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The federal government of the United States (as well as some state and municipal governments) imposes an income tax on the taxable income of individuals, corporations, trusts, decedents' estates and certain bankruptcy estates. The income tax was first imposed during the Civil War, then again, after the 16th Amendment was ratified in 1913. Current income taxes are imposed under various provisions of Subtitle A of the Internal Revenue Code of 1986, as amended.
Legal history
Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises," but Article I, Section 9 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States."
In addition, the Constitution specifically limited Congress' ability to impose direct taxes, by requiring it to distribute direct taxes in proportion to each state's census population. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."
The courts have generally held that direct taxes are limited to taxes on people (variously called "capitation", "poll tax" or "head tax") and property (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960)). All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, , pp.581-582) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.
Early efforts to tax income
In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 United States Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, and rents were direct taxes on property, and therefore had to be apportioned. Since apportionment of income taxes is impractical, this had the effect of prohibiting a federal tax on income from property. Due to the political difficulties of taxing individual wages without taxing income from property, a federal income tax was impractical from the time of the Pollock decision until the time of ratification of the Sixteenth Amendment (below).Passage of the Sixteenth Amendment
In response, Congress proposed the Sixteenth Amendment (ratified by the requisite number of states in 1913), which 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.
Modern interpretation of the power to tax incomes
The modern interpretation of the Sixteenth Amendment taxation power can be found in Commissioner v. Glenshaw Glass Co. . In that case, a taxpayer had received an award of punitive damages from a competitor, and sought to avoid paying taxes on that award. The Court observed that Congress, in imposing the income tax, had defined income to include:- "gains, profits, and income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."
The Court then enunciated what is now understood by Congress and the Courts to be the definition of taxable income, "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Id. at 431. The defendant in that case suggested that a 1954 rewording of the tax code had limited the income that could be taxed, a position which the Court resoundingly rejected, stating:
- The definition of gross income has been simplified, but no effect upon its present broad scope was intended. Certainly punitive damages cannot reasonably be classified as gifts, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income."
Id. at 432-33. Tax statutes passed after the ratification of the Sixteenth Amendment in 1913 are sometimes referred to as the "modern" tax statutes. Hundreds of Congressional acts have been passed since 1913, as well as several codifications (i.e., topical reorganizations) of the statutes (see Codification).
Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), confirmed that wages and income are not identical as far as taxes on income are concerned, because income not only includes wages, but any other gains as well. The Court in that case noted that in enacting taxation legislation, Congress "chose not to return to the inclusive language of the Tariff Act of 1913, but, specifically, 'in the interest of simplicity and ease of administration,' confined the obligation to withhold taxes to 'salaries, wages, and other forms of compensation for personal services'" and that "committee reports ... stated consistently that 'wages' meant remuneration 'if paid for services performed by an employee for his employer'". Id. at 27.
Other courts have noted this distinction in upholding the taxation not only of wages, but also of personal gain derived from other sources - but there are limitations to the reach of income taxation. For example, in Conner v. United States, 303 F. Supp. 1187 (S.D. Tex. 1969), aff’d in part and rev’d in part, 439 F.2d 974 (5th Cir. 1971), a couple had lost their home to a fire, and had received compensation for their loss from the insurance company, partly in the form of hotel costs reimbursed. The court acknowledged the authority of the IRS to assess taxes on all forms of payment, but did not permit taxation on the compensation provided by the insurance company, because unlike a wage or a sale of goods at a profit, this was not a gain. As the Court noted, "Congress has taxed income, not compensation".
Federal rates
In 1913 the tax rate was 1 % on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 % on incomes above $500,000.
During World War I the top rate rose to 77 %; following the war, the top rate was scaled down (to a low of 25 %).
During the Great Depression and World War II, the top income tax rate rose again. In the Internal Revenue Code of 1939, the top rate was 75%. The top rate reached 91% during the war; this top rate remained in effect until 1964.
In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).
The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).
During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
The top rate was cut to 35% and the bottom rate was cut to 10% by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.
The complexity of the U.S. income tax laws
Even venerable legal scholars like Judge Learned Hand have expressed amazement and frustration with the complexity of the U.S. income tax laws. In an article called Thomas Walter Swan, 57 Yale Law Journal No. 2, 167, 169 (December 1947), Judge Hand wrote:
- In my own case the words of such an act as the Income Tax . . . merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception — couched in abstract terms that offer no handle to seize hold of [and that leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.
Complexity is to some extent a separate issue from flatness of rate structures. In the United States, income tax codes are often legislatures' favored policy instrument for encouraging numerous undertakings deemed socially useful — including the buying of life insurance, the funding of employee health care and pensions, the raising of children, home ownership, development of alternative energy sources and increased investment in conventional energy. Special tax rebates granted for any purpose increase complexity, irrespective of the system's flatness or lack thereof.
State and territorial income taxes
| Area | Income tax rate and notes (not including capital gains) |
| Massachusetts | Article 44 of the state constitution requires a fixed marginal tax rate within each class of income. This is not precisely a flat tax (usually defined to mean a single marginal tax rate across all classes of income) but is similar. Wages and most other income are currently taxed at 5.3%. This tax rate has moved up and down between 5% and 6% over the past few decades; in an unusual and rarely-used provision of the state tax code, taxpayers may elect to pay at the prior rate of 5.85% instead. |
| Oklahoma | Progressive to $10,000, 6.25% above |
| Puerto Rico | (Not subject to federal income tax or Social Security, only partial participation in Medicare) |
See also
- Tax protester: A person who believes that the income tax is unconstitutional, or otherwise does not apply to income that has not been deemed taxable, e.g. with the definition of gross income.
- Tax resister: A person, e.g. Henry David Thoreau, who refuses to pay a tax as a protest against government policies and who is fully aware that he is breaking the law.
External links
- TaxAlmanac - Online tax collaboration A wiki created by tax professionals with detailed information on US IRS Tax Law and the only known free up to date copy of the US Internal Revenue Code.
- US Individual Tax Useful US Income Tax Information
See also
"Income tax in the United States"