Before the Income Tax, There Were Tariffs

Like ‘em or hate ‘em, many among the United States electorate assume that the income tax has been with us since roughly 1776, right after we sent the British packing with an ignominious Revolutionary War defeat still ringing in their ears. In reality, both the personal income tax and corporate excise tax were imposed under the Taft administration via the auspices of the 16th Amendment. The year was 1913.

Prior to that, the Federal government paid its way primarily by means of tariff revenues. It seemed to work out pretty well, at least from a budgetary point of view. For example, let’s look at 1882. In that year the government had revenues of $403 million, which was more than enough to cover almost paltry expenses of $257 million. Yes, Virginia, back then our politicians in Washington managed to operate with a 36 percent SURPLUS.

The complaint against the tariff system, since it was a consumption tax and the cost was simply added onto the final price of consumer goods, is it was perceived to discriminate against the poor. In the year 1894, With a Democrat in the White House (Grover Cleveland) and Democrat majorities in both houses of Congress, a type of income tax was voted into law. This one was aimed squarely at the rich, imposing a 2% tax on incomes over $4,000, a level which affected less than 1 percent of American families.

The idea of an income tax was codified even more s

trongly in 1913 with the passage of the 16th Amendment. This took the judicial system out of the mix by legalizing the idea of the personal income tax. As President Taft left office and Woodrow Wilson took up residence at 1600 Pennsylvania Avenue, the Democrat controlled Congress quickly passed a new personal income tax at the following levels:

– 1 percent on incomes above $3,000
– 7 percent on incomes above $500,000

These marginal rates, however, could be drastically modified due the presence of deductions, which have been a feature of the American taxation system ever since. Since then, the actual tax rates have ebbed and flowed according to the whims of various Republican and Democrat congresses’. The strange thing is that we still have the idea of a corporate income tax in place, leaving two separate and uncoordinated tax institutions.

Is it time to overhaul the tax codes and implement something fairer and less confusing? American Monetary Association founder Jason Hartman thinks so! (Top image: Flickr | Tax Credits)

The American Monetary System

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