Last year, 25 of America’s highest earners had their tax information accessed by Propublica. The information was supposed to be private, but it was reported because it proved what many had suspected for years: the poor pay more.
Personal income tax is now the largest contributor to the Federal government, but that wasn’t always the case. Federal income tax began as a wartime measure to pay for the Civil War. From 1873-93, the tax disappeared. The government subsisted largely on tariffs, which had the benefit of making American-made products more affordable than the British counterparts.
In 1894, a new, more permanent federal income tax was introduced by congress. This taxed any income over $4,000 ($131,960 in 2022 money) at two percent. The Supreme Court found the tax unconstitutional and it was only collected for one year.
Flash forward to 1909 when President Taft is in office and income inequality is a hot political issue. An increasing number of Americans felt that progressive tax policy, which taxes the wealthy at a higher rate than the poor, should be adopted. Taft, who would eventually lead the Supreme Court, respected the 1894 decision. An income tax was not constitutional and therefore unavailable.
His solution was to advocate for the next best tool to combat inequality: a corporate income tax.
He argued this would be effectively a tax on the wealthy business owners, jerryrigging a progressive income tax while staying within constitutional bounds. This had the unintended consequence of permanently separating corporate income from personal income. “It’s as if corporations were owned by Martians who would otherwise be untaxed,” John Gordon, author of “The History of the Income Tax,” said.
In 1913, Congress ratified the 16th Amendment that incorporated income tax into the constitution. Adjusted for inflation, the tax would only affect income over the 2022 equivalent of $573,163. There were seven simple tax brackets that were taxed at one percent to seven percent sequentially. Any income earned over the 2022 equivalent of 14.3 million was taxed at seven percent in the highest tax bracket.
Despite the new amendment, the old corporate income tax remained, putting money earned through a corporation on an entirely different playing field than money earned through wages. This holdover from 1909 opened the door for corporate income to be taxed preferentially, which is the opposite of legislative intent.
The Income Tax Act of 1942 was passed as World War II raged on. It expanded the income tax from a rich person’s burden to a regular American’s tax. Once again, war necessitated changes in tax policy. This time, unlike during the Civil War, the measures became permanent. Since then, the tax code has been changed hundreds of times and is now up to thousands of pages from the nine-page income tax law originally passed in 1913.
The personal income tax was originally written as a progressive tax. It is no longer nearly as progressive. The highest tax bracket now begins at income exceeding $539,900. This is less than the inflation-adjusted 1913 minimum taxable income of $573,163. The brackets have moved so much that income once too low to be taxed at all is now taxed in the highest bracket of 37 percent.
The 2022 Federal Budget shows that individual income tax made up 1.7 trillion of the 3.5 trillion in government receipts in 2021. Almost half of the federal government’s total receipts come from the personal income tax. Corporate income is still taxed separately, and it brought in just 268 billion last year. This is only 15% of what wage-earners contributed. The separation between corporate gains and money earned through wages or salaries raises questions about the purpose of tax policy.
Taxes are a necessary burden to pay for government services. They exist most fundamentally to raise revenue for the government. There are also three other broad objectives, according to Associate Professor of Accounting at Duke University Scott Dyreng. These are to “stimulate economic growth, achieve social goals, and encourage specific investments”. The tax system is a tool our leaders can influence society with.
Take two brothers, Kurt and Burt. They each make $40,000 this year. Burt works 50 hours a week, and Kurt does not. Kurt had long-term gains, meaning he held on to a stock for more than a year and sold high to profit $40,000 from the market. Kurt will not pay federal tax on his earnings because it is under the $41,675 capital gains tax minimum. Burt will pay thousands of dollars in personal income tax, as his income places him in the 12 percent tax bracket. Kurt and Burt show that our current tax system disincentives wage earning to favor corporate gains.
Income inequality is politically relevant once again. Early 20th century progressive tax reform offered solutions. These solutions have been rigged in favor of wealth accumulation.
Reforms are necessary to build an economy that works for all Americans. It is once again time to reimagine what a fair share looks like.
Jonathan Wagner is a senior at UT this year majoring in public relations. He can be reached at [email protected].
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