Academic journal article Journal of Business and Accounting

An Examination of the 1913 Tax Act: The Origination of Modern Taxation Policy

Academic journal article Journal of Business and Accounting

An Examination of the 1913 Tax Act: The Origination of Modern Taxation Policy

Article excerpt

ABSTRACT

This paper reviews in some detail the 1913 tax legislation since it represents the beginnings of modern taxation policy. Earlier attempts to create an income tax based system were not very successful. Most taxes enacted from the Revolutionary War to the Civil War were excise or consumption taxes on items such as alcoholic beverages and tobacco products. Following the Revolutionary War, Adam Smith in 1776, in his "The Wealth of Nations," recommended an income tax. He felt that the ideal tax system should tax individuals based upon their "ability to pay." This concept remains central to our existing tax system as we continue to use a progressive tax rate system that taxes the wealthy at a higher tax rate than the poor. Although the 1913 tax legislation was only 27 pages in length, it was packed with detailed information concerning the creation of the United States' first comprehensive "income" based tax system. This paper reviews the many aspects of the 1913 law that pertains to individual taxes, business taxes, and other miscellaneous taxation issues. Finally, the authors review some of the aspects of this law that continue to be included in our current taxation system.

INTRODUCTION

Excise taxes and tariffs have been the major forms of taxation throughout the early history of the United States. In 1646, the Massachusetts Bay colony taxed the produce of estates as an early form of income taxes (Sherwood, 1925). During the Civil War, there were a number of attempts to create an effective income tax system from 1861 to 1871 when the amended law finally expired. Congress attempted a later income tax law in 1894 that was a part of the Wilson Tariff Bill. The Supreme Court found this unconstitutional in 1895 in the case "Pollack vs. Farmer's Loan and Trust." The tax was held to be a direct tax that was not apportioned among the states as the Constitution required. In 1909, Congress imposed an income tax on corporations. This law was worded differently than the previous act and the Supreme Court ruled that it was an excise tax rather than a direct tax (Ibid).

The Sixteenth Amendment to the Constitution was passed on February 25, 1913 in a effort to clear the way for future income tax legislation. The key phrase in this act was that "Congress shall have power to levy and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration" (16th Amendment, 1913). Following the 1913 legislation, there were significant changes made in the Revenue Acts of 1916, 1918, 1921, and 1924. The intent of this paper; however, is to emphasize the details of the 1913 law which is discussed in the following sections.

THE 1913 INCOME TAX ACT-OVERVIEW

On October 3, 1913, President Woodrow Wilson introduced the modem income tax system with the passage of the Underwood Tariff Act. The portion of this legislation that pertained to income taxes was only 27 pages in length. These pages contained a remarkable number of principles and practices that continue to be important today and are still contained in our current Internal Revenue Code (IRC). Taxation principles such as voluntary compliance, self-reporting, progressive tax rates, and the ability to pay principle were included in this early piece of tax legislation. Specifically, House Resolution 3321 was introduced on October 3, 1913. This was the first income tax legislation that taxed earnings of both individuals and corporations (Kixmiller & Barr, 1919). It was, indeed, a landmark piece of tax legislation.

The first Form 1040 was introduced in 1913 and was vastly different from the current form. The 1913 Form 1040 was only three pages in length with a fourth page containing instructions on its preparation. Single taxpayers who earned more than $3,000 per year were required to file the form. Since $3,000 was a lot of money at this time, there were a large percentage of citizens who were not required to file. …

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