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You know the saying—nothing is certain except death and taxes. While that may be true, taxes
tend to be more complicated and very inconsistent. And they didn't always exist as they do
today. In fact, America's first citizens enjoyed very few taxes.
But as time went on, more levies were added—federal income tax, the alternative minimum
tax, corporate tax, estate tax, the Federal Insurance Contributions Act (FICA), and so on. Some
were increased, while others were repealed—only to be added again. Below is our analysis of
the origins of some of the more common taxes we face today.
KEY TAKEAWAYS
The Constitution gave Congress the power to impose taxes and other levies on the
general public.
While the Civil War led to the creation of the first income tax in the U.S., the federal
income tax as we know it was officially enacted in 1913.
Many of the taxes we pay today were created in the 1920s and 1930s including the
estate tax, gift tax, and Social Security taxes.
Income tax rates used to apply to everyone based on income regardless of status—
single, married, and heads of households.
After the Revolutionary War, the Constitution gave Congress the power to impose taxes and
other levies on the general public. States were responsible to collect and pass them on to the
government. Most of these were excise taxes—taxes imposed on specific goods or services like
alcohol and tobacco. The government also tried direct taxation—taxing things an individual
owned. That didn't last, and the feds went back to collecting excise taxes.
Income Taxes
The Civil War led to the creation of the country's first income tax and the first version of the
Office of the Commissioner of Internal Revenue—the earlier version of what we now call the
Internal Revenue Service (IRS). This office took over the responsibility of collecting taxes from
individual states. Excise taxes were also added to almost every commodity possible—alcohol,
tobacco, gunpowder, tea.
The federal income tax as we know it was officially enacted in 1913, while corporate income
taxes were enacted slightly earlier in 1909.
Other Taxes
The first estate tax was enacted in 1797 in order to fund the U.S. Navy. It was repealed but
reinstituted over the years, often in response to the need to finance wars. The modern estate
tax as we know it was implemented in 1916.
Tax rates were the same for everyone and there was no filing status. This meant everyone paid
the same rate whether they were single, married, or heads of households. But all that changed
over time. Tax rates increased considerably, with the highest marginal tax rate reaching 37%.
Modern tax rates also depend on filing status.
60.0%
Tax Refor
50.0% of 198
40.0%
30.0%
Sin Taxes
Because cigarette and alcohol taxes are built into the prices of these products, many
Americans don't even know they're paying them. Federal tobacco taxes were first enacted in
1794, but came and went over the years until 1864. That year, a box of 20 cigarettes was taxed
at 0.8 cents.In 2020, the rate was $1.0066 per pack.
States also tax cigarettes. In 2019, Missouri taxed them at a low of 17 cents per pack, while
New York taxed them at a high of $4.35 per pack.
Important: Since cigarette and alcohol taxes are built into their prices, many
Americans don't realize they're paying them.
Spirits, wine, and beer are each taxed at different rates by both the federal and state
governments. In 2020, the top federal excise tax rates were $13.50 per proof gallon of spirits,
$1.07 to $3.15 per gallon of wine depending on the wine's alcohol content, and $18 per 31-
gallon barrel of beer.Each state sets its own tax rates for each type of alcohol.
The lowest tax rate for spirits in 2019 was $2.00 per gallon in Missouri and the highest rate
was $32.52 per gallon in Washington.
For wine, the lowest tax rate in 2019 was 20 cents per gallon in California; the highest was
$3.26 per gallon in Kentucky.
Beer was taxed at a low of 2.0 cents per gallon in Wyoming and a high of $1.29 per gallon in
Tennessee.
The government started taxing cigarettes and alcohol to pay back the debts it incurred during
the Revolutionary War. However, social purposes have also long influenced the taxation of
these items. The higher the tax, the more likely Americans are to be discouraged from
consuming tobacco and alcohol. But because tobacco and alcohol taxes are flat taxes, they fall
disproportionately on the poor. In other words, it is mostly the poor who are discouraged from
using tobacco and alcohol, because other income groups can afford to pay the higher taxes.
Gasoline Taxes
If the government taxes behavior it wants to discourage, why does it tax gasoline? After all, gas
taxes were implemented long before the environmental movement kicked in. Federal excise
taxes on gasoline were implemented in June 1932 under President Herbert Hoover as part of
h f i i li hi d i d i h f
the Revenue Act of 1932. As its name implies, this act was designed to increase the amount of
money the government had at its disposal. The gasoline tax was expected to raise $150 million
in new tax revenue for the government.
In 1932, gas was taxed at a rate of 1 cent per gallon.By 2020, the tax rose to 18.4 cents per
gallon.State gasoline taxes and fees can tack on an additional cost, ranging from a low of
14.35 cents per gallon in Alaska to a high of 60.60 cents per gallon in California.
Investment Taxes
Taxing investment income might seem particularly counterproductive since investment is
necessary for economic growth, but that hasn't stopped the government from including it
under its wide umbrella of taxable income. Capital gains taxes were enacted in 1913, along
with the income tax.Dividend taxes were enacted in 1936 but only lasted through 1939. They
reappeared in 1954 and have persisted ever since.
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Related Terms
Understanding Taxes
Taxes are a mandatory contribution levied on corporations or individuals to finance government activities
and public services. more
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