Evolution of Income Tax in America
While taxes paid by American colonists to Great Britain were one of the main reasons for the Declaration of Independence and ultimately the Revolutionary War, America's Founding Fathers knew that our young country would need taxes for essential items such as roads and especially defense. Providing the framework for taxation, they included procedures for the enactment of tax law legislation in the Constitution. Under Article I, Section 7 of the Constitution, all bills dealing with revenue and taxation must originate in the House of Representatives. Otherwise, they follow the same legislative process as other bills.
Before the Constitution: Before final ratification of the Constitution in 1788, the federal government lacked the direct power to raise revenue. Under the Articles of Confederation, money to pay the national debt was paid by the states in proportions to their wealth and at their discretion. One of the goals of the Constitutional Convention was to ensure that the federal government had the power to levy taxes.
Since Ratification of the Constitution: Even after ratification of the Constitution, most federal government revenue was generated through tariffs -- taxes on imported products -- and excise taxes -- taxes on the sale or use of specific products or transactions. Excise taxes were considered "regressive" taxes because people with lower incomes had to pay a higher percentage of their income than did people with higher incomes. The most recognized federal excise taxes still in existence today include those added to the sales of motor fuels, tobacco and alcohol. There are also excise taxes on activities, such as gambling, tanning or the use of highways by commercial trucks.
Early Income Taxes Came and Went: During the Civil War from 1861 to 1865, the government realized that tariffs and excise taxes alone could not generate enough revenue to both run the government and conduct the war against the Confederacy. In 1862, Congress established a limited income tax only on people who made more than $600, but abolished it in 1872 in favor of higher excise taxes on tobacco and alcohol. Congress re-established an income tax in 1894, only to have the Supreme Court declare it unconstitutional in 1895.
16th Amendment Forward: In 1913, with World War I looming, ratification of the 16th Amendment permanently established the income tax. The amendment gave Congress the authority to impose a tax on the income earned by both individuals and corporations. By 1918, government revenue generated from the income tax exceeded $1 billion for the first time, and topped $5 billion by 1920. The introduction of the mandatory withholding tax on employee wages in 1943 increased tax revenue to almost $45 billion by 1945. In 2010, the IRS collected nearly $1.2 trillion through income tax on individuals and another $226 billion from corporations.
The Role of Congress in Taxation
According to the US Treasury Department, the goal of Congress in enacting tax-related legislation is to balance the need to raise revenue, the desire to be fair to taxpayers, and the desire to influence the way taxpayers save and spend their money.