Monday marked the official celebration of George Washington’s Birthday — commonly called Presidents’ Day — and a grateful nation celebrated with fireworks, parades, and half-off sales at outlet malls throughout the land. (You may have missed the fireworks and parades, but the sales were hard to avoid!) Washington served long before the lawmakers working in the city named for him imposed an income tax. But have you ever wondered which Presidents shaped the current tax system we all know and love?
For the first fourscore and seven years of our history, we relied on tariffs to finance the government. Things started heading downhill in 1862, when President Lincoln signed the first income tax law to help pay Civil War expenses. The tax itself was 3% on incomes above $600 (roughly $13,000 in today’s dollars) and 5% on incomes above $10,000 ($212,000 in today’s dollars). Lincoln also appointed the first Commissioner of Internal Revenue. Clearly this is why more states celebrate Washington’s birthday than Lincoln’s.
Lincoln’s tax was repealed in 1872, and for the next 40 years, the government raised 90% of its revenue from taxes on alcohol and tobacco. In 1909, President Taft proposed a constitutional amendment authorizing the government to impose income taxes without apportioning the burden according to state populations. Four years later, New Mexico became the crucial 36th state to ratify what became the 16th Amendment. Later that year, president Woodrow Wilson signed the Revenue Act of 1913, which imposed a progressive tax starting at 1% on incomes above $3,000 (roughly $66,000 in today’s dollars) and topping out at 7% on incomes over $500,000 (a whopping $11 million in today’s dollars). Wilson’s administration also introduced the first Form 1040 — which probably explains why there’s never been a national holiday for Wilson’s birthday!
World War II forced Washington to raise taxes to unprecedented heights. So naturally, President Franklin Roosevelt presided over some important changes in tax policy. He signed the Revenue Act of 1942, which imposed a 19% tax on the first dollar of taxable income (!) and raised the top rate to 90% on incomes over $200,000. (On a brighter note, it created new deductions for medical expenses and investment expenses.) In 1943, he signed the Current Tax Payment Act, which imposed withholding. And in 1944, he signed the Individual Income Tax Act, which created the first standard deduction on Form 1040.
Top marginal tax rates remained at 70% for the next 30 years, as deductions, shelters, and loopholes proliferated like bad movie sequels. In 1976, candidate Jimmy Carter declared the income tax “a disgrace to the human race.” As President, he signed the Tax Reduction and Simplification Act of 1977, which replaced the old percentage standard deduction with a fixed amount ($3,200 for joint filers, or roughly $10,000 in today’s dollars). A year later, he signed the Revenue Act of 1978, which cut tax rates, cut the number of brackets, and established the first flexible spending accounts.
A decade later, President Reagan signed the Tax Reform Act of 1986. This once-in-a-generation law drastically cut the number of tax deductions, the number of tax brackets, and actual tax rates. At the same time, the law extended the Alternative Minimum Tax and created a new category of “passive income” that killed most of the old-school tax shelters. While later Presidents raised rates and expanded the number of brackets, the ’86 tax act remains the foundation for today’s tax system.
Are you looking for one President to blame for the monster that we know as the Tax Code? That’s too easy, they all are. But we can help you with the hard stuff like protecting you from the system they’ve all created. As this year’s tax filing deadline approaches, don’t hesitate to let your friends, family, and colleagues know that we’re here to protect them too!