The Income Tax Turns 100

 Call it a case of selective memory for poor old Uncle Sam, says USA Today.

Last month, the U.S. Labor Department launched a website commemorating its centennial, capping months of activities to publicize the agency's history. A few years ago, the government produced a special disk marking 100 years of the U.S. Forest Service. Heck, even the National Archives made a big deal last year of making the 1940 census forms publicly available after 72 years.

Yet this year's centennial of the federal income tax has, for some reason, been ignored.

February came and went without the Internal Revenue Service mentioning the 100th anniversary of the 16th Amendment, which permitted the income tax. Last week, the "What's hot" section of its website included questions and answers for fuel-tax-credit extensions — but not a word about America's most maligned tax reaching the century mark.

The government's low-key approach may grow out of its new-found austerity. Congress recently upbraided the IRS for wasting $60,000 on a regrettable 2010 video parody of "Star Trek."

But chances are equally good that the omission is by design.

"I don't think many people will be drinking a toast to the income tax," said John Steele Gordon, a financial historian whose books include An Empire of Wealth: The Epic History of American Economic Power.

Few things unite Americans like taxes, and, at age 100, the income tax remains the subject of seemingly endless fighting in Washington. This time of year, of course, it's on everyone's mind.

Rifling through receipts is a rite of spring, as common in early April as Opening Day and daffodils. And like many traditions, few can remember how it all began.

Why we tax

There are many reasons citizens hate the income tax (at least 1040 of them this week, as Monday is the deadline to file 2012 returns), but historians say there are important reasons we tolerate it, too.

Chiefly, the federal government operates far differently because of it. Before the tax, the federal government collected most of its revenue from tariffs and excise taxes, which disproportionately hit low- and middle-income Americans who spent more of their means on the taxed goods.

"Like most consumption taxes, it was pretty regressive," said Ajay Mehrotra, a law professor who teaches tax policy at Indiana University. "It was passed on in the price of goods. It's not considered a big deal because the federal government is not doing a lot in the early 19th century."

The US kept a small military in those days, and its international relations were not substantial during a time of relative isolation. There was no income security for the retired, the disabled, the orphaned or the unlucky. There were no highways, not to mention air traffic to control. Scientific research was limited.

Banks failed more often — and their customers faced ruin, since there were no government guarantees. States and local authorities, the ones often reeling from natural disasters, responded to such crises on their own time and dime.

From that fitful environment, a more active — and, thus, more expensive — federal government took shape. Taxes and rising debt made it possible.

A public push

In 1909, President William Howard Taft, urged passage of a corporate income tax and a constitutional amendment permitting the personal income tax. Taft never expected the amendment would muster support from 36 states.

It did over the next four years, though not everyone was thrilled. Richard Byrd, speaker of Virginia's House of Delegates, at the time urged its defeat in language many "tea party" activists might echo today.

"A hand from Washington will be stretched out and placed upon every man's business; the eye of the federal inspector will be in every man's counting house," Byrd said, according to an account with the Tax History Museum.

Arizona ratified the measure on April 6, 1912 -- less than two months after becoming a state.

On Feb. 3, 1913, Delaware ratified the proposed change, ensuring passage of what became the 16th Amendment, a provision giving Congress the power to levy and collect taxes on income. New Mexico and Wyoming ratified it the same day for good measure. Six states never did. (Connecticut, Rhode Island, Utah and Virginia rejected it. Florida and Pennsylvania never considered it.)

The income tax had broad public support at first because less than 1% of the public owed income taxes, according to the National Archives.

By September 1913, Congress rejected plans for a flat income tax and settled on the progressive tax structure still in use today. It also lowered tariffs. On Oct. 3 of that year, President Woodrow Wilson signed the Revenue Act of 1913 into law. The new income tax imposed a 1% levy on incomes more than $3,000 for individuals — equivalent to about $70,000 today. The tax rose 1 percentage point for higher incomes, topping out at 7% for income greater than $500,000.

By comparison, the tax due Monday begins at 10% of income less than $8,700 and reaches 35% for incomes more than $388,350. Next year, the top rate goes back to 39.6%, where it stood during the Clinton years.

For a century, most — but not all — Americans have dutifully if grudgingly paid their taxes in full.

For those who don't, the tax man cometh.

The IRS estimates that in 2006 it missed about $450 billion from taxpayers who underpaid or didn't pay at all.

Source:  USA Today at http://www.usatoday.com/story/money/personalfinance/2013/04/14/income-tax-turns-100/2081901/