Bunting tripp & Ingley - certified public accounts

Happy birthday, Internal Revenue Code!

February 28th, 2013

On March 1, 2013, the U.S. income tax law turned 100 years old.

The origin of the income tax is generally cited as the 16th Amendment, passed by Congress on July 2, 1909, and ratified by a sufficient number of states on Feb. 3, 1913. With the way cleared, the Revenue Act of 1913 was signed by President Woodrow Wilson on Oct. 3, 1913, with an effective date retroactive to March 1, 1913, the first month after ratification of the 16th Amendment.

The history of the income tax actually goes back even further. During the Civil War, Congress passed the Revenue Act of 1861, which included a tax on personal incomes to help pay war expenses. The tax was repealed 10 years later.

In 1894, Congress enacted a flat-rate income tax, which was ruled unconstitutional the following year by the Supreme Court because it was a direct tax not apportioned according to the population of each state. The 16th Amendment removed this objection by allowing the federal government to tax the income of individuals without regard to the population of each state.

The Revenue Act of 1913 imposed an income tax with rates ranging from 1 percent on incomes below $20,000 to 7 percent on incomes above $500,000. For comparison, $20,000 in 1913 had the purchasing power of about $440,000 today. The top rate of 7 percent would have applied to incomes above $11 million in today’s dollars.

Did outraged voters send their elected members of Congress packing after the next election if they voted in favor of the income tax?

Not likely. Even a quarter century later, in 1939, it’s estimated that only 5 percent of the U.S. population earned enough income to be required to file a tax return.

This year, when you are filing you tax return, tip your hat to 100 years of progress and take a moment to remember Oscar Underwood, the long-forgotten representative from Alabama who sponsored the Revenue Act of 1913.

“I have always paid income tax. I object only when it reaches a stage when I am threatened with having nothing left for my old age – which is due to start next Tuesday or Wednesday.” – Noel Coward

The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.