Wednesday, February 18, 2015

A history of taxes in the United States, part 2: Post World War I and later

As we inch closer to April 15, we can’t help but have taxes on the mind. While some are looking forward to a refund check, many others lament the day they have to turn over their hard earned money to the government. But we all have to pay taxes, even if we don’t think our system is particularly fair. But was our tax system always like this? In part one of this blog, we looked at a timeline of taxes in the early history of the United States. Today we’ll outline the modern history of taxation, starting with the end of World War I. Maybe after reading this you’ll have a new perspective and appreciation for the amount you have to pay!

Post World War I
Right after World War I, the U.S. economy experienced a huge surge, and the government saw record levels of tax revenue come into its coffers. In 1918, the last year of the war, government tax receipts reached $3.6 billion. But by 1920, those receipts reached $6.6 billion, despite the fact that taxes rates had been lowered after the war.

Sales Tax
Sales taxes were first introduced in the United States, starting with West Virginia in 1921. By 1933, 11 more states added sales tax, and 18 more by 1940. As of 2010, Alaska, Delaware, Montana, New Hampshire and Oregon were the only states without sales tax.

The Great Depression
The salad days of a booming economy were ended with the historic stock market crash of 1929. In the ensuing months and years, government tax receipts fell accordingly, to a paltry $1.9 billion by 1932.

That same year, President Herbert Hoover signed the Revenue Act to try and lift the country from the brink of collapse, and generating more tax revenue was a big part of that. Between Hoover and President Franklin Roosevelt’s New Deal, taxes were increased across the board to make up for a heavy deficit to fund government programs. In 1936 the top tax rate was 76%!

Social Security
In 1935, President Franklin Roosevelt signed the Social Security Act, which set up the system of social security, among other things. Social security taxes were first collected in January of 1937, and the first benefits were paid out in 1940.

World War II
By 1940 the U.S. was preparing war once again and supporting its allies, and taxes were ramped up accordingly. Income tax rates were 23% for citizens who made $500 or more, and those rates climbed all the way up to 94% for the richest Americans. By 1945, 43 million Americans paid taxes every year and the government collected $45 billion, up from only $9 billion in 1941.

Post War
After the war ended, the Revenue Act of 1945 scaled taxes back by $6 billion, but the government couldn’t bring them lower because of the big payouts into social security and other expanded programs.

The Pricey ‘50s
Even as the war ended and the country saw great prosperity, the withholding system of pay-as-you-go and high tax rates continued. The highest tax rates were still over 80% and a lot of wartime tax codes were never repealed.

Inflation in the 60’s and 70s
The U.S. saw incredible inflation during the decades of the 1960s and 70s, with the deficit growing as Medicare was added to the burdensome social security system. Even President Nixon was forced to pay more than $400,000 in back taxes!

Reaganomics takes on taxes
President Reagan brought the Economic Recovery Tax Act to life in 1981, lowering every individual tax bracket by 25% The Act also changed the method companies used for accounting for their taxes. By 1985, more than 400,000 Americans were millionaires because of the tax cuts under Reaganomics.

But President Reagan wasn’t done, signing the Tax Reform Act in 1986, which lowered the tax rate among the richest payers from 50% to 28%, which was the lowest it had been since 1916.

The Clinton Era
Democratic President Bill Clinton in office signaled the end of tax reductions during the 1980s. Starting in 1993 taxes generally were increased, and in 1997 the negative income tax was introduced, which awarded tax credits for some people.

A Republican in the executive office once again meant more tax cuts. Starting in 2001 with the Economic Growth and Tax Relief Reconciliation Act, Bush’s cuts reversed Clinton’s increases, except for continuing growth in tax credits. The new tax act was expected to save taxpayers $1.3 trillion over the next decade, making it one of the largest tax cuts since World War II.

How are we now?

By 2009, tax rates had risen significantly once again, with a top marginal rate of 35%. The Tax Foundation calculated that U.S. citizens had to work all the way through April 11 every year just to pay their taxes.  That day became known as Tax Freedom Day, conspicuously right before the IRS filing deadline, April 15.

No comments:

Post a Comment