It has been said that two things are certain in life, death and taxes. Since governmental entities do not produce goods or services that they can sell for a profit, they depend on some form of taxation to finance their operations. The amount of taxation a governmental entity must assess depends upon the level of service they are required to provide the public they serve.
In the United States (U.S.), the authority to asses taxes is given to the House of Representatives in article 1 section 8 (Archiving Early America, 1996-2010). The people of their districts elect the representatives of the House of Representatives so through these elected representatives, the people determine the levels of service provided by the government and thus the level of taxation the government will collect.
Presently the tax bite in the United States is about one-third of the Gross Domestic Product (GDP) of the country. At the turn of the 20th century, the tax bite was only about 10 percent of GDP but this was high when compared to the level of taxation for the colonists who first settled in the American Colonies. This is because they only paid taxes to provide security against internal and external enemies, a system of courts and justice, prisons, roads, schools, public buildings, poor relief, and even churches in some colonies (Rabushka, 2002). The increase in the percentage of taxation is due to an increase in the public’s reliance on the government to provide more and more services.
The early colonists paid little in taxation to their local governments and it was not until the 1640’s that public officials received any compensation. According to Richard T. Ely a prominent nineteenth-century historian “One of the things against which our forefathers in England and in the American colonies contended was not against oppressive taxation, but against the payment of any taxes at all” (Rabushka, 2002). The feeling of those who braved the hardship of travel across the Atlantic and tamed a wilderness on their own was that since the crown had not helped them in their endeavors, why should they be obligated to pay taxes to them.
With this attitude in mind, the authors of the U.S. Constitution deliberated at great length over the taxing provisions in the Constitution. The belief that taxes assessed upon the Colonies by the crown were excessive led to the mantra “no taxation with out representation” (The Congressional Digest, 1963) . Not wanting the young nation to experience another revolt, the framers of the constitution took the taxation provisions very seriously.
However, the young nation was $60 million in debt from the revolutionary war, a substantial sum for the day. Therefore, it was imperative that the young nation develop an acceptable method of revenue collection to prevent the young nation from financially collapsing before it even began. It was decided by the framers that direct taxes, taxes levied on the citizens of the country, be uniform throughout all the states and to insure implementation of this policy, gave taxing authority to the House of Representatives because it was closer in representation to the people (The Congressional Digest, 1963).
With passage of the Revenue Act of March 3, 1791 a broad tax program of levies on distilled spirits, carriages, refined sugar, snuff, and snuffmills, property sold at auction, bonds, and slaves was introduced. In addition, the act imposed a progressive tax on houses and lots. However, the revenue collected was slight; approximately $208,000 in 1792, which was one-tenth of the amount, collected during the same year from customs duties.
After the war of 1812, there was an increase in the collection of customs resulting in the abolishment of all direct-taxation. However, the Civil War erupted in 1861 and led to the formation of the foundation of the present U.S. internal revenue system in July 1862. This new law provided for a progressive tax on incomes and for tax withholding, the first federal income tax. This income tax continued after the war because of the need to pay off debt incurred to finance the war. In 1872, this first federal income tax was abolished (The Congressional Digest, 1963).
In 1880, the Supreme Court was called upon to rule on the constitutionality of the Federal Income Tax in a claim filed by a private citizen. The Supreme Court ruled that the tax was constitutional citing that it was “in the character of an excise of duty” and not an income tax. However, 15 years later in 1895 the same Supreme Court ruled that a two-percent income tax provision appended to the Tariff Act of 1894 was ruled unconstitutional. The court’s reasoning in this instance was that the tax was not apportioned according to representation as required by Article 1 Section 9 of the Constitution (The Congressional Digest, 1963).
After the turn of the century, agitation for a Federal income tax arose from the southern and western states. In his State of the Union address, President Theodore Roosevelt discussed the introduction of a graduated income tax. However, debate ensued on the need to pass a constitutional amendment due to the courts ruling in 1895. In 1909 Congress passed legislation authorizing the levying of a one-percent corporate income tax and an amendment to the Constitution authorizing the levying of a tax on income. Congress quickly passed the legislation and sent the amendment to the states for ratification (The Congressional Digest, 1963).
Many believed there was little chance of ratification by the states but to their surprise, the amendment achieved ratification by the required 36 states in February 1913. On October 3, 1913, President Wilson signed legislation enacting a new income tax that would now be constitutional due to ratification of the 16th amendment (The Congressional Digest, 1963).
In our next posting, we will look at how this income tax has grown through the years. We will see how politicians in order to gain political favors and votes now use the income tax and how they use it to engineer social behavior. We will also see how the progressive income tax is used as a vehicle to transfer wealth from the affluent of society to the poor using refundable tax credits.
References
Archiving Early America (1996-2010). The constitution of the United States. Retrieved
March 26, 2010,
http://www.earlyamerica.com/earlyamerica/freedom/constitution/text.heml
Rabushka, A. (2002, Aug/Sept). The colonial roots of American taxation, 1607 through
1700. Policy Review, 114, pp. 61-80. Retrieved March 24, 2010, the ebscohost database
The Congressional Digest (1963, April). The evolution of the federal tax system.
Congressional Digest, 42, pp. 100-101. Retrieved March 24, 2010, Te Ebscohost
Database
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