Income Tax (U.S.)

income tax

income tax, assessment levied upon individual or corporate incomes. Although personal incomes were occasionally taxed in medieval Italian cities, the income tax is essentially a modern form of taxation. The first important income tax was levied in Great Britain from 1799 to 1816 in order to raise funds for the Napoleonic Wars. After several other temporary income taxes, Britain adopted a permanent one in 1874. The first income tax in the United States was imposed in 1864, during the Civil War, but was discontinued in 1872. Various European countries, as well as Australia, New Zealand, and Japan, adopted regular income taxes during the latter half of the 19th cent.

In the United States, the income tax law of 1894 was declared unconstitutional on the grounds that it was a direct tax not apportioned according to state population. The adoption of the Sixteenth Amendment (1913) permitted both the corporate and individual income tax to become a lawful element in the federal tax structure. Since then they have been a major source of revenue for the federal government, yielding as much as 85% of all its receipts in some years. Income taxes had been levied sporadically by various states since 1789; since 1919 most states have adopted the tax. The first major American city to impose a tax on incomes was Philadelphia (1939).

In general, personal incomes below a certain amount are exempted from the individual income tax, with the actual income subject to tax affected by exemptions, deductions, credits, and the like. The tax is applied to the net income remaining after these modifications, and the rate becomes progressively higher for larger incomes. From the mid-1960s until 1982 the tax rate ranged from about 15% for the lowest brackets to about 70% for the highest, with a similar structure for corporate income taxes. In 1982, Congress passed President Reagan's plan to cut the highest rate on personal income tax from 70% to 50% and the capital gains tax from 50% to 20%. The Tax Reform Act of 1986 further lowered the maximum marginal tax rates from 50% to 28%, the lowest since the 1920s. A top rate of 31% was added in 1991, and additional rates of 36% and 39.6% for the wealthiest individuals were approved in 1993. Under changes enacted in 1997, the tax rate on most long-term capital gains is 20%—10% for people in the 15% tax bracket; the rate is slightly lower for investments held at least five years. Further changes enacted under President George W. Bush in 2001 reduced the rate in the lowest income-tax bracket to 10% and called for the tax rates of all brackets above the 15% rate to be reduced to 25%, 28%, 33%, and 35% by 2006; the changes became permanent, with the exception of the restoration of a 39.6% top rate, in 2013. A tax overhaul signed by President Trump in 2017 altered the income tax brackets somewhat, to 10%, 12%, 22%, 24%, 32%, 35%, and 37%, but also shifted the ranges of income in those brackets and greatly altered exemptions, deductions, and other rules used to determine net income. The most significant changes, however, affected the corporate income tax, including dropping the rate from 35% to 21%. In many states and cities, lowered federal income taxes have been offset by higher state and local income and property taxes. In the 1980s and 90s, the call for a "flat tax" —a single tax rate (around 17%–20%) for individuals and businesses—was a recurring campaign issue among American conservatives. Such an income tax has been adopted by a number of E European countries.

See D. J. Gaffney and D. H. Skadden, Principles of Federal Income Taxation (1982); J. Creedy, The Dynamics of Income Distribution (1985); M. Levi, Of Rule and Revenue (1988).

The Columbia Encyclopedia, 6th ed. Copyright© 2018, The Columbia University Press.

Income Tax (U.S.): Selected full-text books and articles

Taxes in America: What Everyone Needs to Know By Leonard E. Burman; Joel Slemrod Oxford University Press, 2013
Librarian's tip: 0.50
The Individual Income Tax By Richard Goode Brookings Institution, 1976 (Revised edition)
Financing State and Local Governments By J. Richard Aronson; John Hilley L.; Financing State and Local Governments Brookings Institution, 1986 (4th edition)
Librarian's tip: Chap. Five "State Taxes on Individual Income and Sales"
State Sales and Income Taxes: An Economic Analysis By George R. Zodrow Texas A&M University Press, 1999
Fairness and Efficiency in the Flat Tax By Robert Ernest Hall American Enterprise Institute, 1996
Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated By C. Eugene Steuerle The Brookings Institution, 1985
Librarian's tip: Chap. Three "Taxation of Corporate Income"
Entity Theory as Myth in the Origins of the Corporate Income Tax By Bank, Steven A William and Mary Law Review, Vol. 43, No. 2, December 2001
Who Paid the Taxes, 1966-85? By Joseph A. Pechman Brookings Institutuion, 1985
Tax Reform and the Cost of Capital By Dale W. Jorgenson; Kun-Young Yun Oxford University, 1991
Librarian's tip: Chap. 2 "Taxation of Income from Capital"
Helping Working Families: The Earned Income Tax Credit By Saul D. Hoffman; Laurence S. Seidman W.E. Upjohn Institute for Employment Research, 2003
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