Income Tax History: Timeless Issues
In 1789, Benjamin Franklin said that “…in this world nothing is certain but death and taxes.” With taxes, we can also be certain that the system will be complex and people will question its fairness.
Because professional athletes pay taxes in many of the places they’ve played, they have to navigate a tax maze. Any hockey, baseball or basketball player who had games in Pennsylvania paid taxes based on a ratio between total games played (including pre- and post- season) and games in the state. Athletes who played in Michigan have the same ratio but without the pre-season. For football players who had Pennsylvania games, the ratio compares total days worked. Meanwhile, Pittsburgh’s 3% tax for the games played there can be offset with a federal deduction. In addition, there are reciprocity deals where paying tax in one state like Pennsylvania (a 3.07% rate) means not paying in NJ (8.97%) or Indiana (3.4%).
You can see where this story is going. Not really about athletes, it is all about a complex tax system. While the first 1040 form in 1914 had a single instruction page, the current one has 189 pages. Add to that the different state regulations and the average person devotes 27 hours annually to tax preparation.
100 years ago, on February 25th, the 16th Amendment to the US Constitution legalized an income tax. Implementing the tax, the House passed legislation during May that was signed by President Woodrow Wilson in October, 1913. That bill was 14 pages long. As for rates, the maximum was 7% on incomes over $500,000 and 1% for those at $3,000 (equal to $69,649.80 today). The forms? The first 1040 form was 3 pages long. Still though, even then, there were deductions and loopholes.
Before that first federal tax was passed, many thought the tariffs that had been providing most federal revenue were unfair. Consumers were bearing the burden, domestic manufactures were protected, and prices were higher than they might have been. During the 1920s, the debate centered on tax rates with Treasury Secretary Mellon saying that high income tax rates “kill the spirit of business adventure” while cutting taxes will “advance general prosperity.” (sound familiar?) The, during the 1930s, add the onset of Social Security and questions about the size of a safety net.
Fast forward to today and we have the same complexity challenges and fairness debates.
Sources and Resources: Sadly, two excellent tax history articles, one at WSJ.com by John Steele Gordon and the other at The New Yorker by Jill Lepore, are both gated. I do recommend, though, this Forbes blog from which I got my sports tax facts and this Quartz interactive for a history of individual income tax rates and the source of the above graph.