US Income Tax Celebrates 90th Birthday This Month

by Mike Godfrey, Tax-News.com, Washington

03 October 2003

This month marks the 90th anniversary of the introduction of a federal income tax in the United States, during which time the legislation has swelled from a 400 page booklet in 1913 to cover some 50,000 pages in 2003, according to tax advisory firm CCH.

Evidently, the America of 2003 has changed immeasurably since 1913 when President Woodrow Wilson introduced income tax as part of the Underwood Tariff Act, and the exponential growth in the tax code merely reflects the complexities of modern life. However, Mark Luscombe, an advisor and attorney at CCH notes that the core of the income tax code remains very similar today to what it was 90 years ago.

"The Code has become large and complex in part because it deals with complex problems," observes Mr Luscombe. "Even in 1913, questions of how you figure the tax on insurance companies took up an inordinate amount of the law, and those questions have become more complex over time as Congress, the IRS and the courts have tried to spell things out in greater detail," Luscombe adds.

To honour the occasion, CCH has published a commemorative booklet reproducing the 1913 law which originally levied a 1% 'normal income tax' on the 'net income' of individuals. On income over $20,000, a graduated tax of 1% to 6% was imposed and the top 6% rate kicked in on income above $500,000.

From the beginning, income tax was levied on all sources of income from all Americans regardless of where in the world they lived. It also taxed the income of resident aliens and the US income of non-residents. The tax filing procedure also began life on a form 1040 still used to this very day. The original form was three pages long with an extra page for instructions. Whilst today's form 1040 is two pages long, it is accompanied by a 126 page explanatory booklet.

CCH notes some of the other features of the original tax code:

• Individuals could deduct interest they paid, such as mortgage interest.
• Nearly all state and local taxes were deductible in 1913, whereas today, sales tax is not.
• Casualty losses – those due to "fire, storms or shipwreck and not compensated for by insurance" – were deductible in 1913, as they are today.
• As with today’s law, state and local bond interest was exempt from tax.
• Unlike the current law, interest on United States bonds was also untaxed.
• "National" taxes, such as excise tax on telephone service first instituted to pay for the Spanish-American War, could also be deducted in 1913, but today such taxes are non-deductible.
• There were no special provisions for capital gains in 1913 – they were taxed like all other income.

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