The types and amounts of tax collected are completely different than they were 200 years ago. Some of these changes are traceable to specific events, such as a war, or the passage of the 16th Amendment which gave Congress the power to levy a tax on personal income. Other changes were more gradual, responding to changes in society, the economy, and in the role of the federal government. For most of our country's history, individuals rarely had any contact with the federal government as most of the government's tax revenues were derived from excise taxes, tariffs, and customs duties.

In 1765, the English Parliament needing funds to pay for its war against France, passed the Stamp Act, the first tax imposed directly on the American colonies. Colonists lacked representation in the English Parliament. This led to the rallying cry of the American Revolution "taxation without representation is tyranny" and established a persistent wariness regarding taxation.

On Dec. 16, 1773, a group of Americans disguised as Indians board a ship and throw 342 chests filled with tea into Boston Harbor to protest England’s tax on tea. The Boston Tea Party is perhaps the most famous event in U.S. tax history.

The Articles of Confederation of 1781 reflected the American fear of a strong federal government. The federal government had few responsibilities and no tax. It relied solely on donations from the States. When the Constitution was passed in 1789, it was recognized that no government could function if it relied entirely on other governments for its resources. Therefore, the federal government was granted the authority to raise taxes.

The Act of 1862 established the office of Commissioner of Internal Revenue. The Commissioner was given the power to assess, levy, and collect taxes, and the right to enforce the tax laws through seizure of property and through prosecution.

The 16th amendment was ratified by Wyoming on February 3, 1913, providing the three-quarter majority of states necessary to amend the Constitution. It allowed the Federal government to tax the income of individuals without regard to the population of each State. The 16^th Amendment states "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.". It made the income tax a permanent fixture in the U.S. tax system and resulted in a revenue law that taxed incomes of both individuals and corporations.

On October 3, 1913 President Woodrow Wilson signed into law the Revenue Act of 1913, also known as the Tariff Act of 1913. Congress levied a 1% tax on net personal incomes above $3,000 and rising to 7% on incomes of more than $500,000. Less than 1% of the population was subject to income tax in 1913. It also lowered basic tariff rates from 40% to 25%, the lowest rates since the Walker Tariff of 1857. In 1913 the first Form 1040 appeared as the standard tax reporting form, and March 1^st was the date specified as the filing deadline. Click here to view the first Form 1040.

Before the income tax most citizens were able to pursue their financial affairs without any knowledge by the federal government. Individuals earned their money and wealth was accumulated and dispensed with little or no interaction with the federal government.

Most tax legislation begins with the president who consults with his financial advisors and Treasury Department officials before sending a plan to Congress. He can do this at any time, but he usually does it shortly after the State of the Union address.

All tax legislation must originate in the House Committee on Ways and Means. The panel which consists of the most senior and powerful members of the House, holds hearings, makes changes, and forwards the bill to the full House.

The bill that the House of Representatives gets from the Committee on Ways and Means is then drafted into legislation and is accompanied by a detailed report that gives the Committee's reasons for recommending the bill. The IRS and the courts may later use this Committee report as an interpretation of the legislation. If the House approves the bill it is sent to the Senate Finance Committee.

The Senate Finance Committee is responsible for all Senate legislation dealing with tax matters. They hold hearings and usually makes changes before sending the bill to the full Senate.

The Senate debates the bill and usually makes additional changes before holding a vote before the full Senate. If the Senate approves an unchanged version of the bill it received from the House, the bill goes to the White House for the president's signature.

If the Senate makes changes in the bill it received from the House, it goes to a conference committee whose members are appointed by the Speaker of the House and the President of the Senate. This committee combines the two versions into compromise legislation. The compromise bill goes back to the full House and the full Senate, which each must approve the same version of the bill.

The United States entry into World War I greatly increased the need for revenue. One problem with the income tax law was how to define "lawful" income. Congress responded by passing the 1916 Revenue Act. It deleted the word "lawful" from the definition of income. Consequently, all income, regardless of how it was obtained, became subject to tax. The Supreme Court would subsequently rule the Fifth Amendment could not be used by bootleggers and others who earned income through illegal activities to avoid paying income taxes. As a result, many who broke various laws and were able to escape prosecution for those crimes were convicted on tax evasion charges.

The 1916 Act raised the lowest tax rate from 1% to 2% and raised the top rate to 15% on taxpayers with incomes in excess of $1.5 million. The 1916 Act also imposed taxes on estates and excess business profits.

The income tax fundamentally changed the relationship between the citizens and the federal government by giving the federal government the right and the need to know all about an individual’s or business's financial life. Consequently, in 1916 Congress required that information from income tax returns be kept confidential.

Needing still more tax revenue, the War Revenue Act of 1917 lowered exemptions and greatly increased income tax rates. Tax revenues increased from $809 million in 1917 to $3.6 billion in 1918. 

The tax rates dropped sharply after World War I. During the 1920s, with a booming economy, Congress cut taxes five times returning the lowest tax rate to 1% and lowering the highest rate to 25%. As tax rates and tax collections declined, the economy got even stronger.

The economy grew steadily during most of the 1920’s. It was a golden age as innovations such as radio, automobiles, aviation, and the telephone became popular. On August 24, 1921, the Dow Jones Industrial Average stood at 63.9. By September 3, 1929 it had risen more than six fold to 381.2. During the summer of 1929 it became clear that the economy was contracting and that the stock market would soon go through a series of unsettling price declines.

When the New York Stock Exchange opened on the morning of October 24, 1929, nervous traders sensed something was wrong. By 11:00 AM the market was plunging. At noon a group of powerful bankers met secretly at J.P. Morgan & Co., next door to the New York Stock Exchange, and agreed to spend $240 million of their own funds to stabilize the stock market.

How do Taxes Effect the Economy?
Raising taxes takes money from consumers and dampens the economy, because consumers have less money to spend. This results is less retail and home sales and lower investment and savings rates. However, raising taxes can increase public-sector jobs, provided the increased revenues are spent that way. It also helps decrease government debts which dampen the economy. During wartime government spending is much higher and it boosts all phases of the economy.

Lowering taxes puts extra money in consumers' pockets. Consumers can then spend this money, boosting retail and home sales and investment and savings rates. However, the extent of this boost depends on how large the tax cut is, and which taxes are cut. Cuts for middle-income and low-income people tend to put more money into the economy because these taxpayers are more likely to spend their extra cash right away, on purchases or renovations they have been putting off. Cuts for high-income taxpayers tend not to have the same effect, because this group already has enough money to buy everything they need. High-income taxpayers tend to save their extra money, so cuts for these taxpayers end up being used for investments and savings. Cuts for high-income taxpayers improve the outlook on Wall Street. Cuts in corporate and business taxes give businesses more money to spend, often creating jobs and boosting the bottom line.

Other notable tax evaders:

• On October 10, 1973, Spiro T. Agnew, the 39^th Vice President of the United States, resigned and then pleaded nolo contendere (no contest) to criminal charges of tax evasion and money laundering;
• Soviet spy Aldrich Ames earned more than $2 million for his espionage and was also charged with tax evasion as none of the money was reported on his income tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood. The $2 million remains to this day in an undisclosed bank account. Russian intelligence has refused to disclose this bank account information in order for the United States to seize it, arguing that that money was rightfully earned by Ames;
• Leona Helmsley the billionaire New York City hotel operator and real estate investor nicknamed "The Queen of Mean." She was convicted of federal income tax evasion in 1989 and served 19 months in prison, after receiving an initial sentence of 16 years;
• Irwin A. Schiff, a prominent member of the group which refers to itself as the tax honesty movement, and which has been referred to by the Internal Revenue Service and other government agencies as the tax protester movement. Schiff is known for writing and promoting literature that claims the United States income tax is applied incorrectly. He has lost several civil cases against the federal government and has a record of multiple convictions for various federal tax crimes. Schiff is serving a 13-plus year sentence for tax crimes as Inmate #08537-014 at the Federal Correction Institution at Fort Dix, New Jersey.

In 1943 Congress re-introduced payroll withholding, as had been done during the Civil War, with the Current Tax Payment Act. This greatly eased the collection of the tax for the Bureau of Internal Revenue. It also greatly reduced the taxpayer's awareness of the income tax by increasing it’s transparency, which made it easier to raise taxes in the future. 

Tax withholding was also introduced in the Tariff Act of 1913, but repealed by the Income Tax Act of 1916. The Current Tax Payment Act required employers to withhold taxes from employees' wages and pay them directly to the government on the workers' behalf quarterly.

On August 16, 1954 the Internal Revenue Code of 1954 was enacted by Congress, succeeding the Internal Revenue Code of 1939. The Code temporarily extended the Revenue Act of 1951's 5% increase in corporate tax rates through March 31, 1955, increased depreciation deductions by providing additional depreciation schedules, and created a 4% dividend tax credit for individuals. References to the Internal Revenue Code subsequent to 1954 generally mean Title 26 of the United States Code, as amended. The basic structure of Title 26 remained the same until the enactment of the comprehensive revisions contained in Tax Reform Act of 1986, although individual provisions of the law were changed regularly.

The Social Security system remained basically unchanged until 1956. In 1956 Social Security began an evolution and more and more benefits were added, beginning with Disability Insurance benefits. In 1958, benefits were extended to dependents of disabled workers. In 1967, disability benefits were extended to widows and widowers.

One of the most notable characteristics of EGTRRA is that its provisions are designed to sunset, or revert to the provisions that were in effect before it was passed. EGTRRA will sunset on January 1, 2011 unless further legislation is enacted to make its changes permanent.

EGTRRA brought to prominence a lesser known provision of the Internal Revenue Code, the Alternative Minimum Tax (AMT). It is an alternate system of calculating a taxpayer's liability that removes many so called "tax preference items". The applicable AMT rates were not adjusted in step with the lowered rates of EGTRRA and the 2003 act, causing many more people to face higher taxes because of the AMT than had originally been planned. The AMT was originally designed as a way of making sure that wealthy taxpayers could not take advantage of "too many" tax incentives and reduce their tax obligation by too much. When it was introduced in 1969 it was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax. In 1970, 20,000 taxpayers owed AMT. In 2006, 3.5 million taxpayers owed AMT, because of a temporarily higher exemption, which expires at the end of the year. In 2007, unless Congress acts, 23.4 million taxpayers will owe AMT. If the 2001-2006 tax cuts expire as scheduled at the end of 2010, 39 million taxpayers, more than one-third of all taxpayers, will be hit with the AMT in 2017. If the tax cuts are extended, that number jumps to 53 million taxpayers, about half of all taxpayers.

Income Tax
The federal government taxes income as its main source of revenue. Forty-three (43) states and a few counties and cities also levy income tax. Income can be taxed at a flat rate - or on a graduated scale, with the people who earn the most money paying a greater percentage of income tax.

Advantage: Graduated income taxes are a progressive tax, which means the taxpayers with lower incomes pay less in income tax than those with higher incomes.

Disadvantage: Truly fair and equitable income taxes are difficult to assess.

Sales Tax
Sales tax is levied on the purchase of such things as furniture, clothing and movie tickets. The federal government does not have a sales tax, but states, counties, and cities often rely heavily on sales tax. The tax rate and the types of goods subject to these taxes varies from place to place.

Advantage: Sales tax is collected by the merchant, making it easy for governments to track.

Disadvantage: Sales taxes are regressive, meaning that they impact most heavily on those with the least ability to pay. Both poor and wealthy people pay the same tax for the same item, although that sum represents a higher percentage of the poor person's income than it does of the wealthy person's income.

Use Tax
Similar to sales tax, these taxes are levied for services such as telephone, electric and other utilities, and for leases and rentals. They are also levied on "users" of goods purchased "sales tax free" in another state.

Advantage: Use taxes are collected by the vendor, making it easier for governments to track.

Disadvantage: Use taxes are regressive, meaning that they impact most heavily on those with the least ability to pay.

Excise Tax
Excise tax, sometimes called "luxury tax," is used by both the state and federal governments. Some examples of items subject to excise tax are heavy tires, fishing equipment, airplane tickets, gasoline, beer and liquor, firearms, and cigarettes.

Advantage: These taxes can sometimes be used to discourage the use of items such as cigarettes and alcohol, or to reduce demand for items that may be scarce.

Disadvantage: Excise taxes are regressive, meaning that they impact most heavily on those with the least ability to pay.

Real Estate Tax
Federal and state governments do not tax real estate. Real estate tax is most local government's main source of revenue. Most localities tax private homes, land, and business property based on the property's value (ad valorem). When real estate is mortgaged, real estate taxes are ordinarily collected and escrowed monthly by the mortgage lender along with the mortgage’s principal and interest payment. The escrowed real estate tax is then remitted to the taxing authority once a year.

Advantage: This is a progressive tax, which means people with lower property values pay less in real estate taxes than the wealthy who usually own property of higher value.

Disadvantage: If re-assessments are not made by the Property Tax Assessor annually, owners of new homes pay more than those who own older homes that have appreciated in value over the years.

Personal Property Tax
Some local governments also assess tax on personal property such as boats, cars, airplanes, appliances, and furniture.

Advantage: This is a progressive tax. The poor usually pay less in property tax than the wealthy, because they own less property and property of lower value, than the wealthy.

Tolls and Permits
These are use fees for such public services as highways, parking lots and public parks.

Advantage: Tools and permits place the burden of paying the tax only on the people who use the services. Revenue from tolls are often used to build and maintain highways and bridges and only people who drive on those highways and bridges pay the tax.

Disadvantage: Tolls and permits are considered regressive, meaning that they impact most heavily on those with the least ability to pay.

Estate, Gift and Inheritance Taxes
Estate tax is imposed on the entire estate of the individual. Inheritance tax is imposed on the transfer of property after the owner's death. Under the inheritance tax system, the beneficiary of the property must pay the tax. A gift tax is levied on large gifts from one individual to another, usually parent to child. The federal government has an estate tax and a gift tax. Many states have some type of inheritance tax.

Advantage: Estate, inheritance or gift taxes are progressive since they are levied only on those whose wealth has increased.

Disadvantage: Death taxes sometimes require the sale of some or all of the property to pay the taxes.

Tariffs
Tariffs are taxes that governments levy on imports and exports. The tariff is usually paid by the person or vendor doing the importing and passed on to the consumer.

Advantage: Tariffs make foreign goods more expensive, thus making American made items more attractive.

Tax rates can be progressive, regressive, or flat. With a progressive tax the rate of tax increases as the amount of taxable income increases. The U.S. income tax is a progressive tax. There are six tax brackets for ordinary income ranging from 10% to 35%.

An individual pays tax at a given bracket only for each dollar within that bracket's range. The individual's marginal tax rate, the percentage of tax on the last dollar earned, has no effect on any underlying income taxed at a lower bracket. This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary.

Income tax systems often have deductions available that lessen the income tax liability by reducing taxable income. Claiming deductions may reduce an individual's tax liability by a rate equal to the marginal tax rate of their particular tax bracket. If an individual is able to increase the amount of their tax deductions by $1,000 and the individual's marginal tax rate is 25%, the tax deductions will reduce the individual’s tax liability by $250 ($1,000 x 25%). Please note that if part of the individual’s $1,000 of income that was offset by $1,000 of tax deductions was taxed in a lower tax bracket then the reduction in tax liability would be less than $250.