Tax History Lesson for Independence Day

From the Desk of Michael T. McCormick

Tax History Lesson for Independence Day

In light of the upcoming holiday and the popularity of “Hamilton,” I thought I would share a little history lesson on the origins of the IRS and the federal Income Tax.

The roots of IRS go back to the Civil War when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year. Our modern income tax came into being in 1913 when Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

In 1918, during World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply in the post-war years, down to 24 percent in 1929, and rose again during the Depression. It has been a roller coaster ever since. During World War II, Congress introduced payroll withholding and quarterly tax payments. In the 50s, the agency was reorganized to replace a patronage system with career, professional employees. The Bureau of Internal Revenue’s name was changed to the Internal Revenue Service. Only the IRS commissioner and chief counsel are selected by the President and confirmed by the Senate.

When the income tax was first instituted, the United States Tax Code was a mere 400 pages. A quick weekend read. The current United States Tax Code is in excess of 75,000 pages and climbing!

If I haven’t lost you yet, you may be a real tax wonk! Check out the original 1040 return from 1913 here. Oh, for a simpler era in tax preparation!

Happy 4th of July!