The Rise of the Progressive Federal Income Tax System

Income Tax Federal Progressive Revenue

Progressive Federal Income Tax

Before we dive into the details of the Revenue Act of 1913 and the progressive tax system, let’s briefly go over what we’ve learned about the history of the income tax. During the War Between the States, the U.S. government imposed the first income tax in order to fund the Union army. This tax – which was brought about through the Revenue Act of 1861 – was conceived as an emergency measure and was not intended to continue after the war. Following the surrender at Appomattox, the income tax lingered around until about 1872, but it then disappeared for over twenty years. The income tax made its reappearance with the Wilson-Gorman Tariff Act of 1894, but the tax provision of this act was quickly struck down with the opinion stated in the case of Pollock v. Farmers’ Loan & Trust Co. (1895). This second hiatus was interrupted by the sixteenth amendment to the U.S. Constitution which consolidated the taxing power of the Congress by eliminating the rule of apportionment which had applied to direct taxes.

With the sixteenth amendment, the Congress was transformed into a monstrously powerful entity, a taxing giant free of traditional legalistic constraints. When historians of the future assess the relative importance of the many amendments to the Constitution, their assessment can be said to be accurate only if it includes the sixteenth amendment near the very top of the list.

On October 3, 1913, President Woodrow Wilson signed the Revenue Act of 1913 into law. Along with reducing tariff rates, the act instituted a progressive tax structure in which higher earning individuals had a greater tax liability. Just as the sixteenth amendment allowed, the tax could be collected on income derived from any source, no matter whether it be direct or indirect, without any requirement to apportion among the states according to population.

Original Tax Table

By current standards, the tax table created by the act of 1913 was remarkably gentle. Single filers who earned less than $3,000 were exempt, as were married filers who earned $4,000; adjusted for inflation, in 2016 these amounts would translate to approximately $73,100 for single filers and $97,500 for married filers. Single filers were required to pay one percent on earnings above $3,000 ($4,000 for married filers); income above $20,000 but below $50,000 was taxed at a rate of two percent; income above $50,000 but below $75,000 was taxed at a rate of three percent; income above $75,000 but below $100,000 was taxed at a rate of four percent; income above $100,000 but below $250,000 was taxed at a rate of five percent; income above $250,000 but below $500,000 was taxed at a rate of six percent; and all incomes above $500,000 were taxed at a rate of seven percent.

Subsequent Tax Acts

This tax table created by the Revenue Act of 1913 only lasted for three years. It was replaced by a new table contained in the Revenue Act of 1916. The tax table of the act of 1916 (which can be viewed in full here) doubled the lowest income tax rate from one percent to two percent, and it increased the highest tax rate to fifteen percent. The 1916 tax table lasted for only a single year as it was replaced by the War Revenue Act of 1917. Prompted by America’s entry into World War I, the act of 1917 greatly increased tax rates across all income levels in order to support the war effort. The 1917 act imposed a top rate of sixty-seven percent on income above $2,000,000.

The act of 1917 was superseded by the Revenue Act of 1918. This act saw a top rate of seventy-seven percent and this applied to all incomes above $1,000,000. The revenue derived from these wartime acts contributed approximately one-third of the total fund for World War I; eye-catching of itself, this fact is made all the more impressive considering that only about five percent of the population paid income taxes in 1918.

After the Great War, the Congress continued to make revisions to the tax structure. In the 1920s, four different tax acts were passed – the acts were passed in 1921, 1924, 1926 and 1928. The act of 1921 was noteworthy as it implemented a tax on corporate income of ten percent. This rate on corporate income was likewise revised and by the 1928 act the rate was increased to twelve percent. Though the scourge of war formed the basis for the transformation of the income tax, little interest was shown by the politicians in Washington in reducing the tax to pre-war rates.  And the decades following the 1920s would see a steady increase in the share of Americans filing tax returns. The federal income tax was firmly in place, supported by our nation’s political leaders and fully backed by constitutional law.

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johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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