The Evolution of Taxes in America

The Evolution of Taxes in America

( – Taxes have always brought about strong feelings in Americans. Remember the Boston Tea Party? While we may not always be happy about paying them, there are some solid reasons why they exist. Let’s review the evolution of taxation through US history to better understand why these levies exist and how they actually benefit us.

Why Do We Pay Taxes?

The main reason for paying taxes, according to the US Department of the Treasury, is to fund the government at various levels. In return for this funding, local, state, and national governments maintain and offer a multitude of public services, including:

  • Public schools
  • Road systems
  • Natural resource management
  • Veterans benefits
  • Social services
  • Disaster relief
  • Space exploration
  • Military services
  • Law enforcement

Taxes occur at all government levels: local, state, and federal. Different levels of government levy taxes on different criteria and spend the resultant funding differently.

The federal government gets the majority of its funding through income taxation. State governments use levies on income, property, and consumption (sales tax, for example). Local governments make money mainly through taxing wealth, including property, and through consumption.

On What Basis Are We Taxed?

Governments tax us based on three main categories:

  • Income
  • Wealth
  • Consumption

Let’s review each basis and its history.

Income Tax

The first federal income tax began with the Revenue Act of 1861 during the Civil War, according to the Library of Congress. The money helped to pay expenses from the war. Congress repealed it in 1872, but there was another attempt to tax income in 1894.

The US Supreme Court struck that down as unconstitutional in 1895 because Article I, Section 8 of the Constitution states it is not legal to issue a direct tax without collecting it from each state based on population. Congress corrected this issue with the 16th Amendment in 1913.

Today, the government taxes the income of individuals and businesses through payroll taxes. These include funds that go to the Social Security and unemployment programs. We usually pay federal, state, and, in some cases, local taxes on our earnings.

Consumption Tax

Many of us know consumption taxes by the name sales tax, but they also include excise taxes, which have been around since the Revolutionary War. Excise taxes are usually on purchases considered luxuries or non-essentials. The government also imposes them on goods it wants to discourage us from buying, like tobacco and alcohol.

They use them to build revenue, as well. One example is the gasoline tax, which started in 1932.

States manage their own sales taxes. In some states, local governments also impose a percentage on top of what the state collects. We pay it as we purchase goods, and vendors collect the taxes for the states and localities and send the revenues monthly or quarterly.

There may be exceptions. For example, in some states, food items are exempt from sales taxes.

The first sales tax was in West Virginia in 1921. Only five states do not include this charge: Oregon, Delaware, Alaska, New Hampshire, and Montana.

Wealth Tax

Wealth taxes bring in large amounts of revenue for local governments. They include property levies. We also pay them when buying a vehicle or livestock. Estate taxes fall in this category as well.

The first estate taxation occurred in 1797, but it became more common starting in 1916. The government also began taxing capital gains and dividends in 1913 and 1936, respectively.

Taxes may not be something we enjoy paying, but they fund many important purposes. Over time, taxation increased as our societal needs increased at local, state, and national levels. We enjoy stability, infrastructure, education, community services, health and retirement support, military protection, and more benefits from our taxes. In many ways, they are an investment in ourselves.

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