It would take a Civil War to bring income tax into the young nation. The American Civil War was disastrous and expensive for the nation. A massive amount of debt was incurred waging war against itself. In order to help pay for it, Congress passed the Revenue Act of This act created most of what we consider the modern tax system—progressive with allowances for some deductions.
This was also the time when the U. The Constitution forbade any direct taxes not levied in proportion to each state's population. Although a victory for taxpayers, many people were beginning to note the damage that revenue-collecting tariffs and duties were having both on world trade and the living standards of the poor.
The 16 th Amendment was introduced in to pave the way to an income tax by removing the proportional to population clause, thus saving the poor souls at the IRS from the unemployment line. Interestingly, the phrase lawful income was later changed to simply income in , giving prosecutors a way to convict organized crime figures such as Al Capone when all other avenues were exhausted. World War I led to three acts that cranked up tax rates and lowered the exemption levels.
The number of people paying taxes in the U. These taxes were rolled back following the war in five phases, and the economy experienced a huge boom. The New Deal ran a heavy deficit that needed to be made up by revenue. Taxes were raised several more times with the exception of the Revenue Act—it contained a corporate tax cut that Roosevelt objected to, but was nevertheless passed.
By , the need for the U. Progress in lowering taxes was sporadic and confusing. Rather than rolling back rates, the tax code was being rewritten to allow deductions in certain circumstances or to lower rates on, say, private foundations while raising rates on corporate profits. This explosion in loopholes and fine print is one reason most people today can master the theory of relativity before the tax code. The s and s were a time of massive inflation , with government deficits continuing to grow with the addition of Medicare to the expensive Social Security system.
Inflation became a huge problem for taxpayers because taxes weren't indexed for it. This meant that although the real value of people's incomes was being decreased, they were also required to pay more taxes.
With the controversy over the Watergate scandal, the president's tax evasion wasn't as big of an issue as it might have been. The Economic Recovery Tax Act of represented a turning point for the tide for taxation, even though it was only temporary.
Reagan also sought to bring inflation under control, but he succeeded a little too well. The government's budget was based on an accepted rate of inflation, and when the attempts to quash inflation kicked in too quickly, a deficit was created.
Consequently, Reagan had to pare back some of his tax cuts in , specifically on the corporate side, to try and make up the budget shortfall. Despite this, the IRS announced that in more than , Americans had reached the millionaire rank thanks to the high-level tax cuts under Reaganomics. With more Americans now willing to take their wealth in taxable income, the overall tax receipts were relatively unchanged despite the drop. The Republicans did a lot to bring taxes under control, but their control over the size of government was less laudable.
Medicare and Social Security were burdens they inherited, but other expenditures were added to the bulging deficit. When former President Bill Clinton took over in the s, the downward trend in taxes was at an end. Modest tax increases were ushered in and saw the introduction of negative income tax. Negative income tax was a hidden spending program whereby people who paid no tax could get funds through the tax system in the form of tax credits.
The tax cut introduced by former President George Bush once again dialed back the trend of tax increases but continued to increase tax credits that lead to negative income tax. Though not intended for it, this long-term tax cut helped shorten the recession following the dotcom crash, sparing the economy any specific stimulus measures. This came at a very stressful time—more baby boomers were leaving the workforce and the world was reeling from the effects of the financial crisis and the Great Recession.
But things have changed once again after the election of former President Donald Trump. President Reagan is lionized by many for cutting taxes and government. But the story is more complicated. Reagan knee-capped regulation and much domestic spending, and early in his administration he slashed taxes in ways that drastically reduced revenue. Yet he vastly expanded military spending, so his cuts were only to things he disliked. Less known is that he reversed many of his tax cuts with several laws enacted in and after.
Major tax reform under Reagan happened again 35 years ago this month when he and Congress raised corporate taxes, providing a roadmap from which members of Congress should draw lessons now. The reforms, while revenue-neutral overall, blocked enormous loopholes that allowed profitable corporations to pay single-digit tax rates or nothing at all.
The Biden administration now seeks, as in , to raise taxes on corporations and the wealthy. Early Reagan administration policies necessitated subsequent reform. This contributed to the share of federal revenue from the corporate income tax plunging from one-quarter in the s to just 6.
The shrinking corporate tax inspired Citizens for Tax Justice CTJ to publish a pathbreaking report, which found that of profitable corporations paid no federal income tax in at least one of the first three years of the Reagan administration and 17 paid no tax in all three years combined. The findings empowered reformers who wanted the economy to do more for families and communities and less to further enrich the wealthy.
The deficit that Reagan vowed to eliminate in his campaign had quadrupled, due to both ballooning military spending and the hollowed-out tax code. Jeffrey Frankel Jeffrey Frankel.
This analysis is being published here in collaboration with EconoFact, a nonpartisan economic publication. To recall what transpired in the s might indeed help shed some light on the potential impacts of proposed tax legislation.
But the two huge tax bills during the Reagan years — the Economic Recovery Tax Act of and the Tax Reform Act of — differed in almost every respect. These differences must be taken into account in order to draw lessons for today. If the tax bill was a model of how to do fiscal reform and the tax cut was a model of how not to do it, the process emulates the less worthy of the two precedents.
First, the rushed process has been extreme: utterly lacking in both due deliberation and bi-partisanship. The usual hearings have not been held, nor has there been even a pretense of including Democrats in the negotiations. To be sure, the current proposals do not get everything wrong.
Reducing the U. But the legislation cuts the corporate tax rate too much and limits these deductions too little to come anywhere near meeting the criterion of revenue neutrality. Jeffrey Frankel is the James W. Friday, Nov The Latest. World Agents for Change. Health Long-Term Care. For Teachers. NewsHour Shop. About Feedback Funders Support Jobs. Close Menu. Email Address Subscribe.
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