The United States has had an income tax since 1864 when it was first enacted to help finance the Civil War. Since then, the income tax has become a key part of the government's revenue stream, helping to fund everything from social welfare programs to defense spending. The history of the income tax is fascinating and controversial.
The first income tax was imposed during the Civil War to finance the Union war effort.
The Abraham Lincoln administration implemented the first income tax in the United States during the Civil War to finance the Union war effort. This new form of taxation was created in 1861 by the Lincoln Treasury Department, and although it was initially suspended after the Civil War ended, it soon came back into practice as a way for the government to bring in revenue. Through progressive taxation, higher-income earners paid a progressively larger portion of their income as taxes, resulting in an ever-growing government source of finance that would shape our society’s structure immensely over time.
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The income tax hits lower-income people harder than richer citizens. This type of taxation, known as a regressive tax, means low earners are paying a larger proportion of their earnings compared to high earners. Supposedly, there are programs in place to help poorer citizens who struggle with the cost and in some cases may even offer them relief. Unfortunately, these programs often don’t make up for the income often lost due to paying more taxes than those with higher incomes. It signals an ever-growing income inequality where those with less money have to fight harder every day just to make ends meet, including when it comes to filing taxes each year.
Many of those who receive a paycheck from which their income tax payments are withheld usually are very excited when they receive a large refund for overpayment from the previous year. What they don’t realize is that they’re giving the government a year-long interest-free loan with their own money.
The true goal should be to have withheld just enough to cover your income tax bill while not overpaying so much that you get a large refund months later.
The modern income tax system
The modern income tax system as we know it today began in the United States in 1913 when the 16th Amendment was ratified, granting Congress the ability to impose taxes on incomes "from whatever source derived" beyond the revenue previously allowed by various tariffs and excise taxes. This meant that taxes could now be levied from incomes sourced from companies, individuals, wages, or any form of investment. While the origin of the modern income tax bill has been a contentious issue for some people, it led to vast improvements in technology, job opportunities, and social reforms across the nation.
The Earned Income Tax and the Capital Gains Tax
The Earned Income Tax Credit (EITC) and the Capital Gains Tax are two types of taxes that affect different types of citizens. The EITC is aimed at individuals who have lower incomes and who have children, while the Capital Gains Tax applies mostly to those with high incomes who engage in investments like stocks and bonds. For the most part, lower-income taxpayers receive more benefits from the EITC than they pay through individual income taxes, while higher-income taxpayers usually pay a larger amount in Capital Gains Taxes.
The Internal Revenue Service is charged with collecting the taxes all people owe
The Internal Revenue Service (IRS) is responsible for ensuring individuals and businesses fully comply with rules and regulations regarding the payment of taxes. They receive the information provided on tax returns, audit or investigate tax returns when needed, track payments of companies and individuals, contact those who are behind on their payments to arrange for payment plans, enforce collection remedies based on laws, and provide information on how to pay taxes.
Contrary to the false claims made by the current Republicans, the additional funding requested for the IRS was not so that could “…come to your house or small business with guns to harass you.” The additional funds to be spent over the next ten years are primarily for 1) hiring more administrative workers to replace those retiring, 2) hiring more administrative people because there aren’t enough now (have you ever been on hold with the IRS?), and 3) making sure the wealthy pay their fair share of taxes instead of getting away with paying almost no taxes. Number 3 is the real reason the Republicans don’t want more IRS funding.
Why rich people pay fewer taxes than middle- and lower-income people
Individual income tax rates also vary depending on how much money you make: the more you earn, the higher your marginal rate will be, but wealthy people have ways to avoid paying their fair share of taxes.
Despite the fact that the more money you make the higher your individual income tax rate will be, wealthy people are still able to find ways to avoid their fair share of taxes through complex tax-minimization strategies.
Techniques used to reduce their owed personal income tax liabilities include everything from “offshore” investments, taking advantage of tax credits and deductions, to leveraging trusts, businesses, and assets like real estate properties.
Unfortunately, these popular tactics employed by high-net-worth individuals often leave those with more moderate incomes unable to take full advantage of the same opportunities under unfavorable financial situations. It is clear that effective tax reform is needed in order for everyone in society to be on an equal playing field when it comes to taxation.
In Summary:
The first income tax was imposed during the Civil War to finance the Union war effort.
In 1894, Congress enacted a flat rate Federal income tax, but it was ruled unconstitutional by the Supreme Court in 1895.
The modern income tax system began in 1913 when the 16th Amendment was ratified, allowing Congress to levy taxes on incomes "from whatever source derived."
Since then, there have been numerous changes to the tax code, with rates fluctuating depending on economic conditions and political pressure.
Today, the United States has one of the world's highest corporate income tax rates, at 35 percent.
Individual income tax rates also vary depending on how much money you make - the more you earn, the higher your marginal rate will be.
What do you think about our tax structure and the role of the IRS today? Let us know in the comments or start a dialogue in the W.A.S. Chat Forum for paid subscribers on the W.A.S. app.
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