After the tax increases imposed during World War II were reduced, from a high of 20.9 percent to 14.4 percent, it was not long before they were increased once again to pay for the Korean War. Since that time, the history of Americans tax burden continued to change with the circumstances of the United States (U.S.) . Tax laws changed by Congress would effect every individual and business taxpayer.
Internal Revenue Modernization
The Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS) in 1953. By 1959, it had become the world's largest accounting, collection, and forms-processing organization. Computers were used by the IRS to streamline its work and provide better service to taxpayers.
Congress passed a law in 1961 requiring individual taxpayers to use their Social Security number as a means of tax form identification. By 1967, business and tax returns were used by computers in deciding which tax return should be audited.
Tax Rates and the Economy
During the 1950's, tax policy was seen as a tool for raising revenue and changing incentives in the economy. The income tax went through revisions or amendments almost every year since the major reorganization of 1954 such as the Tax Reform Act of 1969 that reduced income taxes for individuals and private foundations.
During the 1960's and through the 1970's, the U.S. experienced rising inflation rates, eventually reaching 13.3 percent in 1979. Income taxes were not indexed for inflation and the tax burden rose from 19.4 percent of GDP to 20.8 percent. This effected the economy and in 1981 the Reagan Administration proposed tax cuts to make up the difference.
The Reagan Tax Cut
President Ronald Reagan proposed the Economic Recovery Act of 1981 which was supported by both political parties. It represented a fundamental shift in federal income tax policy.
The Act included:
- A 25 percent reduction in individual tax brackets, phased in over 3 years, indexed for inflation.
- Bringing the top tax bracket down to 50 percent.
- An Accelerated Cost Recovery System.
- A 10 percent Investment Tax Credit .
The essential idea behind the Act was that taxes have their first and primary effect on economic incentives.
Changes Resulting from the 1981 Tax Policy
The tax cuts in 1981 represented changes such as:
- A new focus on marginal tax rates and incentives as key factors in how the tax system effects the economy.
- A shift away from income taxation and toward taxing consumption.
- An accelerated cost recovery on the business side.
- The reduction of multiple taxation on individual savings.
Also in 1981, the Individual Retirement Account (IRA) was enacted. In addition, the Federal Reserve Board altered monetary policy to bring inflation under control. However, inflation went down faster than expected and by 1982, the U.S. was experiencing a deep recession. This led to a tax increase in 1984 that pared back some of the tax cuts enacted by Reagan, especially on the business side.
Social Security and Medicare Additions
As the Social Security system evolved, other benefits were added such as:
- Disability Insurance
- Disability insurance for widows and widowers.
- Automatic cost-of-living increases.
In 1965, Medicare, began providing the medical needs of persons aged 65 or older, regardless of income. An Amendment to the Act created the Medcaid programs, providing medical assistance for persons with low income and resources. These all required additional tax revenue and so the payroll tax was repeatedly increased over the years. In the 31 years that followed, the maximum Social Security tax burden rose from $60 in 1949 to $3,175 in 1980. Between 1980 and 1990, it rose to $7,849.
Shifts in the Tax System
For many years, the Federal Tax system had been a hybrid of income and consumption taxes, with the balance shifting one way or the other with the major tax acts. The 1986 tax act shifted the balance once again toward the income tax. In 1990, Congress enacted a significant tax increase to 31 percent which was later raised to 36 percent with an effective top rate of 39% under President Bill Clinton. The centerpiece of the Tax Payer Relief Act of 1997 was a tax benefit to certain families with children through the Per Child Tax credit that only effected lower income families.
Over the years, the tax system would continue to shift from income to consumption tax. Under the Clinton Administration, movement was toward tax vehicles that would encourage savings, such as the Medical Saving Account; an Educational IRA and Section 529 Qualified Tuition Program to help taxpayers pay for future education expenses for their children. It was during this time that the Roth IRA came into being.
The Bush Administration and Taxes
Under President George W. Bush and a Republican Congress, the Economic Growth and Tax Relief and Reconciliation Act was passed in 2001. The individual tax rate would fall from 39.6 percent to 33 percent. It also included:
- Expanding the Per Child Tax credit from $500 to $1000 per child.
- Increased the Dependent Child Tax credit.
- Put the estate, gift, and generation-skipping taxes on course for eventual repeal.
The Act was followed by a downturn in the economy however it is also credited for shortening it. Bush eventually called for and Congress enacted an economic stimulus bill which included the extension of unemployment benefits to assist workers and families that were under financial stress due to the slowing economy. It also included an acceleration of depreciation allowances for business investments.
If history is any proof, the tax burden on Americans will continue to be a balance between consumption and income taxes, often time including them both as the U.S. economy contracts and expands. One thing is certain, from Colonial Times to the present, they will always be part of the economic picture of the United States.
Source:
U.S Department of the Treasury History of Taxes
Join the Conversation