Read My Lips* – Talking Taxes

It’s that time of year again, when people scramble to get receipts and tax returns to accountants (or the numerically-savvy), and numbers and letter combinations like “W2” and “1040” enter casual conversations. In recognition of Tax Season, btw takes a look back at some history of taxes in the United States.

New Nation, Old System

By the time the colonists embarked on a new way of governing its people, the concept of taxes had been around for thousands of years. Ancient Mesopotamians didn’t even have physical money when they were required to pay its governing body “in kind” (meaning giving something of value like animals or providing a kind of labor).

Deep in debt following its victory in the Seven Years War, the British government passed the Stamp Act in 1765. This was the first internal tax imposed directly on the American colonists, which called for them to pay a tax on all printed materials, such as paper used for official documents, periodicals, and even playing cards. Many Americans were opposed to this because the British Parliament did not include representatives from the colonies. They called this, “taxation without representation.” Colonial dissatisfaction led to massive protests and boycotts. Even though the Stamp Act was eventually repealed, the British Parliament passed the Declaratory Act (on the very same day), which gave it the right to create and enforce laws (including taxes) in the colonies. This led to more protests, upheaval, and ultimately the American Revolution.

New Nation, Familiar Challenges

Faced with its own war debts and the challenges of creating a functioning government, the Founding Fathers included in the Constitution the right of the government to collect taxes. Often the tax was placed on goods, such as alcohol, tobacco, sugar and some property. It was the Civil War (and more war debt) that prompted Congress to both create the office of the Commissioner of Internal Revenue and to pass the Revenue Act of 1861, which imposed taxes on personal incomes.

The 16^th Amendment to the U.S. Constitution (authorized in 1909 and ratified in 1913) officially gave the government the right to impose a federal income tax. World War I, the Great Depression, and World War II led to the passage of various tax acts, including the establishment of the Social Security system in 1935. In 1953, the Bureau of Internal Revenue was reorganized and became the Internal Revenue Service (IRS).

Persistent and rising inflation rates throughout the late 1960s and ‘70s caused a heavy tax burden, which led to an “under-performing” economy. This laid the groundwork for the Economic Recovery Tax Act of 1981 (often referred to as the Reagan Tax Cut). This law dramatically reduced taxes, although a series of increases were enacted throughout Reagan’s presidency. The Tax Reform Act of 1986 made broad changes to the tax code, dropping rates down on both individuals and corporations, and increasing the personal exemption and standard deductions.

Modern Issues

In 2001, the federal budget experienced a rare financial surplus. Many believed that this was a result of a rising tax burden. In response, Congress passed the Economic Growth and Tax Relief and Reconciliation Act of 2001 (known as the Bush tax cuts). This legislation reduced taxes for every American income earner and increased credits and benefits. The laws included “sunset provisions,” which means that they expired in ten years. The timing of the expiration coincided with automatic spending cuts laid out in the Budget Control Act of 2011. This led to a situation called the Fiscal Cliff, which led to the American Taxpayer Relief Act of 2012, where 82 percent of George W. Bush’s cuts were made permanent.

Dig Deeper Many presidential candidates provide a plan for how they will handle taxes if elected president. Do some research into what the five current candidates have said about taxes. Write at least one sentence on each.

* In 1988, then-presidential nominee George H.W. Bush uttered the famous phrase, “Read my lips, no new taxes,” at the Republican National Convention. (It was a promise he wouldn’t be able to keep as president…)