Tax Facts A Short And Lively Accounting Of The Irs

April 14, 1991|By WILLIAM ECENBARGER | WILLIAM ECENBARGER,WILLIAM ECENBARGER last wrote for the magazine on the high cost of freedom of choice.

UNCLE SAM'S BITE BEGAN AS A NIBBLE 78 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. 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, and 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.

The story of America's income tax begins in 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 S. 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 had gathered on his own and then figures the tax (between 3 and 5 percent), posts the figures in a public place and attempts to collect.

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

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 income 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.

1909 --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 three-quarters of the state legislatures of the United States.

U.S. Representative 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.

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.

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

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