Investment Income Tax Article

In the nation's early history, very few taxes were imposed in the US to run the government. From 1791 until 1802, the Government collected internal taxes on alcohol, carriages, sugar, tobacco, auctioned-off property, corporate bonds, and slaves.

Then, in order to pay off the debts that were incurred from the War of 1812, sales taxes were were imposed on gold, silverware, jewelry, and watches. However, in 1987, Congress did away with those taxations. And the Government was supported by collecting tariffs from imports brought into the country.

Congress then passed the nation's first income tax law in 1862 to support the Civil War effort. It was a forerunner of the modern income tax in that it wa based on a progressive scale, much like what is used today. The lowest tax rate was a flat 3%, and it applied to people who earned anywhere between $600 and $10,000 a year. The next highest tax rate was 5%, and it was levied on any income amount that exceeded $10,000. For people who earned a higher dollar amount, the rates were increased accordingly. Additional sales and excise taxes were added, and an "inheritance" tax also made its debut.

The Act of 1862 was also the beginning of the Internal Revenue Service -- the office of the 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 income and through prosecution. His powers and authority remain very much the same today.

Rates were changed when the Government instituted the Internal Revenue Act of June 30, 1864. The people who earned between $600-$5000 paid 5%, while the people who earned over $5000+ paid 10% of their incomes. This tax change was needed in order to generate additional revenue to fund the Civil War. Now, every taxpayer had to submit a list of their income as well as a list of any taxable property they might have to the tax assessor before the first Monday in May. And, fines were imposed on people who failed to abide by the tax laws.

Internal revenue collections reached their highest point in the nation's 90-year history of more than $310 million in 1866. (An amount not reached again until 1911.)

In 1872, Congress did away with the imposed income tax once again. Instead of taxing people's incomes, Congress once again looked towards the taxation of goods, tobacco and alcohol, for revenue. It had a short-lived revival in 1894 and 1895.

Questioning the validity of the taxes imposed during the Civil War times, lead the U.S. Supreme Court to finally hand down a ruling in 1895, that said that the income tax was unconstitutional because the taxes were not collected proportionately among the states. To correct this situation, the 16th Amendment to the Constitution was ratified on February 25, 1913. Now, income taxes were a permanent part of the United States economy, and Congress could tax incomes however they saw fit.

In FY 1918, annual internal revenue collections for the first time passed the billion-dollar mark, rising to $5.4 billion by 1920. With the advent of World War II, employment increased, and so did tax collections -- to $7.3 billion. The withholding tax on wages was introduced in 1943 and was instrumental in increasing the number of taxpayers to 60 million and tax collections to $43 billion by 1945.

Congress enacted the largest tax cut in U.S. history in 1981, approximately $750 billion over six years. The tax reduction, however, was partially offset by two tax acts, in 1982 and 1984, that attempted to raise approximately $265 billion.

The Tax Reform Act of 1986, one of the most far-reaching reforms of the US tax system since the adoption of the income tax, was an attempt to remain revenue neutral. The act called for a $120 billion increase in business taxation and a corresponding decrease in individual taxation over a five-year period. Following what seemed to be a yearly tradition of new tax acts that began in 1986.

* The emphasis of the Revenue Reconciliation Act 1990 was increased taxes on the wealthy.

* The purpose of the Revenue Reconciliation Act of 1993 was to reduce by approximately $496 billion the federal deficit that would otherwise accumulate in fiscal years 1994-98.

* The Taxpayer Relief Act of 1997 included $152 billion in tax cuts, a cut in capital-gains tax for individuals, a $500 per child tax credit, estate tax relief, tax incentives for education, and a host of revenue-raising and tax-simplification provisions.

* The Economic Growth and Tax Relief Reconcilation Act of 2001 included a variety of tax cuts and offered benefits to a broad range of taxpayers through relief provisions that included: married couples; families w/ children (to help pay for education, and childcare); single mothers; and seniors. The act also included tax cuts that completely eliminated the entire income tax liability for some families.

Over the years, there have been several grass roots efforts by Americans who believe that the idea of a mandatory income tax and the Sixteenth Amendment are unconstitutional. At least one group claims to have proof that the amendment was not even ratified because at least eleven states did not vote on it. The main goal of these groups is to get the amendment declared legally null and void.