History of Taxation in the United States of America 1800s - 1900s

History of Accounting > Tax History > History of Taxes in the USA

After the Civil War ended, there was a shift away from tangible property,
to intangible property, because of the importance it was playing in our
economy at the time. Both the states and federal governments began to
investigate ways to increase their revenues by taxing items like corporate
stocks and the income generated from bond holdings.

By 1837 many states had instituted a form of income tax on their citizens.
In 1911, Wisconsin became the first state to establish a “State Tax
Administration”, whose role it was to collect both corporate and individual
taxes.

The first few attempts at a Federal income tax were deemed unconditional
by the US Supreme Court. When the Revenue Act of 1861 was adopted, it
was the first of its kind that the courts did not overturn. Finally in 1913, the
Sixteenth Amendment to the Constitution was ratified, and it allowed the
Federal government to tax its citizen’s income without requiring it to give a
portion of the proceeds back to the states.

The Federal income act of 1913, also defined income using prior
documents and laws. It deemed income to be “All income from whatever
source it was derived”. The personal income tax at the time, had very few
allowable deductions. However, the business side of the law, did allow
for business expenses to be deducted from income before it was officially
declared, “Taxable Income”.

As the years passed, the Federal income act of 1913 was improved by
adding more sophisticated and comprehensive definitions of deductions
and income. In 1918 the law was changed to include a foreign tax credit,

which helped the multinational corporations, who at the time were being
taxed twice on their income prior to its introduction. They were paying taxes
in the countries where they were doing business in, and they were also
paying taxes on that income to the United States.

Due to the overwhelming financial burdens placed on the country by World
War I, federal taxes where significantly increased to help pay for it. In 1921
after the war ended, the Treasury Secretary was Andrew Mellon, who was
an extremely wealthy industrialist. He served three different presidents, and
was able to bring about a series of important income tax reductions. The
principle reasons behind these decreases, is that less taxes would mean
more growth for the economy, and additional jobs for the countries citizens.

The United States Tax Code was established in 1926, which brought many
elements of the system together into one unified document. Title 26, which
was also known as the Internal Revenue Code, included such items as
gift, estate, income, and excise tax provisions. It also expanded on other
previous necessities such as enforcement and tax returns.

The last of these tax cuts occurred in 1928, which was only one year before
the start of the great depression. As the depression wore on, and World
War II began, the nation once again needed capital, and was forced to
increase the taxes its citizens paid. During the administrations of President
Johnson, Nixon, and Reagan, both personal and corporate tax rates where
reduced.

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