It seems that tax reform is always an election issue. Next year’s presidential election will be no different as the 2010 Congress extended the Bush-era tax cuts to year-end 2012 in a deliberate effort to make tax reform a wedge issue.
I am a firm believer that history can provide great direction to our future. Tax reform is nothing new, so I decided to learn more about the United States’ history of taxation. I had many preconceptions and prejudices going in, and I appreciate what I have learned. Given the history, it is hard for the average person to know the foundational tenets of our current tax system. Apparently, it is hard for tax experts as well.
CCH is a leader in the tax information world. CCH’s publications and products are sought after sources for tax professionals. Even so, I was surprised to see the following phrase on its website: “the CCH brand has been a market leader since 1913, the year the U.S. federal income tax was created.”1
The federal income tax was not created in 1913. The 16th Amendment to the U.S. Constitution, which gave the federal government authority to collect taxes on income, was ratified in 1913. However, the first income tax appeared more than 50 years earlier as a means to raise revenue for the Civil War.2 At the time, the U.S. Constitution clearly stated that Congress did not have the authority to impose direct taxes, but proponents “viewed the tax as an indirect tax because it did not directly tax property values.” 3
The income tax, phased out after the Civil War, was re-introduced in 1894 as part of the Wilson-Gorman Tariff. 4 This income tax did not last long as the Supreme Court ruled the income tax was a direct tax, and thus unconstitutional only one year later.5 The Pollack decision is what necessitated the eventual constitutional amendment.
The purpose of this blog is not to rip on CCH. I am sure the quote is misunderstood. The point I am trying to make is that history tells us tax reform will certainly be an issue in this upcoming election and many more to come. We should strive to understand what exactly is being advocated rather than rely on catchy phrases or perceived notions.
Fun Fact: Income taxes were a major player in raising revenues for World War II. The Roosevelt administration made full use of its communication cunning to expand the income taxation base. For instance, the United States Treasury commissioned a Walt Disney animated short called “The New Spirit,” which starred Donald Duck. The short propagates that filing and paying income taxes is one’s patriotic duty and is essential to the war effort. “In early 1942, more than 32 million people in 12,000 theaters watched “The New Spirit.”6
Did the Roosevelt strategy work? Absolutely. Tax revenues were $6.2 billion in 1941. By 1943, tax revenues had increased more than nine fold to roughly $57.4 billion. 7