Income Tax - A Brief History Of The U.S. Income Tax

Introduction

The U.S. Federal Income Tax Code requires American corporations and citizens to pay a percentage of their income (earnings) to the government. This income tax provides for the operation of the government. The current Tax Code is found in Title 26 of the U.S. Code of Federal Regulations (CFR), as amended.

A Clause For Alarm

The Taxing and Spending Clause of the U.S. Constitution is found in Article I, Section 3, Clause 1. This article gave Congress the power to impose taxes, duties, imposts, and excises. However, Section 9 required that these taxes be uniform throughout the country.

A Very Taxing War

In 1861 the American government imposed a personal income tax to help pay for the Civil War. However, a federal income tax was not feasible at that time due to difficulties in classifying property and in the way that wages were paid.

Congress Created A Loophole

The Sixteenth Amendment to the Constitution was ratified by the States in 1913. This Amendment increased the power of Congress to levy taxes. In summary, the Amendment gave Congress the power to levy federal income taxes that were not uniform across all states. Furthermore, this income tax could be imposed regardless of any census or population data.

The Modern Federal Income Tax

The U.S. Tax Code has been amended (modified) many times since it was first approved. The tax laws and rules have grown increasingly complex to address increasingly complex financial and legal situations. The result is a tangle of legalese that requires teams of trained professional accountants, computers, or both, to understand.

Understanding The Federal Income Tax Return

Generally, American citizens have income tax deducted from each paycheck by their employers. The employers group the taxes from their company and send them to the government. Corporations pay income taxes in a similar manner.

The U.S. Internal Revenue Service (IRS) requires each citizen or corporation to make an accounting of their tax situation once per year (usually by April 15). This accounting takes the form of filing a tax return.

The broad purpose of the tax return is to determine whether or not the individual or corporation has paid enough income tax throughout the year. If exactly enough income tax was paid, all is well. If the tax return indicates that taxes were underpaid, additional tax must be paid to make up the shortfall. Finally, if too much income tax was paid, the person or company receives a refund of the overpayment, or a return of the taxes overpaid.

Why A Large Tax Refund Is Bad

Many people are delighted to receive an income tax refund. What they have failed to consider is that the refund is their money from the start. The Government has had interest-free use of it during the past year.

Those who consistently receive large tax refunds should decrease the amount of taxes withheld by their employers. This action decreases or eliminates an annual tax refund, but it puts more money in the person's pocket each month!

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