Income Tax celebrated its 100th birthday in 2013. 100 years of the constitutional amendment allowing the federal income tax.
From 1776 until 1913 the federal government paid its way with levies on liquor and tobacco and with excise taxes on fancy imported goods and foreign servants.
During this period the U.S. rose from a small group of states to become the most powerful nation in the world. Occasionally there was not enough money to pay all the bills, so the government would just print extra money. When this happened, bankers took a hit because the interest they were receiving from loans now was worth a bit less. Bankers never like to lose money, so a bunch of international bankers got together and formulated a plan that they thought would help the nation’s economy, but most importantly would keep them from losing money and perhaps make them a bit of profit.The plan involved a federal income tax and the Federal Reserve Board.
The plan was that when the economy was in recession, the government
Stop trying to run the government on in-come tax revenue. Why not raise tariffs and duties. That was how the government financed itself until 1913. A graduated tax seemed to work well for 50 years
would borrow money from the Federal Reserve and plow it back into the economy. And when the economy was expanding, the government would tax the public and use the money to pay back the loans.
In order to make this plan work, the U.S. Constitution had to be changed, because our founding fathers specifically banned federal income tax twice in the Constitution.
In 1913, after several years of lobbying (i.e. giving lots of money to Congressmen) by banking organizations, Congress created the Federal Reserve System. and gave its bankers the power to control the nation’s economy.
At this same time, under the guidance of bankers and political centrists a Constitutional Amendment was being circulated throughout the states.
This 16th Amendment was never lawfully ratified by the three-fourths of the states as required by the Constitution. Many of the states did not follow lawful procedure in ratifying the Amendment. Others made changes in the Amendment before they ratified it. Ultimately only two state lawfully ratified the Amendment as set forth by Congress.
In the late winter of 1913, despite these facts and no doubt because he was under pressure by the commercial banks, Secretary of State Finlander Knox stood before Congress and said, "It appears that the Amendment has been ratified."
Under this new income tax, only a small percentage of wage earners had to pay . Americans didn’t have to pay any tax unless they earned more than $4000 a year (the equivalent of $65,000 today), and that first tax bracket was merely one percent.
The seven percent rate applied only to people earning more than $500,000.(eight million dollars today) And in 1913 that included the Rockefellers, Carnegies, Mellons, Morgans, Goulds, Vanderbilts and almost no one else
It took Congress just three years to bump the rate up to 15 %. In one more year it soared to 67 %. Of course, that was only for incomes above $2 million (the same as 32 million dollars today) Unfortunately this brilliant plan to stabilize the economy did not work. In 1929 the U.S. was hit with the worst depression in history and hundreds of bankers went bankrupt.
But this did not bring an end to federal income tax or the Federal Reserve and federal income tax was never used for the purpose intended until 2008. This system was a monster and like the monsters of myth, it could not be killed. It just kept growing larger.
Once members of Congress learned what a nifty money-maker the income tax was for the federal government there was no stopping them
When the nation entered World War II, income tax was imposed upon the average wage earner. and surprizingly enough, they were quite tolerant of this tax on their incomes, for it was a modest bite and, after all, there was a war going on.
In one swoop, the government added 50 million new taxpayers to the rolls, people of moderate incomes.
The rate in 1943 was 19% on earnings of $2,000. It would be similar to paying a tax of one-fifth on an income of $18,555 in today’s dollars. The rate went up to 88% on incomes of more than $200,000, a salary the equivalent of $1.8 million today.
The only problem to this huge windfall of new income for Washington was that there was no good system for collecting all that money. Before World War II, taxes were paid on a monthly basis. Everybody had to fill out forms and mail in their taxes, much like the self-employed today, who must send in quarterly payments.
Then Congress came up with withholding - the cleverest, most significant innovation of government bureaucracy ever.
Withholding was created 54 years ago, in June 1943, when Congress passed the Current Tax Payment Act. It provided for a 20% withholding tax. It also included a forgiveness of 75% of either the 1942 or 1943 tax liability, whichever was smaller.
In effect, Congress was saying: We know you don’t have the money to suddenly pay all this tax, so we’ll let you off the hook by taking only 25% of what you didn’t know you already owed, and we’ll only take from your pay, before you even get it, 20% from now on. We’ll take the burden of figuring it out off of your shoulders.
In other words: "We’re from Washington, trust us."
And, behold, today, when taxpayers get refunds on their taxes, they are glad - it's a gift from Uncle Sam. They seem to have forgotten that it was their money in the first place, not a gift from the government