Get Ready for Tax Increases: The History of Income Tax

Get Ready for Tax Increases: The History of Income Tax

whitehouse.jpgThe dire state of
our economy after the Great Depression in 1929 led to the passage of the Social
Security Act in 1935.  This law provided
for payment known as unemployment compensation to workers that lost their
jobs.  Other areas of the Act gave public
aide to the aged, the needy, the handicapped, and to some minorities.  This Act would define our federal system of
benefits for years to come and forever change the way that the government
provided for its people that were in need.

In 1953 the Bureau
of Internal Revenue was renamed the Internal Revenue Service (IRS) after a
reorganization of its function.
  The new
name was chosen to reflect the service aspect of its work.
  By 1959, the IRS became the world's largest
accounting, collection and forms-processing organization. In 1961 computers
were used to automate and streamline the work by improving service to tax
  This is when Congress passed a
law requiring individual taxpayers to use their social security number as a
means of tax form identification.

Beginning in the
late 1960's and continuing through the 1970's the
U.S. experienced persistent and rising inflation
rates, reaching 13.3% in 1979.  The
problem with this was that along with paying more for goods and services, many
people were forced into a higher tax bracket by reducing the value of
exemptions and deductions.  Our tax
system at that time was not indexed for inflation.  To off-set this process the Economic Recovery
Tax Act of 1981 tax was passed with strong bi-partisan support in Congress, something
we haven't seen for a long time, bringing the top tax bracket down to 50%.


In former President
Ronald Regan's State of the Union address he called for sweeping reform of
income tax, so it would have a broader base and lower rates, along with making
it simpler, fairer and more efficient. 
The outcome of this was the passing of the Tax Reform Act of 1986 which
brought the top statuary tax rate down from 50% to 28% while the corporate tax
was reduced from 50%-35%.

The numbers of tax
brackets were reduced and the personal exemption and standard deductions
amounts were increased and indexed for inflation.  It shifted the tax burden from the individuals
to the corporations. Yet, some of the provisions of the Act led to a downturn
in the real estate markets which played a major role in the collapse of the
Savings and Loan industry.

Between 1986-1990
the Federal tax burden rose as a share of GDP from 17.5%-18%, yet in 1990 government
spending that caused budget deficits prompted Congress to enact a significant
tax increase in the top tax bracket to 31%. 
Shortly after former President Bill Clinton's election, the Congress in
1993 enacted a second increase to the top bracket to 36%, with the effective
rate being 39.6%.

Some modest tax
cuts were made when the Taxpayer Relief Act of 1997 was passed.  This was when families with children could
get tax credits, along with lower income families.  The 1997 Act launched the modern
proliferation of individual tax credits and refundable credits.

In 1993 the tax
increase shifted toward consumption tax. 
Tax vehicles such as the Medical Saving Accounts, Education IRA, and
Section 529 Qualified Tuition programs were formed to help the tax payer with
college, savings and medical expenses. 
The Roth IRA was also introduced at this time.

By 2001, there was
a federal budget surplus of $281 billion with a cumulative 10-year projected
surplus of $5.6 trillion.  It's hard to
believe with the current state of our economy that we ever had that much of a
surplus.  In 2001, under former President
George W. Bush's leadership, the Economic Growth & Tax Relief and Reconciliation
Act was passed.  The main reason for
passing this was to regain some of the ground lost in the 1990's in terms of
low marginal rates.

 Unfortunately, our
economy was already in a downturn when the Act was being debated, even with
Bush's passing of an economic stimulus bill that extended unemployment
benefits.  A lesson to be learned from
the economic slowdown of the early 90's and a near depression two years ago is
that we can never assume that an economy is recession-proof.

History has proven
this to us and taxes will rise to cover the deficits in our government.  It's going to more difficult for the
generation X and Y to attain the level of monetary success that their parents
had because of the tax increases.  Hold
on to your seats, the taxes are coming!

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