8/8/2009
Purpose is threefold
Evolution of Taxation in the
constitution
 American lawmakers have always worked to balance three
goals in the process of creating taxes – to build revenue, to
influence people’s spending habits, and to be fair to all
taxpayers.
Lesson 2
1781-1789
The writers of the Articles of Confederation did not support a strong
federal government. Only state governments had the power to tax,
and they had to turn over tax revenues to the federal government.
The Constitution gave the federal government new, stronger powers
to tax citizens directly. Taxes were in the form of tariffs and excise
taxes. These types of taxes were unfair because people with lower
incomes had to pay a higher percentage of their income than did
people with higher incomes This type of tax is a regressive tax.
1862-1872
During the Civil War, the federal government required
more revenue than tariffs and excise taxes could provide. A
tax on income was established during the civil War and was
abolished after the war.
1
8/8/2009
1913-Present
The Whiskey Tax
Because of industrialization and modernization, many people gained
huge fortunes that were not taxed. A tax on income was intended to
make the system of taxation more equal. The ratification of the
Sixteenth Amendment in 1913 gave Congress the right to collect
income taxes. Now, people with higher incomes paid more taxes
than those with lower incomes. This form of taxation is known as a
progressive tax.
In 1791, congress placed an excise tax on the sale of whiskey. The tax
was a direct tax on the people who made and sold whiskey. Farmers
in western Pennsylvania felt threatened by the tax, and many refused
to pay it. To them, whiskey was not an industry but a currency
because they traded it just like it was money.
In 1794 hundreds of farmers staged the Whiskey Rebellion to protest
the tax. This rebellion was the first test of the federal governments
power to tax. The president sent troops to face the citizens and
made a point that the Constitution is the law of the land and must be
obeyed.
The Tariff of 1832
Social Security Act of 1935
By 1832, revenue tariffs accounted for 89 percent of government
income. After the War of 1812, Americans bought large amounts of
textiles from the British because they were cheaper than American
made goods. To protect the infant American industries.
By 1935, the Great Depression had been going on for six years. Millions were
unemployed, and few jobs were available. As part of President Franklin D.
Roosevelt’s New Deal, the federal government created jobs for the unemployed.
However, the elderly could not work, and many were living in poverty. Frances
Perkins, the first female presidential Cabinet member, was charged with
developing an “old-age” insurance program. The result was the Social Security Act
of 1935, designed to provide elderly retired workers with pensions. At first, Social
Security deductions were considered “contributions,” not taxes. The program
appeared to be self-funded because only those who contributed would receive
credits toward retirement benefits. However, far too many people needed help, so
the program was expanded to include the families and survivors of retired and
disabled workers, the unemployed, and federal workers.
2
8/8/2009
Wealth Tax of 1935
Victory Tax 1942
During the Great Depression, President Franklin D. Roosevelt’s New Deal
programs put millions of jobless Americans back to work and stabilized the
economy. Social Security programs provided pensions to those who could
not work. However, the government needed new taxes to pay for these
programs. The Revenue Act of 1935 put a new progressive tax, the
Wealth Tax, in place. Those making more than $5 million a year were taxed
up to 75 percent. Unlike their Civil War grandparents, the wealthy were
not happy to pay income taxes during crisis times. Loopholes in the tax
code were used. The federal government aggressively prosecuted tax
evaders. The Revenue Act of 1937 cracked down on tax evasion by revising
tax laws and regulations.
In 1939 only about five percent of American workers paid income tax. The United
States’ entrance into World War II changed that figure. The demands of war
production put almost every American back to work, but the expense of the war
still exceeded tax-generated revenue. President Roosevelt’s proposed Revenue Act
of 1942 introduced the broadest and most progressive tax in American history,
the Victory Tax. Now, about 75 percent of American workers would pay income
taxes. Because so many citizens paid the tax, it was considered a mass tax. To ease
workers’ burden of paying a large sum once a year, and to create a regular flow of
revenue into the U.S. Treasury, the government required employers to withhold
money from employees’ paychecks. Additional taxes were put in place in 1943. By
war’s end in 1945, about 90 percent of American workers submitted income tax
forms, and 60 percent paid taxes on their income. The federal government covered
more than half its expenses with new income tax revenue.
3