By Joe Jarvis
Imagine starting a small business in the USA in 1875.
Imagine working for yourself, or building a company from scratch. With no corporate taxes, and no income taxes, you kept the full rewards of your risk and labor.
It’s not surprising that in about 100 years the United States went from non-existent, to having the largest economy in the world.
Unparalleled economic freedom helped create the industrial revolution which spurred legendary economic growth from 1870 through the turn of the century.
For most of the 19th century, the main source of tax revenue for the federal government was tariffs—taxes on imported goods.
But in 1913, everything changed.
Around the world, communist and socialist philosophies were spreading. Marx was a hero. The Bolsheviks would come to power in Russia in just a few years. And America was caught up in the same craze.
There were all these rich people in America now, and the politicians wanted them to pay their fair share…
In 1913, the 16th Amendment was added to Constitution, which allowed Congress to replace tariffs with an income tax as the main source of US federal revenue.
The first income tax code was just four pages long. And the top tax rate was 7% on income over $500,000—worth around $12 million today.
Plus, in today’s money, anyone earning under $76,000 per—most people—paid no income taxes at all. That’s how nice the tax code was…
But it didn’t take long for things to change. Tax rates went up, the exemption fell, and debts from the Great War mounted.
By 1918 the top earners handed over 77% of their income.
The top tax rate made it all the way to 94% by 1944 to pay for World War Two.
(Two years earlier, President Roosevelt proposed a 100% tax rate to fund the war, arguing “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” – about $300k in today’s dollars.)
At the same time, the exemption fell to $500 (from $3,000) and the lowest tax rate spiked to 23% (a 23x increase) – meaning you coughed up 23% of your income over $7,000 in today’s dollars.
In just a few decades, the income tax went from barely skimming from the richest of the rich, to confiscating a quarter of the poorest people’s income…
They start off only targeting the rich. But inevitably, rates go up, and everyone pays.
The Alternative Minimum Tax is another great example. The AMT originally targeted 155 people who were making over what today would be $1.1 million per year, but weren’t paying any federal income taxes because of loopholes and deductions.
But the tax was never adjusted for inflation.
But by 2017, five million taxpayers were paying extra taxes because of the AMT, and more than half of them made less than $200,000 per year.
Same story with self-employment taxes…
Today, people who are self-employed pay double the payroll taxes as typical workers. The government forces them to cover both the employee and employer contributions to Social Security and Medicare…
Do you think if the people from 1913 could see America now, would they still vote for the income tax?
Probably not if they saw which people ended up with the burden…
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