Income Tax, Federal

Income Tax, Federal. The first U.S. income tax was introduced during the Civil War and collected through a newly established Bureau of Internal Revenue in the Department of the Treasury. It was designed less as a money‐raiser (though, at its height, it accounted for a fifth of Union revenues) than as a political diversion—conspicuously targeting the well‐to‐do in order to cloak the disproportionate burdens that higher tariffs and new consumer excise taxes placed on typical Americans. Phased out by 1872, it was politically resurrected in succeeding decades in response to sectional (western and southern), partisan (Democrat and Populist), and economic resentments against the power and wealth of the Republican‐dominated industrial East. Congress again enacted an income tax in 1894, only to have it declared unconstitutional by the Supreme Court the following year. The income tax was revived permanently in 1913, with the ratification of the Sixteenth Amendment of the Constitution and the passage by Congress of an income tax graduated up to a 7‐percent rate but with exemption provisions that shielded all but the top two percent of households.

Substantial tax increases in World War I (reaching a peak rate of 77 percent), reinforced by prosperous conditions that more than counterbalanced the Republican‐sponsored income‐tax cuts of the 1920s, transformed the individual income tax into a major federal revenue‐raiser. The small minority of income‐earners receiving over fifty thousand dollars annually shouldered most of this burden, however. New Deal Era tax reforms heightened the class tilt of the income tax (including a new 79‐percent top bracket applying only to John D. Rockefeller Jr.). Nevertheless, the erosion of incomes in the Great Depression, combined with new Social Security and consumer taxes, meant that the personal income tax accounted for under a fifth of federal revenue collections in the 1930s.

Drastic rate increases and cuts in exemption to finance World War II mobilization permanently converted the income tax into the federal government's primary revenue source. The income tax mutated from a class tax (only 5 percent of the public had filed taxable returns in the 1930s) to a mass tax, deducted directly from paychecks beginning in 1943 and applying to most American workers. In 1963–1965, embracing the “New Economics” of the Council of Economic Advisors, the John F. Kennedy and Lyndon B. Johnson administrations subordinated the income redistributional potential of the federal income tax to an apparently successful “Keynesian” countercyclical strategy of using broad income‐tax cuts and temporary budget deficits to stimulate economic growth. Top rates (deceptively high due to gaping loopholes) fell from over 90 percent to 70 percent. In the 1980s, the Ronald Reagan administration, adopting a “supply‐side” logic of economic expansion that demonized tax burdens and privileged business investment, reduced income‐tax rates further, and even subsequent increases left the top rate below 40 percent. Income‐tax reform remained at the center of American debate in the 1990s, assuming a symbolic and political importance that often overshadowed its financial and redistributive significance.
See also Depressions, Economic; Economic Development; Economic Regulation; Federal Government, Executive Branch: Department of the Treasury; Keynesianism; Monetary Policy, Federal; Taxation.

Bibliography

Sidney Ratner , Taxation and Democracy in America, 1967.
W. Elliot Brownlee , Federal Taxation in America: A Short History, 1996

Mark H. Leff