Sunday, March 29, 1992 - Page updated at 12:00 AM

E-mail article     Print

Income Tax -- It Came From The Bottom Line

UNCLE SAM'S BITE BEGAN AS A NIBBLE 79 years ago. Under the Revenue Act of 1913, less than 1 percent of the population - about 357,000 of the wealthiest people in America - were obliged to pay the new income tax.

It was a way to help "the little guy" - slap a 2 percent income tax on the richest people in the United States. Until then, the government had been largely financed by high tariffs, which enriched the manufacturers and their financiers while forcing the masses to pay higher prices for goods.

Populist agitation for an income tax began in the 1880s, but it took 25 years and a constitutional amendment to get the tax on the books. It was made possible by one of the most reactionary Congresses in U.S. history, but the tax itself was shaped by a Congress newly taken over by liberal Democrats.

Today, the income tax is paid by nearly all adult Americans. In a nation settled by tax-haters, the income tax is the most golden of all golden eggs.

The 1913 income-tax law took up 14 pages in the law books; today, it runs about 4,100 pages with an additional 5,000 pages of regulations. Nearly half of all U.S. taxpayers seek outside help in figuring out their taxes.

The original tax applied to all income "from whatever source derived;" today, nearly half of all income is excluded from the tax.

Today, the income tax encourages ordinary people to buy houses, exposes corporations to takeover artists, and dictates how people invest their money.

TAXATION IS ALMOST AS OLD as man. Or woman. It began when the local strongman built a fort at the crossroads or river junction and levied a toll on passers-by. Ancient Rome tried a flat income tax, but it was dropped because too many Romans were dishonest about how much money they made. Informers were used for a time, but in A.D. 313, Emperor Constantine abolished torture, crucifixion and tax informers - calling them "the greatest scourge of mankind."

In early England and Ireland, they tried to measure individual income by the size of one's house, which in turn they measured by the number of windows. The tax wasn't effective as a revenue raiser, but it had a profound impact on architecture, and windowless houses were common in both nations until the 18th century.

Lorenzo de Medici instituted an income tax in Florence in 1451, but it degenerated into a system of political blackmail, and it was repealed upon his overthrow in 1492. The French tried an income tax in the 18th century, but the wealthy escaped payment through bribery and the passage of preferential laws, and many historians see the tax as an important cause of the French Revolution.

The story of the modern income tax is largely the story of modern warfare - hot and cold - and the proper study of the tax begins at the close of the 18th century in England.

1799 - The British House of Commons enacts a tax of 10 percent on all incomes in excess of 200 pounds a year. The original tax law is 152 pages, but it grows quickly as exceptions or special treatments are inserted. The government issues to taxpayers a pamphlet titled "A Plain, Short and Easy Description of the Different Clauses of the Income Tax." The effect of the pamphlet is to confuse the already-baffled public. Soon the basic tax form is supplemented by Schedules A, B, C and D. Enacted to finance war with France, the income tax is called "the tax that beat Napoleon."

1802 - Britain signs a peace treaty with France at Amiens, and the income tax is repealed. So great is the public outcry against the tax that Parliament orders all documents and records pertaining to it burned. The British despise the idea of an income tax ...

1803 - ... but not as much as they despise Napoleon. The tax is reimposed when war breaks out again with France.

1815 - Napoleon meets his Waterloo. Parliament repeals the income tax, and an observer reports "the greatest cheering and the loudest exultation ever witnessed within the walls of the English Senate."

1840 - The Swiss canton of Basle becomes the first modern state to impose an income tax on its citizens in peacetime.

1842 - Britain imposes an income tax to finance military ventures in Canada and China.

1854 - Parliament raises the income tax sharply to pay for the Crimean War, and British taxpayers are given the privilege of financing the Charge of the Light Brigade.

1861 - The U.S. Congress imposes a 3 percent federal tax on all incomes above $800 a year to pay for the Civil War.

1862 - President Lincoln signs legislation broadening the income tax "to provide internal revenue to support the government and pay interest on the public debt." The new law gives the Secretary of the Treasury the power to hire employees to collect the tax and detect fraud.

Two weeks later, George Boutwell, former governor of Massachusetts, rides into Washington on a rainy day to become the first commissioner of the new Bureau of Internal Revenue. He is assigned three clerks and given a small room in the Treasury Building, but it is the birth of what will become the greatest tax-collecting machine in the history of the world - the U.S. Internal Revenue Service.

By Christmas, Boutwell is receiving up to 800 letters a day from taxpayers, and he has built up a staff of nearly 4,000. The tax is collected in this manner: Each taxpayer lists his income and taxable property and then hands the list over to the local T-man. The local collector adds to this list any information he has gathered on his own and then figures the tax (between 3 and 5 percent), posts the figures in a public place and tries to collect.

The collectors are empowered to seize and sell property, but they are also personally liable for any delinquencies - and therefore very aggressive.

1864 - Mark Twain pays an income tax of $36.82, plus a $3.12 late-filing fine, and remarks that he feels "important" because the government is finally paying attention to him.

1872 - The U.S. Congress repeals the Civil War income tax.

1875 - An audit of Lincoln's estate reveals that the late president mistakenly made two income-tax payments on his presidential salary, which was exempt. A refund of $1,219.15 is ordered.

1890 - The U.S. Congress enacts a tax on domestically grown opium. After the repeal of the income tax, the federal government finances itself with a variety of taxes, including levies on items such as whiskey, tobacco, oleomargarine and other "luxuries." In addition, money is raised from tariffs on foreign goods and the sale of public lands. The rising wealth of Eastern businessmen is resented more and more by Southern and Western farmers, who are hit by overproduction and falling prices. Populist politicians preach salvation through an income tax.

1894 - Congress levies a 2 percent tax on incomes over $4,000. Only one in every 100 Americans is rich enough to pay the tax.

1895 - After one of the most celebrated legal battles in American history, the U.S. Supreme Court strikes down the federal income tax by a 5-4 vote, holding that the 1894 tax is not apportioned according to the population of the states as required by the Constitution.

America's 4,047 millionaires rejoice, but liberals complain that the decision is an example of how the Supreme Court abuses its power by making social policy under the guise of interpreting the Constitution.

1909 - The state of Virginia enacts an income tax, but huge numbers of its citizens simply refuse to pay it. Tax agents go into rural counties to collect it and are never heard from again. The tax is repealed in 1910 after less than $100,000 is collected.

The 16th Amendment to the Constitution, authorizing a federal income tax, is proposed. Southern and Western states rush to approve it, but it must be ratified by the legislatures of 36 of the 48 states.

Rep. S.E. Payne, chairman of the House Ways and Means Committee, warns that the imposition of a federal income tax would turn America into a "nation of liars."

1912 - With 35 states ratifying the amendment, Delaware and Wyoming race to become the decisive 36th.

1913 - Wyoming wins by a nose on Feb. 13. Pennsylvania never takes action on the proposal.

With Democrats and Progressives demanding a tax on "swollen incomes," Congress enacts an income tax that is quickly signed into law by President Woodrow Wilson. The House Ways and Means Committee calls the bill a response to "the general demand for justice in taxation."

Most newspapers give the new tax a few inches on inside pages; the big story of the day is the death of explorer Robert F. Scott after he reached the South Pole.

A tax of 1 percent on incomes between $3,000 and $20,000 is supplemented by a graduated surtax of up to 6 percent on higher incomes. It is calculated that John D. Rockefeller faces a tax bill of $2 million. In all, about 350,000 people are subject to the tax. The average American worker - a man, woman or child putting in 12 hours a day and earning $800 a year - is untouched by the tax, and federal judges, state officials and the president of the United States are exempt from paying the tax on their public salaries.

There are six categories of deductions - business expenses, interest on personal debt, other taxes, uninsured casualty losses, bad debts and depreciation of business property. Mortgage interests and medical expenses are not yet deductible.

Predictably, Wall Street complains that the tax is a communist plot and the first step toward the destruction of capitalism. Karl Marx had suggested that a graduated income tax could be used for just this purpose. But most Americans welcome the income tax for the simple reason that they won't be paying it and, because of lower excise taxes, they will pay less for food, clothing and other necessities.

1914 - On Jan. 5, the Treasury Department unveils the filing form for the new income tax. Together with its instructions, it is four pages long. The form is placed in the ordinary stream of numbering by the Bureau of Internal Revenue, which had last issued Form 1039.

The House Ways and Means Committee says completing Form 1040 will not be an onerous task because "those citizens required to do so can well afford to devote a brief time during some one day in each year to the making out of a personal return ... willingly and cheerfully."

In the first year, no money is to be returned with the forms. Instead, each taxpayer's calculations are verified by field agents, who send out bills on June 1. The payments are due by June 30.

On June 28, Archduke Francis Ferdinand is assassinated in Sarajevo, igniting World War I. Inevitably, the United States is drawn into the conflict. And inevitably the income tax is expanded to finance the war. By 1919, the tax base is lowered to $1,000, and the maximum rate is at 77 percent, meaning that for those in the highest bracket, the government claims more than three-quarters of their income.

1915 - Some congressmen find they can't fill out their returns because the instructions are too confusing. They turn to the House sergeant-at-arms, who thus becomes one of America's pioneer tax preparers.

One congressman, trying to explain why the tax law is getting more complicated, says, "I write a law. You drill a hole in it. I plug the hole. You drill a hole in my plug." The remark is widely reported, and a new tax word - loophole - enters the language.

1916 - The 1913 act, which taxes income "from any lawful business," is amended by eliminating the word "lawful" - thereby clearing the way for taxing such activities as bootlegging, gambling, and other illegal enterprises.

1917 - The war creates a popular acceptance of the income tax by making the paying of it a patriotic duty. Government speakers known as "Four-Minute Men" fan out across the nation, preaching at fraternal lodges, movie theaters, service clubs and churches about the importance of "defeating the Hun" by paying taxes promptly and fully.

The War Revenue Act of 1917 raises rates and lowers exemptions.

In an attempt to encourage philanthropy, Congress authorizes the deduction of charitable contributions from taxable income.

1918 - The Revenue Act of 1918 includes a publicity requirement providing that the names and addresses of everyone filing a return shall be a matter of public record.

1921 - Congress authorizes the taxation of capital gains at a lower rate.

1924 - The publicity requirement is expanded to include the amount of tax paid by every taxpayer, and newspapers begin to publish the information for wealthier taxpayers.

1925 - U.S. Sen. James Couzens of Michigan charges that millions of tax dollars are being lost through the favorable treatment of large corporations by the Bureau of Internal Revenue. Several days later, Couzens is notified by the bureau that he owes $11 million in back taxes.

1926 - The publicity requirement is abolished.

Congress authorizes a depletion allowance of 27.5 percent for oil and gas resources. This "oil depletion allowance" will be under almost constant attack for the next half-century as a tax loophole for the rich.

1929 - The National Tax Foundation estimates that average Americans will work 19 minutes each day to pay for their federal income taxes.

1931 - After years of murdering, stealing, extorting, smuggling and bribing with impunity, Chicago mobster Al Capone is toppled from power for tax evasion. Capone is sentenced to 11 years in federal prison for failing to file a Form 1040 between 1924 and 1929.

In the midst of a vigorous campaign by U.S. Treasury Secretary Andrew Mellon to force all Americans to meet their income-tax obligations, it is revealed that a government tax expert was assigned the full-time job of finding ways for Secretary Mellon to avoid paying his own taxes. One of the expert's recommendations, heeded by Mellon on his 1930 return, is the reporting of fictitious gifts to reduce tax liability.

1932 - The income-tax law is amended to provide that U.S. presidents are liable for the tax on their public salaries. Franklin Roosevelt becomes the first president since Lincoln to pay the tax on that portion of his income.

1933 - Testimony before the Senate Banking and Currency Committee reveals that J. Pierpont Morgan Jr., the most powerful banker in the world, with liquid assets totaling $53.2 million, paid no income tax in 1931 and 1932.

1935 - Will Rogers reckons that the income tax makes more liars out of Americans than golf.

1937 - J. Pierpont Morgan Jr. returns from Europe and tells reporters at dockside that taxation is a legal question, not a moral one; therefore, he feels no misgivings about having paid no income tax whatsoever in 1931 and 1932.

President Roosevelt eschews staff help and fills out his own tax return.

1939 - The National Tax Foundation estimates average Americans will work 40 minutes every day to pay their federal taxes, up from 19 minutes 10 years earlier.

Nevertheless, as world war erupts in Europe, the average American blue-collar worker pays no income tax at all, the average lawyer or doctor pays about $25 a year, and a highly successful businessman with an annual net income of $16,000 owes the federal government less than $1,000. But President Roosevelt is about to propose a federal budget of $9 billion to support an Army and Navy of 300,000 men.

When Hitler invades Poland, there are 6.5 million Americans paying federal income taxes totaling about $1 billion; when the war ends in 1945, about 48 million Americans will be paying federal income taxes totaling about $19 billion.

World War II will transform the income tax from a class tax to a mass tax.

1941 - Life magazine surveys a sampling of the new taxpayers and finds them "glad and even eager to pay the tax this year for the defense of the country." To help them over the rough spots, Life recommends a new book, "Your Income Tax," by J.K. Lasser, which sells for $1.

1942 - Congress authorizes the deduction of medical and dental expenses from taxable income.

A Gallup Poll reveals that of the 34 million Americans subject to the income tax for the first time, fewer than 15 percent are setting aside money to make the payment.

1943 - There is considerable concern over the ability of G.I. Joe and Rosie the Riveter to come up with their tax payments in a lump sum, and a solution is offered by Beardsley Ruml, chairman of the New York Federal Reserve Bank: the mandatory withholding of taxes from paychecks by employers.

After euphemizing the concept as "pay-as-you-go," Congress passes the Withholding Tax Act of 1943 and solves a major headache for the Internal Revenue Service: People who inform them, "I don't have the money."

The idea is not completely new. There had been tax withholding for federal employees under the old Civil War tax, and it was used again briefly in World War I. The new law institutes withholding as a "temporary wartime measure," but it has been a part of American life ever since.

1944 - Income-tax rates climb to their highest levels in history - beginning at 23 percent and rising to 94 percent on incomes above $200,000. One of the most affected by the high rates is a young Hollywood actor who is just beginning to earn big money - Ronald Reagan - and the 94 percent bite converts him from a New Deal Democrat to a conservative Republican.

U.S. Rep. Robert L. Doughton, chairman of the tax-writing House Ways and Means Committee, complains that he had to hire a consultant to help him prepare his own income tax.

Chester Clark, 42, an unemployed shipbuilder, commits suicide in Fort Myers, Fla.; police say Clark was literally worried to death over his inability to decipher his income-tax return. His wife says be had been under the impression that the tax was due on Feb. 15. He shot himself while she was away consulting a tax expert, who told her that Clark owned the government $7.50.

Across the nation, 50 million taxpayers - especially 10 million first-time taxpayers - are stumped by the changes Congress made in the income-tax law. Signs sprout up across the nation - "Tax Returns Prepared Here" - in barber shops, private homes, delicatessens. There are more complaints to congressmen about the complication of the tax form than about the amount of taxes.

Composer Irving Berlin writes a song intended to perk up Americans paying their first income taxes. The refrain:

You see those bombers in the sky?

Rockefeller helped to build them

So did I,

I paid my income tax today.

The song never becomes a hit.

1945 - The Internal Revenue begins selling a booklet to the public - "Your Federal Income Tax" - on how to complete Form 1040.

1949 - The National Tax Foundation estimates that average Americans will work one hour and 16 minutes of each work day to pay their federal taxes - up from 40 minutes 10 years earlier.

1952 - Albert Einstein: "The hardest thing in the world to understand is income taxes."

1953 - The name of the Bureau of Internal Revenue is changed to the Internal Revenue Service.

1954 - Child-care expenses become deductible for widows, single parents and certain other taxpayers.

The deadline for filing income-tax returns is changed from March 15 to April 15, chiefly because many taxpayers need more time to complete the task.

1955 - Because their mother wants them to work together, the Bloch brothers - Henry and Richard - set up a company in Kansas City, Mo., to help people prepare their tax returns. The brothers change the name of the company to Block so it won't be mispronounced as "blotch." Today H&R Block is a $894-million-a-year company with 7,500 offices throughout the nation and 40,000 employees - most of them part time. Last year H&R Block preparers filled out one in every 10 income-tax returns filed with the IRS.

1956 - Contestants who win the top prize on television's The $64,000 Question find they have only $25,000 after federal income taxes.

Hans Paul, headwaiter at the Waldorf-Astoria Hotel in New York, is indicted on charges of not reporting tips ranging between $500,000 and $1 million a year on his federal income tax. Paul later is found guilty, fined $7,500 and sentenced to four months in prison.

1957 - Form 1040 scores a technical knockout over Joe Louis. After earning about $5 million in a long, illustrious boxing career, Louis ends up owing the federal government $1.25 million in back taxes. Federal liens are filed against all of his assets, including a trust fund he had set up for his children. To make extra money, Louis referees wrestling matches.

The IRS injects levity into the filing process with an Official Tax Song; the song is an instant failure, and the IRS pulls it from radio stations.

1958 - The IRS rules that taxpayers with expense accounts must itemize unreimbursed expenses on the returns; it is the first big spur to the use of credit cards in the United States. To avoid tedious record-keeping, corporations hand out credit cards to their executives. Ninety days after the ruling, Diner's Club reports signing up 60,000 new members - the biggest membership surge in its history.

1959 - The National Tax Foundation estimates that average Americans will work one hour and 36 minutes each day to pay their federal taxes - up from one hour and 16 minutes in 1949.

1960 - Mrs. Horace Dodge puts her entire $56 million automobile fortune legacy into tax-free bonds, enabling her to realize an annual income of $1.5 million without even reporting it on her income-tax return.

1961 - The IRS resorts to automatic data processing to keep taxpayers honest. A huge IBM computer is installed in a special building in Martinsburg, W.Va., and is promptly dubbed the Martinsburg Monster. Taxpayers are required to use their Social Security numbers on all returns, ending the days when John R. Doe could avoid paying taxes by using the name J. Robert Doe. IRS Commissioner Mortimer Caplin proclaims that now "the taxpayers will be assured that no one is getting away with anything."

1964 - Congress sets the range of the income tax at 14 percent and 70 percent.

1965 - President Lyndon Johnson announces he has borrowed money from an unnamed Texas bank to pay his 1964 income tax of about $100,000.

IRS Commissioner Sheldon Cohen admits that agents used illegal wiretapping, hidden microphones and two-way mirrors in investigating suspected tax frauds.

1966 - Commuters in Santa Ana, Calif., are stranded when the federal government seizes the city's only public bus service because it owes back taxes.

1969 - The National Tax Foundation estimates that average Americans will work one hour and 48 minutes of each work day to pay their federal taxes - up from one hour and 36 minutes 10 years earlier.

1971 - The IRS spends $50,000 in an attempt to collect $232 from an impoverished Mexican-American woman who works as a part-time maid. The agency loses the case.

1972 - A poll by the Advisory Commission on Intergovernmental Relations finds that the American public rates the federal income tax as the fairest of all taxes.

1979 - The National Tax Foundation estimates that average Americans will work one hour and 48 minutes each work day to pay their federal taxes - the same as 10 years earlier.

1980 - A poll by the Advisory Commission on Intergovernmental Relations finds that the American public rates the federal income tax as the least fair of all taxes.

1981 - The Treasury Department estimates that income-tax evasion in the United States totals $90.5 billion a year.

1985 - Because of computer snafus and gross mismanagement, the nation's tax-collection system almost collapses. Hundreds of thousands of tax returns are lost, millions of returns pile up in IRS processing centers, refunds worth hundreds of millions of dollars are delayed or incorrect, and fully compliant taxpayers are subjected to unjustified dunning notices and threats to seize property.

Some IRS employees are so overworked and frustrated that they deliberately destroy tax documents and returns. Outside the IRS service center in Northeast Philadelphia, dozens of unprocessed tax returns, and tax payments totaling hundreds of thousands of dollars, are found in a trash barrel.

Then-IRS commissioner Roscoe Egger eventually admits a "serious breakdown" and issues a rare apology to America's taxpayers.

1986 - Congress enacts sweeping tax changes. The maximum income-tax rate is set at 28 percent, and deductions for sales-tax payments and non-mortgage interest are phased out.

1989 - The National Tax Foundation estimates that average Americans will work one hour and 47 minutes each work day to pay their federal taxes - one minute less than 10 years earlier.

1990 - The IRS has 120,000 employees to collect $1 trillion in taxes this year, but IRS Commissioner Fred T. Goldberg admits that it is letting $40 billion a year slip through its fingers because of old technology and high staff turnover.

During the golden age of Babylon - 4,000 years ago - King Hammurabi consulted astronomers to determine the most propitious time for his subjects to pay their taxes. We don't know what they told him, but we do know that the IRS says your taxes are due April 15.

William Ecenbarger is a freelance writer who lives in Pennsylvania.

Copyright (c) 1992 Seattle Times Company, All Rights Reserved.


Get home delivery today!