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Weekly eLetter 4/20/2018 – A Brief History of Income Tax Rates

Even democratic governments need funding, and tariffs were the precursor to modern day income taxes. Tariffs on goods continued to be the main source of state and federal revenue until the early 20th century. Unsurprisingly, people were upset by the tariffs then and continue to be upset about it today.

The first tax on a domestic product (distilled spirits) was imposed in 1791. Its purpose was to recoup losses from the Revolutionary War. Distilled spirits were a crucial source of income for certain rural farmers, because they were easier to transport than grain. Resentment came to a head in the 1794 Whiskey Rebellion, which required an army of 13,000 to suppress the insurgents.

Actual ‘Income Taxes’ got their start in 1861 and once again the expense of war was the justification, this time The American Civil War. However, it was determined that the tax was unconstitutional and the law was repealed after only ten years. Forty-two years later, in 1913, that pesky Constitutional restriction was removed as the 16th Amendment was passed, stating that “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.”

So, here’s the part that I find interesting. People have always complained that income tax rates were too high but have a look at the changes in rates since the original income tax of 1913. While it’s true that most people do not pay taxes at the top rates, it is instructive that those rates have been all over the map!

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