/ Terry’s Columns / A Brief HIstory of Taxes

A Brief HIstory of Taxes

By Terry Savage on March 26, 2021

The Internal Revenue Service has postponed the deadline for filing income taxes for 2020 to May 17, 2021, giving Americans a chance to avoid this unpopular topic for an extra month. Most states that have an income tax have fallen in line. But those first quarterly estimates are still due on April 15 and June 15.

Did your eyes just glaze over at the boring or confounding idea of reading about taxes. Well, that was intended! Not by me, your columnist, but by the politicians of both parties who have created our monstrous tax system and then changed it several time in recent years on a whim — and likely will do so again in the current year.

The unpredictability of taxes messes up financial planning efforts and leaves ordinary people helpless to adjust. Of course, the very wealthy have expert attorneys and accountants to deal with these changes. But for middle-class America, all too often new tax policies blindside efforts to plan for retirement or pass assets on to children.

How It Started
Of course, the United States of America basically started as a tax rebellion against King George. Do they still teach about the Liberty Tree and the Boston Tea Party? They were about unjust taxes — as was the Whiskey Rebellion, which President George Washington quashed in 1794!
The first American income tax was initiated during the Civil War, but our “modern” income tax started in 1913. (Funny, we typically celebrate centennials like this, but I remember no parties for 100 years of the income tax!) A federal income tax was made possible by passage of the 16th Amendment to the Constitution, ratified that same year.

That first tax was on income over $3,000, which applied to only 1% of the population. By 1945, to fight World War II, people with incomes of $500 faced a 23% tax, while the top marginal rate was 94%.

Over the years, numerous other taxes were added and removed in order to raise money for government projects like the New Deal — and to create incentives for certain behaviors. We have had the alternative minimum tax, designed to make sure the wealthy didn’t use too many deductions to avoid paying taxes. That didn’t work well, since it soon hit many middle-class taxpayers when inflation pushed them into higher tax brackets.

Some taxes were well-disguised. The “Social Security tax” is called FICA. That stands for “Federal Insurance Contributions Act.” When Social Security was created in 1935, with taxes first paid in 1937, people were told they would get a tax-free benefit. But that was changed in 1983, and now higher-income retirees pay taxes on some of their Social Security benefits.

The Most Recent Change
It was clear to everyone that the tax system had become a complicated mess. So the Tax Cuts and Jobs Act of 2017 increased the standard deduction from $6,350 to $12,000 for individual filers, and from $12,700 to $24,000 for joint returns. Fewer taxpayers would need to “itemize” deductions with the new, larger personal exemption.

But at the same time, the law “capped” deductions for state and local income tax, sales tax and property taxes (SALT) on your federal return at $10,000 per return (and only $5,000 if married filing separately). The limitation came just as many states were raising taxes to pay pension promises.

For many tax filers, the pain of limiting their largest deductions far outweighed the benefits of filing a simpler return.
And now another tax bill is on the horizon. It’s not just tax rates that are likely to adjust — but numerous other changes may impact your financial planning — including the “step-up” cost basis that protected inherited assets like long-held homes and investments.

Mark Twain said it best: “No man’s life, liberty, or property are safe when the legislature is in session.” While most people today are focused on getting their piece of the $1.9 trillion being passed out under the American Rescue Plan Act of 2021, don’t be blinded by the goodies coming your way.

Someone is going to have to pay for all this. Yes, our grandchildren will pay. But they are starting with YOU. And that’s The Savage Truth!

money

ASK TERRY

a personal
finance question