that an income tax had been levied. Indeed, during the Civil War, a 3 percent tax on all income above $800 was signed into law in order to help finance the fighting. That tax was signed into law in 1861 and lasted until it was allowed to expire in 1872.
An attempt to levy an income tax of 2 percent on incomes above $4,000 (about $110,000 in today’s dollars) was ruled unconstitutional — even though the Supreme Court had previously ruled the 1861 income tax-acceptable under the law.
After that setback to proponents of an income tax, some presidents began campaigning for an income tax that could be better codified into the law. The reason for this is due to the fact that most of the revenue for the United States at the time came from tariffs, as well as taxes on alcohol and tobacco (sin taxes have been with us for a long time, too). With many hoping to ease tariffs, an income tax seemed like a good fit.
Theodore Roosevelt championed a graduated tax rate, with those of different incomes paying different rates. William Howard Taft asked for a Constitutional amendment, and Congress overwhelmingly approved it with support from both parties. This happened in 1909, but it took until 1913 for three-fourths of the states to ratify the amendment so that it became law.
Changes to the Income Tax
The tax code has been changed and updated in the 100 years of its existence, with tax brackets changing according to inflation, as well as to political pressure. At first, the tax rates ranged from 1 percent to 7 percent, with each bracket going up a single percentage point. Now, of course, we still have seven tax brackets, but the gap between the brackets is wider in many cases.
Right now, the top tax rate sits at 39.6 percent, and the lowest bracket is 10 percent. However, taxable income isn’t based on gross income. In fact, there are a number of deductions that lower your income. Additionally, the marginal tax rate system we have now means that not all of your income is taxed at the same rate. Only the portion of your income above the threshold for your bracket is taxed in that bracket. It makes for a lower effective tax rate.
However, for those who consider our current tax rates at a high, it can provide some balm to go back and look at the highest-ever tax rate, which was 94 percent in 1944 and 1945. And, even after tax rates eased after WWII, the top tax rate was still above 80 percent until 1963. However, there is much debate because the effective tax rate was much lower.