A Major Modern-Age Innovation: Income Tax

The ancient Egyptians did it to cooking oil. England did it to bachelors in the 17th century. But the greatest tax engine in history--$1.6 trillion in 1997--was born in the USA.

It took a constitutional amendment to establish the modern federal income tax, which has enabled the government to collect enough revenue to carry America through two world wars, finance the New Deal, develop the atomic bomb, foster social programs and put a man on the moon.

Love it or hate it, call it progress or peril, the federal income tax paid for it.

At the dawn of the century, the United States had won the Spanish-American War and found itself in the position of being a new world power. Government needed a steady method of generating the revenue required by a growing industrial nation beset with social problems. In 1909, Congress proposed a constitutional amendment to create a personal and corporate income tax that would replace import tariffs.

Constitutional conservatives in Congress railed against it, but four years later, three-fourths of the states had approved the 16th Amendment and the federal income tax was born.

It was 1913. Woodrow Wilson was president. The zipper was popular, as was the fox trot.

The nation’s founding fathers--who made do with buttons, the minuet and tariffs--may have turned in their graves. They had outlawed direct taxes that weren’t apportioned to each state by population.

“The framers would have abhorred the present system. They did not want direct taxes,” said Frank J. Doti, a tax specialist and law professor at Chapman University School of Law in Orange.

Nor did the founders want a big central government, insisting, instead, that the states manage their own affairs and that the populace practice self-reliance. Little did they know what lay ahead.

“The idea of limited government and self-reliance was being replaced by the philosophy of big government, which required big taxes,” wrote tax critic Charles Adams in his 1998 book, “Those Dirty Rotten Taxes: The Tax Revolts That Built America.”

The tax’s reach was much smaller at the start, even in its ability to garner attention: Although its passage made Page 1, it was relegated to a small box, far from the top story of the day on the Mexican revolution. But the real tax story was told further back in the papers: editorial cartoons showed the idle rich in top hat and tails climbing onto the treadmill of government expenses to relieve the working class.

And it was a class tax--98% of the population was exempt. Only the very wealthy, those with taxable incomes of more than $20,000 (equal to about $200,000 today), had to pay the tax, which ranged from 1% to 6%.

These things have a way of growing. World War II changed a class tax to a mass tax, and the federal government discovered the advantages of withholding tax at the source.

In 1939, 4 million people paid income tax; by 1945, the number had jumped to 42.7 million. Today, 125 million of us pay the piper each year.

The law has grown in complexity, too.

“So much so that political pundits have speculated that it is all a ploy by Republican leaders in Congress to scuttle the whole system as a result of complete exasperation by the populace,” said Doti, who believes the system is fundamentally sound--just too complicated. The original 1040 form was three pages long with one page of instructions. The law itself ran only 14 pages. Today, there are more than 250 schedules and forms and the Internal Revenue code is 10,000 pages.

We may hate income tax, but it is probably too entrenched in our everyday lives to imagine it disappearing. It guides our thinking when we get a raise, pay for child care, buy or sell a house, or send a child to college.

The tax bite has actually shrunk for the typical family over the last 20 years. The Treasury Department says a four-person family with a median annual income of $54,900 will pay 7.46% of its income in federal taxes this year, the lowest since 1966.

Who’s picking up the slack? Believe it or not, the experts say it’s the guy in the top hat and tails, or at least designer jeans.

Individual taxpayers making more than $100,000 account for less than 10% of the population but paid more than two-thirds of the income tax bill in 1998, according to the Congressional Joint Committee on Taxation. Those in the top 5%--a family of four making almost $200,000, for example--will be hit hardest in 1999.

But then, just imagine paying taxes on beards (Russia, 1702) or urine used for tanning leather (Rome, 1st century).